5 Strategies of 'Psychological Pricing'

Pius Boachie Pius Boachie - GUEST WRITER

We are all in business to solve problems, add value and make a profit -- tasks which involve pricing your
product or service. But how do you effectively price your product or service to increase sales and make
more money with little or no effort?

Related: Mastering the Art of Pricing: What the Textbooks Don't Teach You

Its simple; use psychological pricing.

Psychological pricing is a pricing/marketing strategy based on the theory that certain prices have a
bigger psychological impact on consumers than others. Below are five pricing strategies entrepreneurs
can adopt:

1. 'Charm pricing': Reduce the left digits by one.

This strategy, often called "charm pricing," involves using pricing that ends in "9" and "99."

With charm pricing, the left digit is reduced from a round number by one cent. We come across this
technique every time we make purchases but dont pay attention. For example, your brain processes
$3.00 and $2.99 as different values: To your brain $2.99 is $2.00, which is cheaper than $3.00.

How is this technique effective? It all boils down to how a brand converts numerical values. In 2005,
Thomas and Morwitz conducted research they called "the left-digit effect in price cognition." They
explained that, Nine-ending prices will be perceived to be smaller than a price one cent higher if the
left-most digit changes to a lower level (e.g., $3.00 to $2.99), but not if the left-most digit remains
unchanged (e.g., $3.60 to $3.59).

In an experiment conducted by the University of Chicago and MIT, women's clothing was used to test
the left-digit effect. First, prices were set for $34, $39 and $44. To the amazement of the researchers,
the items sold best at $39 even though that price was more expensive than other options.

Related: 10 Pricing Strategies That Can Drastically Improve Sales

A postscript: Keith Coulter, associate professor of marketing at the Graduate School of Management,
Clark University, has suggested that this effect may be enhanced when the cents are printed in a smaller
font.

2. 'Prestige' pricing strategy

Prestige pricing is the complete opposite of odd or charm pricing. Prestige pricing involves making all
numerical values into rounded figures, i.e., $99.99 is converted to $100.

You may be wondering why. According to Kuangjie Zhang and Monica Wadhwa in a 2015 study, rounded
numbers (e.g., $100) are more fluently processed and encourage reliance on consumers' feelings,
compared to non-rounded numbers (e.g., $99.99), which are less fluently processed, and encourage
reliance on cognition.

This means that rounded numbers "feel right" because the purchase is being driven by feelings and the
price is processed quickly.

Zhang and Wadhwa realized that consumers were more inclined to buy a bottle of champagne when it
was priced at $40.00, rather than $39.72 or $40.28.

3. 'BOGOF': Buy one, get one free.

This is a pricing strategy in which customers pay the full price for one product or service to get another
for free.

The psychological strategy at work here is, simply, greed. Once a customer comes across the offer, logic
gets tossed to the wind and the main focus is making a purchase to get the free item.

Now, because this technique has been widely adopted and most people no longer take the bait, you
could stir things up a bit by offering one of the following:
Buy one and get 25 percent off your next purchase.

Purchase one and get four bonuses valued at $60, for free.

Buy one, get three for free.

To fully maximize this strategy, get creative with your discount offers.

4: Comparative pricing: placing expensive next to standard

Comparative pricing may be tagged as the most effective psychological pricing strategy. This simply
involves offering two similar products simultaneously but making one product's price much more
attractive than the other.

This is a psychological game of choice for the customer, who has to choose between two products that
are similar but have different prices.

This strategy works well with fashion brands, which place side by side tuxedos with similar quality but
different prices, to make customers pick the more expensive one, which is the desired purchase.

To the average human, if something is expensive, then it is "quality."

A perfect illustration of this strategy would be the case study on The Williams-Sonoma bread maker.

5: Visually highlight the different prices.

X When you offer a sale with a previous price side by side with a new one, you make more sales
because customers feel they are getting a bargain and are not interested in researching the drop in
price.

To make the new pricing strategy work effectively, use the psychological trick of changing the font, size
and color of the new price.

This trick triggers a fluency effect and consumers interpret the visual difference to a larger numeral
distinction, according to 2005 research by Keith Coulter and Robin Coulter.
According to that research, simply changing the font, size and color of the signage for the current sale
price and placing it a little bit away from the previous pricing will increase the number of purchases,
because customers see the new price as cheaper and a better deal than the previous price.

Tip: The pricing difference should be no more than $10.

Related: Make Sure the Pricing Is Right With These Tips

Conclusion

So, given these psychological pricing strategies, you might try them out, remembering to split-test
different ones on different pages and products to determine what works best for your business.

