6.03 – Master Pricing Psychology
Psychology plays a significant role in pricing. The prices you set influence customers’ perceptions of your product’s value and their willingness to buy. Here are some insights into various psychology-based pricing methods.
Pricing to Address Perceptions
Like marketing campaigns, pricing decisions should be driven by strategies rather than random choices. It’s essential to research how your price aligns with supply and demand, competitors, perceived value, and psychological implications.
Odd-Even Pricing
Odd pricing (ending prices with an odd number) often outweighs even pricing (ending prices with an even number) when consumers have a choice. Studies show that 70 percent of customers prefer a price of $9.99 over $10.00 for the same item. Although the difference is just one penny, the price is perceived as significantly lower.
Using a strategy of lowering your price by one penny isn’t going to hurt you and can make your product more attractive. Walmart, for instance, often ends its prices with 88 or 98 cents rather than 99 to create the perception that their products are priced significantly lower than those of competitors.
Rounding down to 99, 98, or even 95 works for dollars too, such as pricing an item at $1.99 or $199 instead of $2.00 or $200.
Price Lining or Price Anchoring
Price lining positions your product within a range of alternatives, giving it a logical spot in customers’ minds. Dan Ariely, a psychologist and professor of psychology and behavioural economics at Duke University, found that people often choose the middle price when presented with a range of similar products. They avoid the most expensive item to feel responsible and avoid the cheapest item because they feel they deserve more.
This phenomenon, known as mental anchoring, is where people frame their choices around the first piece of information they see. Price anchoring is common in restaurants, where a very high-priced item on the specials list makes the lower-priced menu items seem more reasonable.
Framing Prices
How you present or frame an offer impacts its perceived value. For example, “Buy one, get one free” offers drive more sales than “two for the price of one” deals. Similarly, “You can have this car for just $600 a month” influences behaviour more than “Buy it for $40,000”. Framing offers and prices to align with consumers’ expectations makes purchases seem more reasonable and less overwhelming.
Descriptive Pricing
Adding descriptive elements to your pricing can significantly impact sales. For instance, using the word “only” before your actual price can increase sales by around 20 percent, according to a study by Carnegie Mellon University.
Competitive Pricing
Competitive pricing involves setting your prices relative to those of your competitors. Price your products above theirs if you offer more benefits and overall value; price below them if the opposite applies. If you’re not as well-known as a competitor, lower your price to encourage people to try your product. Remember, pricing is not absolute and can be adapted as competition changes and as you rise in your market.
Price creates prestige, which is crucial for the luxury industry. Lowering prices can reduce the sense of status associated with higher prices and diminish the emotional fulfilment a product provides beyond its functional value. This was evident when Avon bought Tiffany & Co. and tried to mass-market the brand with inexpensive jewellery, resulting in significant losses. Eventually, Tiffany returned to its successful high-price strategy.
If you’re in a highly competitive market, consider competitive pricing. Identify which competing products customers view as similar to yours and adjust your price to differentiate your product effectively.
By understanding and leveraging the psychology of pricing, you can better influence customer perceptions, drive sales, and position your products for long-term success.
