Econ 101
I first got hooked on Milton Friedman’s Capitalism and Freedom back in college, and I’ve been studying economics ever since. It’s a weird combination- technology and economics, but when dealing UX and UI design, understanding economics helps explain why people behave the way they do. In a purely free market economy, the price of a good or service is dependent on its supply and demand. (There are other factors of course, but this is the simplified version.) If there is a change in supply or demand of an item, the price of the item will rise or fall accordingly.
Prices can be sticky.
Some economists have argued that there is a “sticky” aspect to this equation derived from human nature. For instance, wages are said to be “sticky-down” since they can move up easily, but move down only with difficulty. During times of high unemployment, wages should move down due to the increase in supply of workers. Prices are typically sticky-up - people love to see prices fall, but hate to see them creep back up, especially in areas that have viable alternatives. You can think of phone or cable bills as an example. When additional charges start to add up, many people start looking for a new provider. We signup for lower introductory contacts, and then leave after it’s up. Humans evolved to value consistency, and that survival instinct is with us today. As such, we associate the starting price with the expected price and become distressed when the price increases.
We are sensitive to change.
Our innate sensitivity to change is why Coke and Pepsi continue to price bottles of their product at 99¢ (although, they are smaller 1.5 litter to make up for increase cost of production). There are more example of sticky-down prices all around. Even in times of inflation, we still have dollar menus at fast food chains and $5 Little Caesar pizzas because that was the price advertised and, therefore, engrained into our collective culture. It’s odd to think about prices as part of our culture, but price has been defined and accepted as a measurement of quality. Our western culture affirms that an expensive car is a high-quality car; a $10 burger is better than a $1 burger, and so on. Basically, this is all to say that if you are pricing your services too low, there will be problems increasing it later on, especially if you start off by giving away your goods or services.
People are aware of price changes as a percentage of the whole and relative impact. If you raise prices by 1%, it will be less noticed than if you initiate a 10% increase. That changes if the relative price is significant to the purchaser’s budget. A 1% increase on a $10 burger ($0.1) is less impact than a 1% increase on a $30K car ($300).
In either case, increasing a price from an introductory low rate will raise attention, especially if it’s a free trial of some sorts.
Free is not innately valued.
A 2013 Softletter report concluded that 62% of freemium subscribers convert to sales at a rate under 1% to 10%. Furthermore, the large majority of SaaS firms that offered a free trial only saw a maximum of 25% of those trials turn into paid accounts. The largest fragment 19% only had a conversion rate of 7-10%. That means, up to 90% of people using their product without paying for it.
The majority of users are unwilling to accept an increase in price of a product they first experienced for free. Remember, the price of a product is associated with its value.
There are many ways to provide value.
Free trials are not a reliable way to attract paying customers. Instead, discover ways to increase the value of your services independent to price. Attract customers with quality, user experience, and features that they value. Prices are just one way of determining value; differentiate on other metrics besides the dollar sign. People are willing to pay a premium for premium features.
Don’t undervalue yourself or your products/services by providing a low introductory cost.