Pricing and the Psychology of Consumption 🔍
How does pricing and the psychology of consumption work on customers? What drives consumers to choose between and buy certain products? Are all our decisions based on value judgements or simply the price? How does psychology and persuasive price and marketing communication influence consumers to buy or switch brands?
In this article, we will explore the emerging discipline of consumer psychology, and its impact on pricing and consumer behaviour. We’ll discuss what drives a person to buy. Their needs and wants. And what pricing and psychological interventions are required to persuade people to buy from you at different price points. By the end of this article, you will learn how consumers think and respond to your pricing – and what you should avoid the next time you issue a price rise.
What is the psychological pricing strategy in pricing and the psychology of consumption?
All these questions (above) can be answered using the teaching and insights derived from a growing discipline called consumer psychology – a discipline which seeks to understand and identify the underlying cognitive processes that drive consumers’ to make specific choices and decisions.
Consumer psychology also includes the study of; how consumers respond to the influence of price, discounts, promotions, product placement, marketing and advertising. This means consumer psychology is very important to pricing and the psychology of consumption. As like pricing, consumer psychology considers both internal and external stimuli that influence purchase decisions. Key considerations include; motivations to buy (internal) as well as cues to buy (external) – i.e., things like; price, store layout, product positioning in the store or any factor that directs people to purchase certain items.
What are the motivations to buy that product?
Psychologists look at a range of human motivations to underpricing and the psychology of consumption. For instance, key motivations include:
- What’s in it for me?
- What will I get from using your product?
- What product will give me the most for the money and time that I’m putting in?
All the above motivations tell psychologists a lot about how people consume everyday products. The major finding being that our decisions to buy one product over another are mostly irrational rather than logical decisions.
In other words, we buy stuff because we want to avoid feeling bad. We desire something so much to feel good that we don’t care how much it costs. For examples: diamond pricing, luxury fashion, house prices.
According to Harvard professor Gerald Zaltman, 95% of all our purchasing decisions are subconscious. In fact, most consumers Zaltman argues don’t compare multiple competing brands and price points like many consumer reports say they do. Rather, they are driven by unconscious urges, the biggest of which is emotion.
Psychological pricing strategy examples
Two good examples of pricing and the psychology of consumption are the concepts of framing and anchoring.
What is the framing effect in pricing? The framing effect is the difference in consumer willingness to pay based on whether the price point is framed as a gain (“you could have…”) or a loss (“don’t miss out…”).
The framing effect used by psychologists and pricing teams to understand; the value consumers place on different price points based on its intrinsic value to them.
A key finding from the framing effect is that consumers are motivated to buy items based on ‘buy more for less’ promotions. But interestingly they are twice as motivated to avoid buying something at full price. Especially when they could have got the same item for less or at a discounted price.
Anchoring effect in pricing
What is the anchoring effect in pricing? The anchoring effect, conversely is the difference in consumer willingness to pay derived from actual comparisons with other like products and price points.
The anchoring effect here is based comparative values and choice models rather than motivations.
Both concepts of framing and anchoring are somewhat used in setting customer price points; (depending on a pricing team’s skills and approach). However, they are not strictly pricing concepts. Rather they are psychological concepts derived from the study of consumer and cognitive psychology.
A good starting point to understand more about the topic of pricing is the book Priceless by William Poundstone.
In Priceless, we are shown how retailers use the framing and anchoring strategy to make a price point more attractive and less attractive to customers. We are also shown how consumers are subconsciously influenced by even arbitrary numbers on a page.
The main argument in Priceless is that consumers don’t really know what anything should cost. And need external pricing cues to guide them.
Poundstone also argues that a price point is like an “anchor” in the consumers’ mind. Serving as “as a mental benchmark or starting point for estimating an unknown quantity”. A good example of this is a luxury Prada watch whereby one Prada watch is intentionally priced higher – at a seven-digit figure – to make the four-figure watch next to it look like a terrific deal.
The use of psychological price points in the psychology of consumption
Another good example of pricing and the psychology of consumption is the pricing technique of strategic price repositioning. Using a well-known consumer psychology technique called psychological pricing; pricing teams can create a new perception of value for a price consumer.
The latest research, for example, shows that the price point of $1.99 instead of $2.00 drives more volume for business as customers perceive the $1.99 price point as fairer than $2.00.
An investigation of why psychological pricing drive profitability is as follows:
- According to psychological pricing, $2.00 is a psychological threshold – a threshold which a significant proportion of customers do not want to pay.
- If the business decides to charge customers $2.00 instead of $1.99 the last two digits of the price would negatively impact sales volume because it exceeds the psychological threshold.
- Reducing the price point by 1 cent and changing the last two digits to .99c boosts sales volume – i.e., the price point is below the psychological threshold and customers feel like they are getting more value for their money even though they’re not really.
- Unit sales volume increases but so too has the profitability of each unit sold.
- The business has established a price point that both increases sales and margin without sacrificing anything – or just 1 cent.
- The customer and business both get what they want as a result of influencing consumer price perception.
Persuasion example in Pricing and the psychology of consumption
The final example of pricing and the psychology of consumption that we’d like to cite in this article is based on the book Persuasion by Robert Cialdini. In this book, Cialdini explores an important motivator in consumer psychology called “pre-suasion.”
The book “Pre-suasion” seeks to add information to existing behavioural science information by demonstrating how susceptible we all are to psychological ‘framing and anchoring’ interventions.
The main premise of Pre-suasion is that consumers are susceptible to a number of latent pres-suasion techniques used by businesses every day. It then identifies what savvy businesses and communicators do before delivering a message to get their messages (overt and subliminal) accepted by consumers.
