Psychological Pricing Strategy Advantages and Disadvantages
What are the psychological pricing strategy advantages and disadvantages?
You saw a big sign on your favourite store or mall’s door or windows that read, “50% OFF, ONE DAY SALE!” What would you do? Do you walk past it or go inside? For sure, you’ll go in and take a look and find yourself buying things that you don’t really need.
Did it also ever cross your mind why most prices end in 99 cents? Like $9.99 instead of $10?
Well, these are some psychological pricing strategies designed to let customers spend more than they intend or a trick to make them purchase quickly. And psychology in 99 pricing is the oldest trick in the book.
Take for instance Apple’s strategy in pricing – they offered 99 cents per song in iTunes. Also, check the Kindle store and you will see lots of books with prices ending with 99 cents.
Though psychological pricing has its advantages to businesses such as getting more sales as it tricks consumers into making a quick purchase, there are also psychological pricing disadvantages in using this kind of strategy.
In this article, we will define psychological pricing. We will also discuss psychological pricing strategy advantages and disadvantages. In addition, we will talk about the 6 most popular psychological pricing strategies that businesses use. We will also provide psychological pricing strategy examples so you will understand them better.
What is Psychological Pricing Strategy?
It is a pricing method where businesses set the prices slightly lower than a whole number. Our brain tends to round down the number instead of round up, reading prices from left to right. So, when you see an item priced at $9.99, you’ll feel that you’re only paying $9 instead of $10 though it’s closer to $10.
6 Most Popular Psychological Pricing Strategies
Behind each advertisement, promotion, discount, and deal out there, there is a corresponding psychological pricing strategy that businesses use. Business owners and marketers certainly deal with the process of pricing their products or services. However, many businesses still struggle with this process because they don’t have enough experience with what and how to charge people for their work even though they understand their customer’s needs.
Below are some common psychological pricing strategies that businesses can use in pricing their products and services:
The false sense of urgency
For sure you’re familiar with sale signs like “Big sale today only” or “One-day sale only” offering “BOGO or 50% discount”. There’s always a sense of urgency on these sale offerings which happens every weekend anyway in some stores.
These “one-day-only” sale signs are called artificial time constraints. The restrictions act as a driving factor for customers to spend. Customers are more likely to buy now rather than next week if they know that the offer is only temporary. Definitely, customers don’t want to miss out on such an obvious good deal. Thus, they purchase the product on impulse to avoid the feeling of regret or missing out.
For example, there’s a 50% off and a 12-hour only coupon offer for a $1,000 winter coat to $500, surely, you will rush to the store to buy it.
What’s the psychological reason? The $1000 is the anchor price that psychologically forces you to make the purchase because you’re getting a huge deal at the $500 price point. In addition, the restriction on the promotion (limiting the time of the offer) drives you into buying it quickly. Admittedly though, these limited sales never truly end.
Studies show that people are more likely to pay $25 for an item priced at $50, than buying for the same item on a regular price at $25. What leads to the excitement of getting a good deal? It’s all about the “price framing” of the item that creates a perceived value.
The 99 pricing (Charm pricing)
The official name for all those 9s at the end of prices in the stores is charm pricing. Based on a study at MIT and the University of Chicago, prices that end in 9 create higher customer demand for products. Our brain reads from left to right. Therefore, when we see a price at $2.99, we see the 2 first and perceive the price to be closer to $2.00 than it is to $3.00. Basically, using prices ending in 9 makes the consumers believe that you’re offering a great deal.
There’s an opposite effect of the popularity of the psychology of 99 pricing. If prices ending in 9 signify a “value price”, prices ending in 0 indicate a “prestigious price.” For luxury items, for example, a diamond ring, it is better to price it ending in “0”. This gives customers the impression that they’re paying for something that is costly and valuable. As an example, notice most of the sales on Gilt Groupe’s flash sales. All of the “before” prices end in 0s or 5s while the “after” prices or the discounted prices end in 7s, 8s, and 9s.
