The world of marketing is filled with a myriad of strategies, each one designed to capture consumer attention and drive sales. One such tactic that cleverly plays with our minds is not as well-known as it should be, though its effects are undeniable. This strategy is none other than Psychological Pricing. Rooted in the fact that consumers’ perception of a product’s price can influence their purchasing behavior, it is a marketing approach that considers the human mind’s response to certain price points.
An example of psychological pricing can be a product that is priced at $11.99. It appears to be less expensive than if the price was set as $12.00, though $11.99 and $12 are almost the same prices. Marketers capitalize on people’s perception of value by creating a ‘mental anchor’ that encourages customers to make buying decisions.
Table of Contents
What is Psychological Pricing?
Psychological pricing is a pricing strategy that psychologically and subconsciously influences potential customers to make a purchase. Strategies like reducing the left digits by .1 (charm pricing) or buy one, get one free (BOGOF), etc. define psychological pricing methods.
It is a tactic that manipulates the prices of products to influence a customer’s spending behavior and increase sales volume or revenue. The objective is to fulfill the customer’s psychological requirements, such as spending less, purchasing a top-quality product, or acquiring a bargain.
Why Psychological Pricing is Effective?
It is a pricing strategy that is frequently used to influence customer behavior. Studies reveal that specific price formatting techniques can trigger a subconscious reaction in customers, ultimately promoting a purchase. These tactics are both economical and simple to execute, making them an excellent supplement to pricing strategies for improved efficacy.
It takes advantage of the fact that consumers usually don’t know the standard price of a product. Our usual way of determining a good deal is either by buying it at a discount or by comparing it to similar products in the same category.
William Poundstone, an American author, columnist, and skeptic writes in his book Priceless: The Myth of Fair Value about psychological pricing strategy and says –
“Marketers had long been doing experiments in the psychology of prices. In the heyday of mail orders, it was common to print up multiple versions of a catalog or flyer to test the effect of pricing strategies. These findings must have dispelled any illusions about the fixity of prices. Marketers and salespeople knew too well that what a customer was willing to pay was changeable and that there was money to be made from that fact.”
How Does It Work?
It employs the use of certain price points that consumers perceive as being significantly cheaper, influencing their purchasing decisions. It’s a tactic rooted in the customer’s emotional response rather than rational thinking. Its working revolves around the following steps:
- Identify the target audience and its preferences.
- Choose the psychological strategy for pricing based on research data.
- Set prices at certain levels that are perceived as cheaper than they really are.
- Promote products/services employing a pricing strategy with catchy taglines or phrases.
- Track consumer behavior to analyze the success of the pricing strategy.
Types of Psychological Pricing Strategies
Business concept. Text PRICING STRATEGY with clock, glasses, calculator, and pencil on gray background.
Different types of businesses use various pricing tactics to land the highest number of sales for the products and services they sell to their target audiences. Some of the psychological pricing techniques that are used by businesses are-
1) Price anchoring
Price anchoring tends to make a sale to the customers based on the hypothesis that customers are inclined to prices offered to them at the very start. Price anchoring relies on stating a specific amount first and then another after.
Customers usually prefer to buy a particular product at the second offered price after knowing the anchored price. Price anchoring works for business concerns that offer a product and similar types to that product at different price levels.
Price anchoring can insinuate a customer to buy a product at a price that works for them and as well as the seller, given that there exist other similar options for the product in question. For example, a product might be initially offered at $250, and later the same is offered at $175, which will influence buyers to opt for the discounted price.
2) Charm pricing
Setting prices ending with the digit ‘9’, based on the “left-digit bias’’ is called charm pricing. Left-digit bias is defined as a premise in which it is assumed that the decision to purchase a product by a customer is influenced or altered through the left-most digit on the price mentioned or offered for a product.
Studies show that prices ending with ’99’ in the end induce more sales than a price ending with a whole number. There is a tendency in humans to treat a price ending with 99 close to the most diminutive figure possible. Charm pricing is the most effective for businesses that offer essential products to land a good deal or sale.
3) Odd-even pricing
Odd-even pricing is similar to charm pricing but covers a broader spectrum of pricing rules. Odd pricing is defined as the fixing of prices ending with odd numbers, like 1,3,5,7,9, etc. On the other hand, even pricing ends with whole digits, such as 0, 6, 8, etc.
