Psychological Strategies in Pricing
Smart business owners often use psychological sales triggers to influence customers’ purchases. And these strategies are also used to help cross-sell or upsell products or services. Psychological triggers can be used to make products seem more or less expensive, create a sense of urgency, or influence the way that customers think about value. For example, they can use price anchoring. That is where a higher-priced product is used to set the standard for what a product is worth. This can make a lower-priced product seem like a good deal, even if it is not actually that much cheaper. Or a limited-time offer creates urgency by offering a product or services only for a short period of time, such as during a sale or promotion. But these are just two of a myriad of psychological strategies used in pricing. Here are five that are used often and are still effective even though people about them.
1. Charm Pricing
One of the most common psychological tools used for pricing today is dubbed “charm pricing.” As the name implies, the goal is to offer pricing that charms customers… pricing that will be perceived as more appealing. Charm pricing uses prices that end in 9 or 8 or 5 to make products appear less expensive than they really are.
A common example would be to charge $9.99 for an item instead of $10.00. Even though the price is only $0.01 less expensive, it “feels” like the better buy to the consumer because it reduces the price from a 4-digit price to a 3-digit price. For an impulse shopper, that is often enough to win a sale. As a psychological strategy, charm pricing recognizes the brain’s desire to save money and feel satisfied emotionally.
If everyone knows about charm pricing, why does it still work? There are a few reasons why it’s still effective. First, people tend to read prices from left to right, and they are more likely to register the first number. So, when they see a price of $999, they will see the 9 and think that the price is less than $1000. Second, people are more likely to buy something if they think they are getting a good deal. So, when they see a price of $99, they may think that they are getting a better deal than if they saw a price of $100.
Charm pricing is used by businesses of all sizes and is a simple way to increase sales and boost profits. It’s a strategy that’s been used for over 100 years and is most effective for products that are priced between $10 and $100, but less effective for products that are priced over $100. It is also not effective for all products. It is most effective for products that people are already interested in buying.
2. Loss Leaders and Penetration Pricing
Two psychological strategies used in pricing products or services that can be highly effective in sales are Loss Leaders and Penetration Pricing. They may seem the same but they are actually different. But both are effective.
Penetration pricing is when a company sets a low price for a new product or service in order to gain market share quickly. Typically, the company plans to increase prices in the future, often setting a time limit on the introductory rate. For example, in 2005, Amazon announced Amazon Prime as a membership service offering free two-day shipping within the contiguous United States on all eligible purchases for an annual fee of $79. Today, Amazon Prime membership costs $139.
Loss leader pricing, on the other hand, is when a company sells a product or service at a loss — or narrow margin — to attract more customers. In theory, some customers will buy these “loss leaders” and then spend the savings on the company’s other, more profitably priced goods but most will opt for the more expensive products. For example, a homebuilder might have a Grand Opening for single family homes in a new community. The smallest model they offer might be a two-bedroom, two-bath home with a one-car garage priced at just $289,900. The site plan shows just four of this particular model. All the rest of the eight models are priced from $339,900 to $599,900. In ads, however, the pricing listed indicates from the $200s to the $500s. The loss leader is meant to attract prospective buyers to look at the community, but those who buy will likely select one of the other models that has more features and square footage.
These psychological strategies are not new. Entrepreneurs have been using loss leaders and penetration pricing strategies for hundreds of years. Case in point. Cornelius Vanderbilt was a shipping and railroad magnate who used penetration pricing and loss leader pricing to beat his competitors. But he wasn’t born rich. Born in Staten Island, New York, in 1794, Cornelius began working on his father’s ferry in New York Harbor as a boy. He quit school at the age of 11.
In 1812, at the age of 16, Vanderbilt decided to start his own ferry service. He borrowed $100 (equivalent to $1,900 in 2022) from his mother to purchase a periauger — a shallow draft, two-masted sailing vessel — which he christened the Swiftsure. Using loss leader and penetration pricing, Vanderbilt’s ferry service was successful, driving his local competitors out of business. He then built a fleet of steamships that were faster and more efficient than his competitors’ ships. Again, he then priced his tickets lower than his competitors while still making a modest profit. This allowed him to attract a large number of customers and gain a dominant position in the shipping industry. He then expanded his business to include other types of shipping.