According to a study, on average, charm pricing can increase sales by 24% compared to the “rounded” price points. As a matter of fact, on one of the experiments conducted by some researchers, they tested a regular women’s clothing item at the prices of $34, $39, and $44. Surprisingly, the item that was priced at $39, sold best than $34 and $44.
Which is a better deal? “Buy one get one free” or “50% off on two items?” Most people would choose the first one even though they are both the same. Purchasing 2 products at a 50% discount is the same as buying full price for the first item and getting the second item free.
This is called innumeracy. Consumers don’t recognize or understand the basic math principles as they apply to everyday life. Other ways where innumeracy is used are coupon design, percentage pumping, and double discounting.
One study from the University of Minnesota’s Carlson School of Management found that consumers prefer to receive something extra rather than a discount. Just like they would prefer a “buy one month and get the next free” than “receive 50% discount on the first month.”
The design of your prices on how you write it can also have a huge impact on how consumers perceive the value of your product/service. Notice the restaurant menu prices. Most of them are written in a smaller font and don’t have the zeroes at the end. They’ll look like “20”, instead of “$20.00”.
The reason for this type of design is that longer prices appear to be more expensive than shorter prices, even though they are just the same number. Subconsciously, longer prices take more time to read, thus, people will see it as expensive.
This is an easy strategy to use. It helps also to omit the “$” sign from your pricing as it makes the price longer. If you’re pricing at a whole number, leave out “.00” as well. If you want to combine this method with charm pricing, make the “.99” in very small font compared to your main price.
Using 7 (plus/minus 2) words in the call to action
You’ve learned that using 9 in pricing is powerful. But how do you create a most engaging call to action to your pricing? You need to apply the Miller’s Magic Number.
Cognitive psychologist George A. Miller found that the maximum amount of letters, digits, or words that humans can store at once is 7 ± 2. He discovered that for short-term memory, 7 is the limit of our capacity. This magic number 7 can also be expanded by categorising information into related groups. How to apply Miller’s Magic Number to pricing?
Let’s take Lyft as an example. Their ads are capable of drawing new riders and drivers, reason why its active customers tripled over a two-year period. Their Facebook ad reads, “Get up to $50 in Ride Credit” (with the Install Now button) below it. The “Install Now” call-to-action button is persuasive because it leads new customers straight to where they can claim their free $50 ride credit.
Useless price points (Decoy pricing)
Most often, customers use your own product/service for reference price.
Many businesses are certainly familiar with the infamous study of Dan Ariely, a behavioural psychologist and bestselling author of Predictably Irrational. He conducted an experiment where he offered 3 different subscriptions to the Economist magazine.
- 1st Option: Online only subscription for $59
- 2nd Option: Print only subscription for $125
- 3rd Option: Print & online subscription for $125
We will think that 2nd Option (print only subscription) was a mistake. Anyway, who would select 2nd Option when you can get both online and print subscription for the same price?
But there’s an underlying motive why 2nd Option is there. Ariely conducted a study to test his intuition. Indeed, the “print only” subscription made a huge difference.
Without the 2nd Option, people couldn’t precisely compare the options. We don’t exactly know the price for web and print subscription. Definitely, most people will choose the “online only” subscription if there’s no 2nd Option because it was cheaper. The second Option is actually a decoy price.
The “print only” subscription helped people compare those two options. Seeing that the “print only” option is priced the same as “print and online” option, people could easily realise the value of the online and print subscription. Why not go for both if you’re just paying the same price with “print only”? Thus, more people chose the more expensive one which is the 3rd Option (print and online subscription). The Economist generated 43% increase in revenue.
Surprisingly, offering choices, however useless they are, helps people decide though they don’t know what they really want.
To let customers take advantage of the expensive version, you can take the same approach. Naturally, customers will compare those options especially when you offer different versions of your product/service.
Advantages and Disadvantages of Psychological Pricing
As with anything in life, psychological pricing also has its pros and cons. It can work well in a lot of situations but it can do more harm than good in some. Let’s examine some of the psychological pricing strategy advantages and disadvantages. Let’s start with the pros first.
It boosts attention to your product.