Retail Pricing Strategies to Increase Profitability

Set the Right Price to Make the Sale

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By Matthew Hudson

Updated May 24, 2017

There are many outside influences that affect profitability and a retailer's bottom line. Setting the right
price is a crucial step toward achieving that profit. Retailers are in business to make a profit, but figuring
out what and how to price products may not come easily.

Before we can determine which retail pricing strategy to use in setting the right price, we must know the
costs associated with the products.

Two key elements in factoring product cost are the cost of goods and the amount of operating expense.

The cost of goods includes the amount paid for the product, plus any shipping or handling expenses. The
cost of operating the business, or operating expense, includes overhead, payroll, marketing, and office
supplies.

Regardless of the pricing strategy used, the retail price of the products should more than cover the cost
of obtaining the goods plus the expenses related to operating the business. A retailer simply cannot
succeed in business if they continue to sell their products below cost.

Retail Pricing Strategies

Now that we understand what our products actually cost, we should look at how our competition is
pricing their products. Retailers will also need to examine their channels of distribution and research
what the market is willing to pay.

Many pricing strategies exist and each is used based on particular a set of circumstances.

Here are a few of the more popular pricing strategies to consider:

The markup on cost can be calculated by adding a pre-set (often industry standard) profit margin, or
percentage, to the cost of the merchandise.

The markup on retail is determined by dividing the dollar markup by retail.

Be sure to keep the initial markup high enough to cover price reductions, discounts, shrinkage and other
anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection
can use different markups on each product line.

Vendor Pricing

Manufacturer suggested retail price (MSRP) is a common strategy used by the smaller retail shops to
avoid price wars and still maintain a decent profit. Some suppliers have minimum advertised prices but
also suggest the retail pricing. By pricing products with the suggested retail prices supplied by the
vendor, the retailer is out of the decision-making process. Another issue with using pre-set prices is that
it doesn't allow a retailer to have an advantage over the competition.

Competitive Pricing

Consumers have many choices and are generally willing to shop around to receive the best price.
Retailers considering a competitive pricing strategy will need to provide outstanding customer service to
stand above the competition.

Pricing below competition simply means pricing products lower than the competitor's price. This
strategy works well if the retailer negotiates the best prices, reduces costs and develops a marketing
strategy to focus on price specials.

Prestige pricing, or pricing above competition, may be considered when location, exclusivity or unique
customer service can justify higher prices. Retailers that stock high-quality merchandise that isn't
available at any other location may be quite successful in pricing their products above competitors.
Psychological Pricing

Psychological pricing is used when prices are set to a certain level where the consumer perceives the
price to be fair. The most common method is odd-pricing using figures that end in 5, 7 or 9. It is believed
that consumers tend to round down a price of $9.95 to $9, rather than $10.

Other Pricing Strategies

Keystone pricing is not used as often as it once was. Doubling the cost paid for merchandise was once
the rule of pricing products, but very few products these days allow a retailer to keystone the product
price.

Multiple pricing is a method which involves selling more than one product for one price, such as three
items for $1. Not only is this strategy great for markdowns or sales events, but retailers have noticed
consumers tend to purchase in larger amounts where the multiple pricing strategy is used.

Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons,
rebates, seasonal prices and other promotional markdowns.

Merchandise priced below cost is referred to as loss leaders. Although retailers make no profit on these
discounted items, the hope is consumers will purchase other products at higher margins during their
visit to the store.

As you develop the best pricing model for your retail business, understand the ideal pricing strategy will
depend on more than costs. It also depends on good pricing practices.

It is difficult to say which component of pricing is more important than another. Just keep in mind, the
right product price is the price the consumer is willing to pay, while providing a profit to the retailer.

What Is Psychological Pricing?

by Shelley Frost

Retailers often use psychological pricing strategies consistently or not at all.

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Psychological pricing uses the customer's emotional response to encourage sales. By pricing products
strategically, a company may increase sales without significantly reducing prices. In some cases, a higher
price is actually more likely to increase sales. Consider several factors in crafting a psychological pricing
strategy to get the best results.

Basics

The customer's perception of you products' prices is the basis of psychological pricing. Instead of
appealing to the rational side of the consumer, this strategy appeals to their emotional side. The pricing
may aim to strike a thrifty note with a bargain or stir up feelings of prestige with a high-end item. Use
psychological pricing to choose an appealing price based on the needs and wants of your target
audience.