People find odd pricing more to their liking as, in their mind, the prices sit as an effective end deal. Even pricing has its own merits. Mainly used for luxurious items, it is applied to indicate the higher quality of items and attract money-spending customers.
4) Decoy pricing
Decoy pricing is based on the premise in which sellers offer two types of products and then a third product that is different and inferior as compared to the first two products in almost every sense. This ”decoy” effect makes the first two products seem so much better than the third one. This effect causes an evident change in the decision-making of a consumer.
Decoy pricing is a psychological pricing tactic that is effective for companies who have set the sale of some specific goods as an end goal so that they can influence their customers to purchase those particular products only.
5) Centerstage
The Centerstage effect mainly concentrates on the consumers choosing a product placed at the center, out of a wide range of products offered side by side.
The centerstage effect is advantageous for any business concern, given that they have tons of products to sell or offer that pertain to the customer’s requirements and wants.
6) Low-syllable pricing
Even reading the number of prices out loud can affect the decision-making of a consumer, whether they decide to purchase a product or not.
For example, if the amount of money being charged for a product requires fewer syllables, then it would be perceived as a cheap amount, as compared to prices with more syllables.
7) Partitioned pricing
The process of setting prices through partitioned pricing involves putting the same price of a product into different categories so that it appears cheap. For example, a product may have shipping charges, which, when segregated, appears pocket-friendly.
Portioned pricing is effective because of the factor of innumeracy. A regular customer normally does not know how to calculate the prices of different components in a product. This is why they take the face value of a product as it is.
8) Prestige pricing strategy
This type of pricing is the absolute opposite of odd or charm pricing. In this, numerical values of the pricing will be into rounded figures e.g. $199.99 is converted to $200.
The study of Kuangjie Zhang and Monica Wadhwa suggests that rounded numbers are more fluently processed and optimize reliance on consumers’ feelings in comparison to non-rounded numbers.
9) ‘BOGOF’: Buy one, get one free
This type of psychological pricing strategy convinces customers to pay the full price for one product or service to get another one free.
It is effective in working upon the human psychology of greed that influences people to make more purchases.
10) Comparative Pricing
This one is again one of the very popular psychology-based pricing strategies in which two similar products are offered simultaneously but the price of one product will be higher than the other product.
Through this psychological game of choice, businesses influence buyers to opt for the product with a higher price thinking that the product having a higher price will be of better quality.
11) Artificial Time Constraints
It is quite an old pricing strategy, but still effective. People are encouraged to make a purchase as soon as possible when they are given an artificial deadline that a certain offer is valid for only a limited period of time.
This type of psychological pricing strategy puts pressure on buyers to make a purchase and it has been found to be effective in many cases.
12) Innumeracy
It is a type of psychological pricing technique where businesses use the lack of numeracy skills among customers to their advantage. They make use of phrases like ‘40% off’ or ‘50% more free’ in order to influence buyers into thinking that they are getting an extremely good deal.
In reality, these discounts may not be as high as what has been claimed. It is thus important to be aware of such techniques and use numerical reasoning to make sure that you are actually getting what has been promised.
13) Price Appearance
This type of psychological pricing uses the appearance of prices to influence buyers into thinking that they are getting something for a really cheap price. The size of the typeface will be decreased and the numbers will not have additional zeroes. This means that it will display as “59” instead of “$59.00”.
This makes it appear as if the buyer is getting the product for much less than what it actually costs.
How to Implement Psychological Pricing Tactics
Psychological pricing is a tactic that can be used to attract customers and encourage them to make a purchase. It typically involves setting lower prices that appear attractive, such as ending in 9 or offering discounted prices.
This is a great way to draw attention to your product or service and convince customers to make a purchase. By making the prices seem lower than they are, you can make customers more inclined to buy. Additionally, displaying prices in a certain way or offering discounts can also help encourage customers to make a purchase.
By using psychological pricing tactics, you can give customers the impression that they are getting a good deal, helping to attract more customers and increase sales.
How to use Psychological Pricing in Marketing Strategies?
Psychological pricing can help you find out the optimal price for the items you sell as well as serve as part of your brand’s overall marketing plan.
