There’s more to a perfect pricing strategy than economics alone. Alongside input costs, demand, and industry competition, there’s another factor determining the success of your pricing: psychology.
Psychology and marketing go hand in hand. Today, I’m taking a quick look at four psychological principles behind successful pricing strategies. By combining these psychological quirks with a bit of customer insight, adjusting your pricing strategy by as little as a few cents could massively improve your sales.
1. Charm Pricing
The simplest psychological pricing tool at your disposal is also the most common. Whether you’re buying a 99-cent bag of chips or a $29,999 sedan, both B2C and B2B markets are saturated with prices that end with the number nine.
This is known as charm pricing, and there’s a reason for its proliferation: it has a significant impact on sales. In his book Priceless: The Myth of Fair Value (and How to Take Advantage of It), William Poundstone conducted eight separate pricing studies. In each instance, prices ending in nine sold 24% better than the nearest “rounded” price point.
This isn’t always through the sheer virtue of being cheaper. Researchers at MIT conducted their own experiment, selling identical clothing at three different price points: $34, $39, and $44. The $39 price point outsold both the $44 and $34 price points, thanks to the psychological lure of charm pricing.
This works because our brains are trained to simplify numbers, and will subconsciously latch on to the first number in a price tag. This “left digit” effect means that a $299 product is subconsciously associated with a reference point of $200, instead of the $300 to which it’s much closer.
There’s even an argument that the prevalence of charm pricing has lead to a type of social conditioning, with charm prices becoming inherently associated with good value.
2. Prestige Pricing
Charm pricing is a valuable tactic, but within the B2B sector, it may be more effective to increase your prices. As we move away from small businesses and into the enterprise sector, the preferences and priorities of consumers begin to change.
While a small-business owner may prioritize low prices, a busy executive or director may gain greater utility from convenience and simplicity. A $19 product may sell better than a $20 product, but a $2,000 price point may generate more sales than an item listed at $1,900.
This is particularly true with luxury brands. These brands differentiate themselves with quality, style, and convenience—not prices. Round-number price points like $200, $500, and $1,000 reflect a “don’t sweat the small stuff” mentality that appeals to their target audience.
3. Anchored Pricing
Say your business offers an accounting software package for $1,000 per month, along with a range of stand-alone monthly add-ons for $50, $100, and $200.
Success! A customer has just bought your top-tier product. Now you might choose to follow-up with one of your cheapest cross-sell opportunities—after all, the customer has already spent a small fortune with you. However, pitching one of your most expensive add-ons may be a better idea.
Before the sale, your would-be customer has no pricing reference, so an extra $200 is a big deal. Post-sale however, the customer’s pricing reference is now the $1,000 they’ve paid for the software package. Suddenly, an extra $200 might not seem so excessive—especially if the add-on improves the functionality of the $1,000 software package.
This is the power of perception. The desirability of a certain product, at a certain price point, can be manipulated by anchoring it to another, much bigger number. This is a particularly powerful tool for reducing churn in industries with long sales cycles.
4. Framed Prices
The same principle can be used to “frame” your prices, in order to increase their desirability. For a great example of this in action, we can turn to the Economist’s recent pricing strategy:
1. Online subscription, $59
2. Print subscription, $125
3. Online and print subscription, $125
At first glance, option two seems useless, offering less value than option three for the same price. However, this option isn’t there to sell print-only subscriptions. It’s actually there to frame the third option, making it more desirable in comparison.
Without option two, consumers have a choice between a $59 online-only package and a $125 print-and-online package—a big price increase just to receive a magazine in the mail.
However, by valuing their print-only copy at $125, the implied value of option three is now $184 ($125 + $59). Suddenly, option three isn’t just the most desirable; it’s also going to save the consumer a ton of money.