Who can resist a 50% discount offer? Or marked down items with before and after prices, like “from $100 to $89.99”. Having big, red signs advertising your product promotion will surely force people to go and check what you’re selling.
Charm pricing is the most common strategy used in this marketing category. Approximately 70% of the products sold in stores are influenced by charm pricing (sometimes called “.99 pricing”).
It makes the decision-making process simpler
Most psychological pricing strategies simplify the decision-making process for customers. Customers are cost-conscious, thus, one of their primary screening points is cost. With the discount or promotion laid out before them, consumers have less time to think about because the offer is clear. This is good for retailers that thrive off of one-time sales.
It offers a high return
One-time sales can offer a high return on investments, especially during peak-volume seasons, like holidays. Promotions that attract the masses is likely to get a high return at the end of the day.
Another way is pricing a product higher when initially launched when demand levels are also high. By doing so, it will generate a higher return on investments made to introduce the item to the market.
Some may accept the tactic as vital in doing business, however, some may see and perceive it as taking advantage of customers. Others may even feel manipulated.
Many of these psychological pricing strategies are based on the notion that customers are buying on impulse rather than well-researched thoughts. Customers who thoroughly think before purchasing will recognize manipulative pricing schemes. They will either control not to buy or leave your store for good and shop somewhere else. Customers who look for the cheapest price are loyal to the price itself and not to the company.
It affects a brand’s reputation
Price is the determinant of your product’s value. However, this is dependent on your customer’s judgement of your pricing. Like for instance, if you set rock-bottom prices just to trick your consumers into a quick deal, they will think your product is of low quality and expect the lowest price possible, whenever possible. Even worse, having cheap prices and perceived low-quality products will stop new customers from coming to your store.
It’s hard to overcome a poor experience, especially when it comes to pricing and not a poor customer service reaction.
No sales guarantee
Using psychological pricing tactics is not a long-term pricing solution. Well, it may increase your sales but only for a short period of time. Some consumers will not mind paying for higher prices because they prefer a different brand. Just because you lowered your pricing does not mean you’ll get new customers. Thus, businesses should have a firmer and long-term plan in place.
The psychological pricing strategy advantages and disadvantages provide ideas that can help businesses with their pricing without sacrificing profit margins. Even though there are risks involved with this marketing strategy, it can also be an effective way to increase profits without a big investment.
Should a business use psychological pricing?
Not all of the above-mentioned tactics are manipulative. Nothing’s wrong with offering price value substitutes or sticking to price thresholds. If these strategies will help you to persuade your customers in the decision-making process and purchase a good product at a price that reflects your product’s value, then go ahead and adopt these strategies wisely.
However, if you use these tactics to sell low-quality products at super high prices, then forget it. Your customers will know sooner or later of the deception. Consequently, losing your customers forever.
There’s no denying that psychological pricing does work. The aim of this technique is to provoke an emotional response. May it be excitement for a low price or fulfilment of a need or a good value.
Therefore, any business thinking about employing this tactic should consider psychological pricing strategy advantages and disadvantages and analyse all points discussed above before adopting psychological pricing.
- Psychological pricing may look like a sure win for your business but still, it relies on the idea that customers operate based on collective patterns of behaviour.
- You could lose credibility when customers figure that you use psychological pricing strategy with outright greediness.
- Since psychological pricing strategies are based on the belief that customers are buying on impulse rather than well-researched thoughts, customers who thoroughly think before purchasing will recognise manipulative pricing schemes.
- Price conveys the value of the product but it is dependent on the customer’s perception of the pricing. Setting super low prices to trick your consumers into a quick deal will compromise your product’s quality.
Psychological pricing takes on many forms, therefore it might be hard to choose which strategy or strategies is/are good for your business.
According to a study, on average, charm pricing can increase sales by 24% compared to the “rounded” price points.
We’ve learned that using psychological pricing will boost attention to a company’s product, simplifies decision-making process and increase revenue.
We also discussed the demerits of psychological pricing that it’s deceptive, it ruins the reputation of the company’s brand and doesn’t offer a long-term guarantee in boosting sales revenue.
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