Pricing Tricks You Never Knew: Do They Really Encourage Shoppers to Buy More..?
Pricing tricks are the tactics businesses use to get you to buy more without you even realising it. For instance, have you ever bought a suit or an outfit that you didn’t really intend on buying but ended up buying it anyway on the fly? Well, you’re not alone. You probably thought you got a good deal or even a bargain, but in reality, you probably didn’t. Is the outfit or suit still sitting, untouched in your wardrobe gathering dust and you’re thinking why did I ever buy that?
Merchants use a lot of pricing tricks and price strategies to get us to spend more — from labelling prices without money signs to setting a per-customer limit. These pricing tricks are used to sell all kinds of products, including clothes, food, toys, cars and houses to increase unit sales at more profitable price points.
Underlying many pricing tricks is a very important fundamental concept in decision-making theory called relativity. Relative decision making is when buyers establish value based on comparisons – i.e., by comparing one thing with another. The value of a particular item will be different in many situations depending on what they are comparing it to and how the buyer came to buy your products or services.
To explore this concept further, we’ll examine how customers perceive value and how they buy from us. We’ll also provide you with all the best pricing tricks to increase unit sales and look at the impact of pricing tricks on pricing strategy development/formulation. By the end of this article, you’ll have a pretty good understanding of how to influence your customers to buy on value rather than just price.
How do customers really buy from us?
According to Weber-Fechner Law theory, consumers typically have reference prices for products. These reference prices are typically based on prices that they have seen before or have paid before in the past. They can also be based on shoppers’ perceptions of fairness and value.
There are two kinds of reference prices:
- Internal reference prices are based on consumer experience. Research indicates, for example, that internal reference prices are typically lower than actual retail prices. What’s more, it is common for consumers to experience “sticker shock” as a result of having a fixed price in their minds prior to purchasing. “Sticker shock” is the dissonance a shopper feels when the price of an item is higher or lower than the price they have in their mind – a price often derived from past experience or knowledge of that product. Dissonance is a physical and emotional reaction. The reaction occurs automatically when a shopper experiences prices that are both higher and lower than their expectations. For instance, based on past experience of buying a pencil for 50 cents. A customer may come across a pencil for 25 cents. As they look at the price, they are surprised that the pencil is cheaper than they thought. They get a slight rush from finding what they consider to be a bargain.
- External reference prices – or RRP prices – are supplied by retailers as a means of anchoring value and prices. Consequently, RRPs have a strong influence on a consumer’s price expectations—e.g., “Regularly $3.99; Now $2.99.” Although one might think that an implausible external reference price would suggest to the consumer that the retailer is not being transparent with their pricing, research has shown that clearly implausibly high external reference prices actually increase internal reference prices.
Relative decision-making processes – the mechanism of value creation
Basic price comparisons:
The simplest form of relative decision making is a basic price comparison. Here the customer simply orders the relative price points from the lowest to the highest to then choose which item has the most value to them.
For example, have you ever seen businesses put all their product prices on one page?
Using a basic form of price comparison, as the example (above); businesses are influencing shopper behaviour by encouraging us to compare their prices with their reference competitors for like products. They probably know that their prices are lower than their reference competitor, and are implementing a penetration pricing strategy to encourage us to buy from them, not their competitor.
The assumption here is that businesses that use basic price comparisons assume shoppers are highly price-sensitive buyers and only value rock bottom prices.
A seller’s over-emphasis on basic price comparisons can also indicate that the seller/retailer hasn’t done enough research on customer value drivers/shopper behaviour. And/ or doesn’t know how their customers really value their products. In the pricing world, we’d call the above example a pretty basic form of value estimation.
Another form of relative value estimation is called “quality discrimination” whereby a company produces different grades of the same product and then prices them differently based on their tangible features (lower to high quality).
Versioning a product based on quality features and benefits gives the consumer the option of buying a higher-value model for more money or a lower-value model for less money. Businesses that use quality discrimination to set prices typically assume that shoppers value tangible features and benefits of a product above all else. This is true to a large extent, however, some shoppers can simply buy on price (and not care much about product quality) while others are willing to pay a bit more for other things such as product guarantees, next day delivery, brand. Quite often tangible features and benefits are not the main purchase driver.
A final example of relative decision making is based on loss aversion theory. Loss aversion theory states people feel the pain of a loss twice as much as the pleasure of again.
Studies have shown that people experience losses very differently from gains. For example, if you make money in the stock market, you’ll experience a certain amount of pleasure. But if you lose money, you’ll experience a lot more displeasure and pain. The emotional response to pleasure and pain is disproportionate.
Research shows that people experience about twice as much pain with a loss than they experience pleasure from again. Which means shoppers are much more likely to be loss averse than pleasure-seeking when they buy your products. What’s more, that loss aversion will be figuring prominently in their minds when they decide to buy from you.
Once a decision is formed in a particular way; people become sensitive to the gains or losses that would be associated with the decision outcome.
For example, if you’re a customer that really values lots of data on your mobile phone plan – because you like downloading lots of movies rather than going to the cinema – you probably wouldn’t buy the standard mobile phone plan option with limited data (even though you’d start off by wanting the lowest price possible). You wouldn’t buy it because you’d recall that running out of data really frustrates you; and puts an end to your major free time leisure activity: watching films on your phone.