Vanderbilt also used psychological pricing strategies to gain market share in the railroad industry. He built a network of railroads that connected major cities in the United States. He then offered free (penetration pricing) or low-cost rides (loss leaders) on his trains to attract customers. This allowed him to attract a large number of customers and gain a dominant position in the railroad industry. Vanderbilt’s use of penetration pricing and loss leader pricing was successful in gaining market share and driving his competitors out of business. He became one of the richest men in America and one of the most powerful figures in the transportation industry.
3. BOGOs, Bundle Pricing, Combos and Packages
These are psychological strategies used to increase sales of one or multiple items. Bundle pricing is when a group of products or services are sold together for a single price, such as 10 cans of tomato paste for $6. Each can is then .60. But when sold individually, each can might be priced at .65. Ironically, sometimes each can is priced at .60 anyway, so the bundle pricing just gets the customer to buy more even if the price is exactly the same for 1 or 10.
A combo deal is similar to bundle pricing, but it usually refers to a set of products or services that are often used together. For example, a car dealership might offer a bundle pricing deal that includes a car, a warranty, and roadside assistance. Or, a restaurant might offer a combo deal that includes an appetizer, entrée, and dessert.
A package deal is a more general term used to describe any situation where multiple items are offered for one price, such as a Buy-One-Get-One-Free. Buy one gallon of ice cream for $5.99 and get the second gallon of ice cream free.
Bundle pricing, combo deals, and package deals are all psychological strategies used to attract customers and increase sales. When multiple items are offered for one price, it can be a more attractive option for customers than buying the items separately. Customers think they can save money and don’t have to worry about the hassle of buying each item individually.
These strategies, however, are not without risks. Businesses need to make sure that the prices of the items in the bundle are fair and that the customers are actually interested in the products or services that are included in the bundle. If the prices are too high or the customers are not interested in the products or services, the bundle pricing, combo deal, or package deal will fail and might actually push customers away.
4. Decoy Pricing
The psychology behind decoy pricing is a bit more complicated than simple pricing using odd numbers, such as $4.97 instead of $5.00. The decoy effect is based on the premise that that customers often change their minds when considering two options if a third choice, or decoy, comes into the picture. The third option is inferior to the other two, making it asymmetrically dominated. This decoy is designed to make one of the other two options look like the better choice. The goal is not to sell the decoy item, but to use the decoy pricing to steer customers to the product that the company wants to sell, such as the one that generates a better ROI.
Decoy pricing is best exemplified in the famous newspaper study conducted by Dan Ariely. Ariely was a behavioral economist and author who had conducted a number of experiments on human decision-making. One of his most famous experiments was the decoy pricing experiment. In the first trial, Ariely offered study participants the choice of a:
- Web-only newspaper subscription for $59
- Print-only subscription for $125
Of the respondents, 68% chose the cheaper web-only option. But in the next trial, Ariely gave participants a choice of three subscription options:
- Web-only for $59
- Print-only for $125
- Web and print for $125
When a third option of a web and print subscription was introduced, only 16% chose the cheaper web-only choice, compared to the 68% who picked this in the first trial. Instead, a staggering 84% opted for the web and print subscription combo even though it was priced as expensively as the print-only version which customers had turned down in the first trial. Why did this happen? The print-only subscription was the decoy. It nudged people to buy the web and print combination because they believed they were getting more for the same price. But what the decoy pricing experiment showed is how people can be influenced by irrelevant information when making decisions. The decoy, the print-only subscription that cost $125 per year, was irrelevant because it was not a real option. However, it still influenced the participants’ choices. The decoy created a frame of reference. The first plan, the web-only subscription that cost $59 per year, seemed like a good deal in comparison to the decoy. The second plan, the print and online subscription that cost $125 per year, seemed like a better deal in comparison to the first plan.
There are a host of other psychological strategies that can be used in pricing. It all depends on what is being sold and how it is being marketed. But it is important to understand and make use of these strategies in prudent ways. For business owners, it is imperative to understand the psychology of pricing. It can make all the difference in the world. Next week we’ll look at more pricing strategies that are even less logical and yet highly effective. Stay tuned!
Quote of the Week
“People buy on emotion and justify with logic.” Zig Ziglar
© 2023, Keren Peters-Atkinson. All rights reserved.
