“At the end of the day, price is merely a perception. Nothing more. Nothing less”. Pricing is a fundamental aspect of any business strategy. It plays a crucial role in determining the success or failure of a product or service in the marketplace.
Pricing decisions are not merely based on production costs and profit margins; they are heavily influenced by consumer behaviour and psychology. Understanding the psychology of pricing is essential for businesses to develop effective pricing strategies that resonate with their target audience.
In a case study from Robert Cialdini’s Influence: The Psychology of Persuasion, a local jeweller sold out turquoise jewellery because they accidentally priced it at double its initial value.
This blog explores the various psychological factors that shape consumer behaviour and how you can leverage these insights to optimize your pricing strategies.
Go to Walmart and you’ll see prices ending with 9 everywhere. Consumers often think that prices ending in “9” (like ₹9.99) are much lower than rounded prices (like ₹10). This is because of how our brains work when we think about numbers.
It’s called the left-digit effect, a phenomenon in which consumers’ perceptions and evaluations are disproportionately influenced by the left-most digit of the product price.
By using price endings like this, businesses can make people feel that their products are more affordable, which can encourage them to buy.
Research shows ending prices in “99” (e.g., ₹599) can result in more sales than rounding up to the nearest round price point (e.g., ₹600). The human mind subconsciously rounds that ₹599 to ₹500, as opposed to ₹600 — even though it’s unreasonable
When you see a container of milk priced at ₹40, you may question whether it’s a good deal.
How can you assess its worth?
It turns out that you gauge the ₹40 by comparing it to a “standard” price derived from various sources like:
Previous prices – How much was the milk last time?
Advertised prices – What price were you promised?
Estimated prices – What price were you expecting?
Competitor’s prices – What price does the competitors serving?
It is important to consistently consider all of these references when determining the price of your product.
The design of your prices can also have a tremendous impact on how customers perceive the value of your product.
Next time you visit an expensive restaurant, look at how they format their prices. The typeface will likely be reduced in size, and the numbers will not be followed by extra zeroes, for example, “19” instead of “₹19.00”.
Using a “₹” sign or adding “.00” for prices can also impact your sale. Not only does it make the price longer, but it also firmly relates the number to consumers’ wallets, exacerbating the pain of parting with their hard-earned cash.
Also, avoid using comma between the prices (use 1499 instead of 1,499). It will not only reduce the written length of the price but also reduce the phonetic length. For example,
- 1,499 – One-thousand four-hundred and ninety-nine (10 syllables)
- 1499 – Fourteen ninety-nine (5 syllables)
The Power of Free
Which do you think is a better deal? “Buy one get one free” or “50% off any two items?” According to a study done by University of Minnesota most people would prefer the first option, even though the two options are identical (buying two items at 50% off is the same as paying full price for one and getting the second free).
The word “free” has a profound psychological impact on consumer behaviour. Offering complimentary items or services can create a sense of reciprocity and enhance the perceived value of the main product. Additionally, consumers tend to underestimate the hidden costs associated with “free” offers, making them more likely to make a purchase. Most people would prefer the first option, even though the two options are identical (buying two items at 50% off is the same as paying full price for one and getting the second free).
The word “free” has a profound psychological impact on consumer behaviour. Offering complimentary items or services can create a sense of reciprocity and enhance the perceived value of the main product. Additionally, consumers tend to underestimate the hidden costs associated with “free” offers, making them more likely to make a purchase.
As we explained in our previous blog, the decoy effect occurs when a third option is introduced to influence consumer choices. Individuals tend to have a specific change in preference between two options when also presented with a third option that is inferior in every. The presence of the “inferior” third option makes the first two seem more attractive.
For example – A company has 3 magazine offerings:
Web only for₹59 a year
Print only for ₹125 a year
Web and print for ₹125 a year
Even someone without extensive business knowledge would easily recognize that offering a “print only” option is not a wise choice.
In fact, it almost seems unnecessary to mention it. However, the company decided to include this option because it influenced consumers to perceive the web and print options more favourably when compared to the “print only” alternative.
Artificial Time Contraints
If you’ve been to any retail establishment in the past few months, we can almost guarantee that you’ve seen a sales sign depicting “one day only sale!” or everything “50% off!!” There always seems to be urgency around these ‘short-term’ sales, which actually can happen every weekend.
The secret is that the sales will always be there. Consumers are afraid of missing out on such an obvious deal, so they make the purchase to avoid this potential feeling of regret
Don’t Discount Premium/luxury Products.
These products are often positioned as symbols of luxury, exclusivity, and superior quality. Also, by paying a premium price, consumers feel a sense of ownership and belonging to an elite group. Discounting such products may undermine their exclusivity and dilute the perception of quality.
Pricing psychology is essential to understanding how people make purchase decisions. As consumers become increasingly savvy and price-conscious in today’s economy, it’s crucial to understand pricing psychology to stay ahead of the competition.
By understanding the psychological underpinnings of pricing, you can make informed decisions that optimize profits and enhance customer satisfaction. You can strategically use pricing cues to create perceptions of value, exclusivity, and prestige.
Moreover, you can cultivate a sense of psychological ownership and loyalty among your customers, fostering long-term relationships and repeat purchases
To know more about our AI-powered dynamic pricing tool BRIO, reach out to us.