The book Pre-suasion: A Revolutionary Way to Influence and Persuade, by Robert Cialdini, gives us vivid examples of how pricing and the psychology of consumption play out in real life. For example, he shows us how an FMCG business used Pre-suasion to market their new soft drinks in a mall of shoppers.
In this example, the soft drinks manufacturer wanted to persuade shoppers that they were more adventurous people when they tried their new soft drink. To do this, the soft drinks manufacturer asked shoppers a quick question before they asked them to try their new drink: Are you brave enough to try this new drink?
They found that when people were asked this question the first 97% of people said they were adventurous people and very willing to try the drink.
This simple experiment showed that when the business framed the tasting like a ‘challenge’ to passing shoppers in the mall, most people were quite happy to try the new drink. They found that making the tasting a trial made people more compliant with their suggestions.
Other Factors Influencing Consumer Buying Behaviour in the Pricing and the psychology of consumption
Below listed are 3 other external factors to consider when you’re thinking about how consumers think and respond to prices, including:
- Cultural factor − Factors like culture, subculture, and social class. For a brand, it is essential to take into account the cultural factors inherent to each market or to each situation in order to adapt its product and its marketing strategy. Things like family and friends can have a big impact on what consumers buy.
- Social factor − Factors like reference group, secondary reference group, and family. This explains the outside influences of others on our purchase decisions either directly or indirectly. Social factors include peer pressure, blending in with society and club membership. These can have a significant effect on consumer behaviour.
- Personal factor − Factors like age, sex, lifestyle, occupation, and financial status. These may explain why our preferences often change as our `situation’ changes. You no longer buy the things you buy when you were young or when your status in life enables you to buy things you always wanted. A consumer’s lifestyle, values, environment, activities, hobbies and consumer habits evolve throughout his life. Things like being a teenager, working for a living, having a family and growing old. All these influence what we buy and when during particular phases in our lives.
In a very real sense, then, pricing and the psychology of consumption are influenced by a range of external factors (listed above) and a hierarchy of internal choices, needs and motivations too. However, there are times in life, when our internal hierarchy of needs can and do override all of the external factors (listed above) with the most notable example being: during times of crisis.
For example, during times of crisis – such as, during the COVID-19 pandemic – we saw how billions of consumers bought huge quantities of ‘essential’ items to meet their immediate and physical needs and also calm their need for safety.
We saw essential items such as; toilet paper, tinned and frozen food, shelf food, flour, medical consumables (face masks and bandages) fly off supermarket shelves until nothing was left and serious supply shortages followed. We even saw people attack other customers in local supermarkets to get the last toilet roll off the shelf.
To explain how our innate human classification of needs impact both consumer and business pricing decisions, we’ll turn to Maslow’s hierarchy of needs now. As Abraham Maslow provides the first and best classification of human needs available.
In short, Abraham Maslow postulates that we are all motivated by five basic categories of needs: physiological, safety, love, esteem, and self-actualisation – each of which are briefly summarised below:
- Physiological needs are the topmost in the hierarchy. If someone is lacking in this area, they’re likely to try to meet these physiological needs first.
- The next need would be safety. Maslow’s theory states that people are more likely to react with fear or anxiety when they feel insecure or our safety is at risk. Our safety needs manifest early in childhood. Children and the elderly have a greater need for safe and predictable environments.
- Then comes feelings of love and acceptance. This need includes both romantic relationships as well as ties to friends and belonging in a family as well as in a social group.
- Then comes the need for greater self-worth. When people’s esteem needs met; they feel confident and see their contributions and achievements as valuable and important to the whole organisation.
- The last need is self-actualisation – refers to feeling fulfilled. Or feeling we are living up to our potential.
Hierarchy of needs theory enacted in the pricing and the psychology of consumption
As we all know from life during the COVID-19 pandemic, Maslow’s hierarchy of needs theory has been enacted by global populations of consumers repeatedly. With billions of consumers globally all making the same decisions to hoard vast amounts of ‘essential’ items based on their physical and safety needs.
But it was not only consumers who influenced by their hierarchy of needs. No, in fact, many businesses made price rise decisions based on our need for physical safety during a time of need and uncertainty.
Understanding how people prioritise their needs is a major influence on how businesses set customer prices. As Maslow’s theory shows people and businesses both make choices using an internal needs-based classification of everyday items – i.e, ‘essential’ to our physical needs and non-essential items that are nice to have.
In times of crisis, we have seen a complete shift in priorities and pricing strategy: We have witnessed a re-classification of value taking place literally overnight – whereby cheaper but essential items have increased in value and price by up to 800% and non-essential fashion retail have decreased in value and price by over 80%.
- More businesses are using psychologists to unravel the psychology of consumption.
- Psychology and emotion play an enormous part in the purchase of any product.
- Most consumers aren’t as savvy as they might like to believe.
- Pricing a product based on its attributes produces lacklustre financial results. Completely overlooks the subconscious, human element in the decision-making process.
Pricing is more than numbers. Understanding the internal hierarchy of needs influencing decision-making process is an important step to improving your price strategy architecture.
In effect, your price architecture is a mirror of our human needs. And a play on our often misguided perception of value. Businesses that ignore these fundamental findings and principles will continue to lose margin issuing uninformed pricing decisions.
It is important therefore to remember that consumer price perception plays an influential role; in any price strategy architecture development work you do.
When your price strategy architecture is not driving the price premiums you deserve; your team don’t know how to fix it. Give us a call and we’ll help you. Don’t miss out on this opportunity.
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