So what’s really happening when shoppers buy your stuff? Well, several things are happening. If we take the example above, for a moment, we can see that you, the shopper are using a more sophisticated form of value estimation. We can also see that the seller (mobile phone operator) is using a more sophisticated versioning strategy on you. You both, however, are framing value using risk or loss aversion. The seller is framing value through risk – not just price and tangible product benefits – and then using the price to articulate that value. Alongside well-crafted descriptions of how the price plan can solve your pain and frustrations with data issues.
A key point here is the pain related to the memory of a frustrating experience (triggered by the data description and usage restrictions in the price option). Any painful past experience shoppers may have had regarding data issues would, in turn, educate them very quickly on the value of more premium versions.
Shoppers can immediately feel the impact of loss aversion based on their past experience or even a good marketing story of ‘what could happen if..?’ People are much more willing to pay for premium versions than you’d ever imagine as long as you’ve nailed their pain and have a product that meets their needs – or stops the feeling of loss.
Many shoppers don’t even realise that many businesses (Amazon, Facebook, LinkedIn) already know this about us and have been influencing our buying decisions by featuring price limits, offer restrictions, version, fences in their offers, promos and pricing plans.
The mobile phone example does not apply to all shoppers; but the point here is segmentation is always working and in real-time: Price segmentation and value driver segmentation. Ultimately shoppers are self-selecting based on their needs. The savvy seller knows this and anticipated our needs without us even realising it by ongoing value driver analysis and shopper research.
Here are some more pricing tricks and tips businesses can legitimately use to increase unit sales and price points:
- Charm prices. Have you ever noticed how Prince Charming always gets the girl, no matter what? As the name implies, no one can resist him because he’s charming. The same is true for pricing…
According to research; the left digit of a price is reduced from around number by one cent to override our logic brain. 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.
It all boils down to how a brand converts numerical values. It is effective because it looks good to the buyer. A $2.99 price is better than a round number price point of $3.00. Why? Answer: People perceive prices to be smaller when they contain fewer syllables.
- The opposite of charm pricing is prestige pricing scheme. For this pricing tricks; the number is rounded off to the nearest numerical value. For example, $9.99 is rounded to $10. According to research, a rounded number is processed faster and entices reliance on consumers’ feelings. Simply stated, the price feels right to the consumer based on their gut feelings. They are more enticed to buy it at around numbers instead of seeing the cents.
- Buy one get one free. This pricing trick makes the buyer think s/he’s getting more for the same price as one. This is based on one thing: greed. Once the buyer sees it; all cautions are tossed to the wind – consequences be damned. Consumers have caught on to this pricing trick and avoid it altogether – especially as there’s now a trend for health over supersizing.
Try to be creative in your pricing tricks
You can still make alternative discount schemes like Buy one and get 25 per cent off your next purchase; buy one and get four bonuses valued at $60, for free. Or buy one, get three for free. Try being creative in your strategy.
- Per-customer limits. Making an item scarce or restricting an offer to a limited group (via subscriptions) can drive demand: Scarcity makes people feel that the product will not be as cheap for much longer and encourage impulse buying behaviours (or emotional buying). Remember: people’s natural response is to get as much as they can or pantry load. Very often people will buy more than they need because of the illusion of scarcity or because of price limits.
- Decoy pricing is another one of those pricing tricks which have been purposefully designed to influence shoppers buying decisions via choice price architecture. In buying a product, the customer is free to choose to buy what they want within the parameters you set. Many shoppers don’t realise that they are operating within price parameters; and that their buying journey has been carefully analysed and set up long before they’ve even thought about making a purchase.
Who does this kind of pre-planning and work? A world-class pricing team – who, in turn, have spent many months building a choice price architecture made up of carefully priced products, added features, benefits and value statements.
- Instead of adjusting the price, improve your value proposition. Let the customer experience your products or services before they buy. Questions like what makes it special, how is it better than other products and what’s the pain your customers; are trying to avoid. Ultimately, you can solve your pricing problem by communicating value more effectively with better pricing and marketing; and by giving shoppers a taste of what’s to come.
- People base about 90%+ of their buying decision on their physical, emotional and psychological needs. These needs are very important internal reference points to shoppers as they buy from you. Understanding how shoppers value your products is the answer to your price-value- profit equation.
- When a business nails the customer’s pain point (risk) and gives them what they need or want (the offer) – in a way they understand; (simple marketing, trials, promotions); there is a substantial price premium to be made (up 15% of profits).
- The buyer gets several stimuli to decide which product to buy. Stimulus like the right decision, no guilt in buying the item and affordability to buy it.
- Human psychology is all about deciding the next action. This is no different when deciding to buy or setting prices (as a business).
- Nothing in this world has a concrete meaning. At the end of the day, value is an abstract concept and a perception. Price is the summation of value. Businesses have to frame and anchor value using a well-crafted price category architecture.
- Sometimes a little nudge from the seller is enough for the undecided buyer to buy the item. Base on past experience, people are often persuade to buy or the fear of loss.
- Relative thinking is a fundamental human driver of purchase decisions. Throughout our entire lives, we make decisions every day to attain our personal goals, objectives or avoid risk and pain. Ignoring our basic human tendencies when we set prices; is costing you millions of dollars each year.
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