Using this type of pricing strategy can help you generate a sense of urgency, stimulate sales, enhance customer loyalty, raise the perceived value of your product or service, and set it apart from your competitors.
Remember to use psychological pricing strategically and thoughtfully, as it may not be suitable for all situations. Keep in mind that psychological pricing involves more than just offering occasional or periodic discounts. Some of the usages of psychological pricing in marketing strategies are-
a) Higher Price Points act as Quality Signals
The pricing strategy used by a business can greatly affect how customers perceive the quality of its products.
b) Pricing transparency improves customer trust
You can also opt for the pricing transparency approach. This involves breaking down the cost of each component of your product such as raw materials, labor, and shipping, and specifying the amount of markup you apply to your products and the underlying reasons.
c) Pay over-time options help ease the sticker shock
Enabling customers to pay for their purchases through services such as Affirm, Klarna, and Shop Pay simplifies the process of affording and justifying larger purchases.
Advantages of Psychological Pricing
- Better attention – Promoting your product in a big way can attract more attention. For example, using large red signs in your physical store can grab people’s attention and make them curious about what you’re selling. Even if they don’t buy anything, your brand will get more exposure.
- Easy decision-making process – Psychological pricing tactics often make it easier for consumers to make buying decisions. By clearly displaying discounts or promotions, consumers have less to consider. This is beneficial for retail stores that rely on one-time sales.
- Better ROI- Utilizing psychological pricing discounts can yield a substantial return on investment for single sales, particularly during high-volume times such as holidays. By offering promotions that appeal to a broad audience, achieving a profitable outcome is feasible.
- Sense of urgency – Psychological pricing can create a sense of urgency, depending on the strategy used. This can motivate customers to act quickly and not miss out on a deal. Additionally, it may lead to a quick return on investments.
Disadvantages of Psychological Pricing
- Deceitful – Psychological pricing tactics can be seen differently by different people. While some may perceive it as taking advantage of customers, others may recognize it as essential in the business world.
- Misperceived value – When using psychological pricing tactics, there is a risk that customers may not perceive your product/service as valuable. Your pricing strategy communicates the value of your offering to customers, and their perception of your pricing is crucial in this communication.
- Not a long-term solution – Using psychological pricing techniques can lead to quick conversions in the short term, but it is not a sustainable approach for long-term pricing solutions. B2B businesses must establish a more stable and lasting plan.
Examples
Psychological pricing can be used to great effect in a retail setting, like when a store offers an item for sale at $9.99 instead of $10.
It’s a simple trick, but it can be incredibly effective in making people feel like they are getting a lower price than they might otherwise. The same concept can be applied to larger-ticket items as well, such as offering a $1,999 mattress instead of a $2,000 mattress.
Another example of psychological pricing is when a store offers free shipping on orders over a certain amount. The idea here is to encourage people to add more items to their cart and get more value out of their purchases.
You can also entice customers by offering them discounts on bulk purchases, such as “Buy 10 items and get the 11th item free.” This encourages customers to buy more of a certain item, which can result in bigger profits for the store.
FAQs
1) What is the psychological pricing definition?
It is a strategic approach to pricing that plays on the customer’s emotional perception of cost. In essence, it involves setting prices slightly lower than a round number to create the illusion of a significantly better deal.
2) What are the types of psychological pricing?
There are popular psychological pricing strategies available such as charm sizing, discounts, bundling, ceiling price, BOGO (buy-one-get-one-free), and others.
3) Why is psychological pricing used?
A store would use an effective psychological strategy for a variety of reasons, such as grabbing customers’ attention, making their decision-making easier, creating a sense of urgency to buy, boosting profits from one-time sales, and other objectives. An adeptly used psychological pricing method lowers the price appearance more than the actual price.
4) Why do companies use 99 cents as a psychological pricing tactic?
Customers tend to round down the prices to the next lower unit, meaning that $5.99 is more likely to be perceived as $5 instead of $6. This strategy is particularly beneficial for the sales of cheaper products where a $1 difference can make a significant impact on the sales and the profits earned.
5) How does psychological pricing increase sales?
It utilizes various tactics and strategies to capitalize on the impulsive nature of customers and increase their likelihood of making a purchase. Although customers may think differently, the ultimate goal is to boost their impulse to buy and close the sale.
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