Have you ever found yourself irresistibly drawn to stores screaming loud with signs of “BOGO deals,” “Flat 50% Off Only Today,” or the like? You end up shopping your heart’s content, only to realize you didn’t need some of those items. Sounds too familiar?
Congratulations!
You’ve just experienced what is popularly known as “Psychological pricing” - a marketing gimmick businesses use to entice customers to buy their products.
Understanding Psychological Pricing
Psychological pricing is the practice of pricing products and services to influence the customers’ subconscious mind - for example, pricing a product at a slightly lower price than a rounded number.
Let’s say a product used to cost $100 and suddenly gets priced at $99. Yes. The price is just marginally lower. But in the minds of the customer, the price has dropped from 3 digits to 2 digits!
And this emotional behavior is what the sales and marketing teams take advantage of to make their products more appealing to prospective buyers.
But do customers fall for such tactics? Of course. Let’s see how psychological pricing works and why it is so effective.
How Does Psychological Pricing Work?
Psychological pricing plays on the general idea that human behavior is so “changeable”; we are not rationalists - our decisions are most often influenced by our emotions, societal pressure, or other perceptions that we hold. And when it comes to buying the product, we always want to make sure we’ve got the best deal. Don’t we?
At the very least, customers want just three things:
- The most affordable price
- The highest quality product
- The best value for money
But more often than not, customers do not know how to gauge the price of a product. For them, it’s a good deal if the sale price is less than the listed price or lesser than other similar products. This is why it’s so easy to influence their purchase decisions - by triggering their emotions or feeding their perceptions.
Psychological pricing does precisely that; you are basically “helping” them decide that your product is a great deal for them.
Here, it’s the sellers' job to decide what best lures their target customers. If your customers are looking for the highest quality product, they may go after the highest-priced product. This is playing into the perception that the best product always costs more. On the other hand, if your customers are looking for the most affordable product, a lower price will naturally be attractive.
Ultimately, the customer believes they are getting the best deal! But do the businesses also benefit from this marketing ploy?
Advantages of Psychological Pricing
Wondering why to use psychological pricing? Here’s why:
Easy and inexpensive strategy: Businesses don’t have to spend much to implement this pricing strategy, but it does take an effort to understand the psychology. It’s reasonably easy to implement and can offer incredible conversion rates.
Increased returns from sales: Psychological pricing allows you to sell more volumes in less time frames, with fewer overheads. This can certainly boost your return on investments.
Garners more attention to your product: While it’s a great sales tactic, psychological pricing can also be a super effective marketing tool. Promoting your product at an attractive price for your customers turns all eyes on you and your product.
Keeps you in a race that you can win: When you offer your products at unbeatable prices, you naturally discourage your competitors from lowering their prices further. You keep them thinking, and they may even reconsider their pricing approach.
When done right, psychological pricing thus works tremendously in your favor. But at times, it can do more harm than good.
Disadvantages of Psychological Pricing
Short-term fixes with transient results: While they offer results, psychological pricing is not designed for the longer term. They may barely have any impact on your overall profit margins. Further, no amount of psychological pricing can cover up a poorly executed marketing strategy.
Price wars with no winners: As the pricing gets more competitive, it results in price wars where no one wins, and everyone’s profit takes a hit.
Loss of trust that proves costly: With psychological pricing, when the customer feels they are being manipulated, they may stop buying your product. This results in a loss of sales that ultimately damages your brand reputation.
Price slashes that harm the brand: When you repeatedly offer significant discounts, there is a risk that the customer may perceive your product as having low quality. This might tarnish your brand and product image eventually.
Regardless, businesses adopt different types of psychological pricing and keep wooing their customers. Let’s see how.
Types of psychological pricing
Charm pricing - a strategy that formats the prices so that they end up with a “0.99” or “0.95” instead of a rounded dollar. This pricing is known as “odd-numbered pricing” or “left-digit pricing.”
Prestige pricing - is the opposite of charm pricing. This involves placing a higher price on the product so that customers perceive the product as exclusive or of high quality.
Price anchoring - is about taking advantage of the customer mindset that relies heavily on the initial price (the anchor) for making decisions. For example: $100 now at $95 only!
Artificial time limitations - this is the “Buy one; Get One” we discussed earlier, with the deal made up just for a day! Imposing such faux headlines causes a sense of urgency in the buyers.
Innumeracy - when presented with “Buy one, get the other at 50% off” and “50% discount on two items”, interestingly enough, we often lean towards the first option, though both effectively mean the same. This lack of numerical insight is called innumeracy.
Decoy pricing - creating a decoy effect by plotting the desired product price against two seemingly unreasonable prices. Just recall the prices of the small, medium, and large tubs of popcorn that you saw when you last visited the cinema. The large tub is usually priced twice as much as the small tub, but the large tub will seem like a better deal than the medium. Here, the medium-sized tub is the decoy.
Bundle pricing - a practice where you offer a package of products at a lesser cumulative price than it would cost if bought separately. Businesses display the actual price of individual products alongside the bundled price, convincing customers that it was indeed a sweet deal!
Final Thoughts
Globally, businesses have always adopted psychological pricing as an integral marketing strategy. However, psychological pricing can be a double-edged sword. It can result in improved sales and super impressive conversion rates for businesses. But when misused or misdirected, it can backfire badly, eroding customer trust and damaging your reputation. Nevertheless, this pricing strategy continues to dominate the pricing scene as businesses evolve newer strategies that resonate with customers’ mindsets.