Types

Because product positioning influences the perception of your item, positioning the product at the low
end speaks to those looking for a value; the higher end of the product's pricing spectrum is associated
with higher quality. The odd pricing strategy prices products just below the whole dollar amount. For
example, instead of charge $5 for a product you might charge $4.99. Buyers associate the price closer to
$4 than $5 even though it is only one cent less. Similar strategies are used for larger dollar amounts. For
example, a home might be priced at $199,500 instead of $200,000. You might also aim to stay
underneath a particular price point such as under $100. The discounting strategy attracts customers
who feel they are getting a deal with a temporary price reduction. Price lining involves distinct lines of
products, each in a distinct price range, such as budget, mid-range and high-end. Additional features on
the upgraded lines don't typically cost much but allow you to increase the price significantly.

Benefits

The psychological pricing method helps you build an impression of your brand without making
significant changes to the product. Simply revising your pricing structure can make your product
suddenly seem like the best bargain on the market or elevate your luxury product to the top of the
available options. Experiment with one or more psychological pricing methods to help find a price point
that increases your sales.

Selection

When using psychological pricing, the target audience for the product determines the way you price
your products or services. Determine who you are trying to reach and what your target audience would
respond to when setting the prices. The specific product or service you are selling is another factor. A
high-end product may not sell well using the odd pricing strategy, which aims to make the product seem
more affordable. Don't forget to consider your competitors when choosing a psychological pricing
method and setting your prices. Straying too far from similar products can make you less competitive.

Psychological Pricing

READ

FEEDBACK

VERSION HISTORY

USAGE

Psychological pricing is a marketing practice based on the theory that certain prices have meaning to
many buyers.

LEARNING OBJECTIVE

Explain the types of psychological pricing

KEY POINTS

Products and services frequently have customary prices in the minds of consumers. A customary price is
one that customers identify with particular items.

Odd prices appear to represent bargains or savings and therefore encourage buying. Thus, marketers
often use odd prices that end in figures such as 5, 7, 8, or 9.
A somewhat related pricing strategy is combination pricing, such as two-for-one or buy-one-get-one-
free. Consumers tend to react very positively to these pricing techniques.

TERMS

Price Points

Price points are prices at which demand for a given product is supposed to stay relatively high.

customary price

A price that customers identify with particular items.

FULL TEXT

Price, as is the case with certain other elements in the marketing mix, has multiple meanings beyond a
simple utilitarian statement. One such meaning is often referred to as the psychological aspect of
pricing. Inferring quality from price is a common example of the psychological aspect of price. For
instance, a buyer may assume that a suit priced at $500 is of higher quality than one priced at $300.

Products and services frequently have customary prices in the minds of consumers. A customary price is
one that customers identify with particular items. For example, for many decades a five-stick package of
chewing gum cost five cents and a six-ounce bottle of Coca-Cola also cost five cents. Candy bars now
cost 60 cents or more, which is the customary price for a standard-sized bar. Manufacturers tend to
adjust their wholesale prices to permit retailers to use customary pricing.

Another manifestation of the psychological aspects of pricing is the use of odd prices. We call prices that
end in such digits as 5, 7, 8, and 9 "odd prices." Examples of odd prices include: $2.95, $15.98, or
$299.99. Odd prices are intended to drive demand greater than would be expected if consumers were
perfectly rational.

Odd Pricing

Odd prices end with digits like 5, 7, 8, and 9. They are intended to drive demand higher.
Psychological pricing is one cause of price points. For a long time, marketing people have attempted to
explain why odd prices are used. It seemed to make little difference whether one paid $29.95 or $30.00
for an item. Perhaps one of the most often heard explanations concerns the psychological impact of odd
prices on customers. The explanation is that customers perceive even prices such as $5.00 or $10.00 as
regular prices. Odd prices, on the other hand, appear to represent bargains or savings and therefore
encourage buying. There seems to be some movement toward even pricing; however, odd pricing is still
very common. A somewhat related pricing strategy is combination pricing, such as two-for-one or buy-
one-get-one-free. Consumers tend to react very positively to these pricing techniques.

The psychological pricing theory is based on one or more of the following hypotheses:

Consumers ignore the least significant digits rather than do the proper rounding. Even though the cents
are seen and not totally ignored, they may subconsciously be partially ignored.

Fractional prices suggest to consumers that goods are marked at the lowest possible price.

When items are listed in a way that is segregated into price bands (such as an online real estate search),
the price ending is used to keep an item in a lower band, to be seen by more potential purchasers.