Using hard data, please prove or disprove this hypothesis: It is better to show a product add-on option price with the price difference (+$41) rather than the full new price ($249)?
When comparing add-on option prices vs. full prices of hotel rooms, customers are more likely to choose the lower base option and then opt for the add-on — even if the total end price turns out higher than the full price version.
However, satisfaction levels of the customers who choose the lower base cost and add-ons are lower than those of customers who initially go for the higher base cost.
ADD-ON VS. TOTAL PRICING: CONSUMER REACTIONS
According to a study by Harvard and NYU, consumers are more likely to pick the lower base price and then add extras, than go for the higher base price with all included. The study focused on the hospitality industry, looking at consumer choices judged by pricing when picking an airline and a hotel room.
When faced with choosing an airline, 94% of participants presented with add-ons went for the lower cost option — and around 10% of these decided to start over with the buying choice when presented with the final price (even if this was higher than the higher base cost option presented at the beginning of the study), which shows that consumers are unlikely to change their minds due to pricing.
When choosing a hotel, a third of participants were presented with the option of lower cost base and add-ons, and of these, only 2.2% of participants did not add any extras to their choice of room. Furthermore, not one participant decided to start over their shopping process when showed the final price.
Therefore, according to the researchers, when presented with a lower price with optional extras and a higher final price, consumers are more likely to choose a lower cost option and pick add-ons — even if the final price it turns out to be higher than the initial higher final price offered.
However, this likelihood varies when extras (optional and non-optional, such as airline fees) are shown gradually during the shopping process ("drip pricing") and when extras (optional and non-optional) are shown all at once at the beginning of the shopping process ("partitioned pricing").
A study by NYU Stern School of Business, reproduced by the US Federal Trade Commission, presented participants with the choice of booking a flight with Delta, where all additional fees and add-ons were presented at the beginning, or with Spirit, where all additional fees and add-ons were presented gradually during the shopping process. The researchers combined different scenarios — some of them had Spirit disclose some fees upfront, others had Spirit drip add-ons gradually.
Overall, Delta took more customers than Spirit: 59.6% of participants chose the former — though it should be noted that most participants were familiar with Delta but not Spirit, which also plays an important role in the final choice.
SATISFACTION LEVELS ON ADD-ON VS. FULL PRICING
When talking about consumer happiness, however, add-on pricing may have a negative impact in the shopping experience.
The NYU Stern Business School study showed that consumers who choose the lower base cost with add-ons are more dissatisfied than those who go for the full cost. When asked if they thought that price was deceptive, on a scale of 1 to 7 (where 1 was "strongly disagree" and 7 was "strongly agree"), the average response for those consumers that went with Spirit (lower base cost, no fees or extras included) was 5.68 — compared to 2.54 for Delta consumers (higher base cost, all fees disclosed at the beginning of the shopping process).
Similarly, when asked if they regretted their choice, Spirit consumers gave a 5.30 in average — compared to 1.90 for Delta, with identical scenarios as above. However, it is worth noting that partitioned pricing brings in lower level of regret than drip pricing.
Research has also pointed out that add-ons, particularly when done in drip form and showed in different ways (such as monetary or percentage of price), can contribute to consumer confusion, leaving them without a clear idea of what they just purchased or how much they are paying — which affects satisfaction levels.
Pricing is not the only factor that comes into play when measuring consumer satisfaction. As mentioned above, familiarity with the brand helps with trust, even for consumers who haven't been customers before — which will elevate overall satisfaction levels, even if the pricing system is perceived as deceptive.
Interestingly, research also shows that, when asked about their experience with a particular brand or shopping process, consumers tend to remember the lower base cost, forgetting about add-ons — which may suggest that satisfaction levels may be lower after the purchasing process, but increase after experiencing the service or goods.
To wrap up, consumers are more likely to go for the lower base cost and pick add-ons for a surcharge than to choose the higher base price, even if it is total. However, add-ons also result in higher levels of dissatisfaction and confusion among consumers.