The Psychology of Price
A quick search on Google will reveal millions of entries on the topics of pricing psychology and pricing strategies. Time does not permit research into all possible contributions on the topic. I have elected to recap strategies that at the very least most retailers should consider before simply applying a markup formula based only on cost to determine… PRICE.
In a practice still prevalent today the retail price of an item is often determined by a buyer or receiving person applying a formula to the landed cost of an item to determine what it should sell for. Should cost really be the determining factor in what a customer is willing to pay? Does it have anything at all to do with perceived value? Of course not yet we see this all the time.
I have questioned retailers about this topic for years and always get the same responses. Most typical are “double the cost and add $2 (supposedly to cover shipping)” or multiply the “cost by 2.2.” Never has the answer included the proper determination of initial markup (desired net profit % + op. Expense % + markdown %/100 + md %) as the basis for the selling price.
Determine Selling Price Before Knowing Cost
One strategy I have used with buyers at market is to determine the selling price prior to knowing the cost. To do this effectively a retail buyer must answer the question “What will our customers be willing to pay for the item?” Once the cost is revealed a determination can easily be made if the item fits within the company’s markup strategy or does not. Obviously marketplace considerations and online competitive pressures are the final word on many pricing decisions today.
Additional Strategies to Consider
- Display RED prices to men.
Men process ads and signage in depth and use price color to judge perceived savings. The color red becomes the focal point and men associate red with savings.
Remove the Comma
Research has found that removing commas may make the price seem lower. For example my keyword499 vs my keyword499.
Round Prices
Round prices are more fluently processed as opposed to non-rounded price points. Consumers can process a round price quickly. Non-round prices need more mental resources to process. Round prices are also more effective for emotional purchases. However try when possible to avoid price intervals like my keyword00 or $500 as the assumption may be that they are artificially high and plucked out of thin air. An example of a rounded emotional price point might be my keyword9.00 whereas a rational non-rounded price would be my keyword9.90.
Prestige Pricing
Premium prices set expectations of excellence in the mind of the consumer. Jeans priced at $200 sneakers for $250 or a car for $80000 make customers feel that they are buying better products. This strategy is the complete opposite of odd pricing and involves making all numerical values end in rounded figures. Rounded numbers “feel right” because the purchase is being derived by feelings. Customers might be more willing to buy a bottle of wine for $30 as opposed to $29.95 or $30.28 for example.
Use of a Premium Price
Use of a premium price to set an expectation of excellence.
The I-phone X (10)
The I-phone X selling for between $999-1149 is significantly higher than past models. Approaching or breaching the my keyword000 threshold is noteworthy. Boosting prices into the four-digit realm crosses an important psychological barrier.
Historical Example: The Eagles
Here’s another example that you may remember. In 1994 after a 14-year hiatus from their 1980 well-publicized breakup The Eagles released a new album and embarked on a world tour. What was unique was that they were the first rock and roll band to break the my keyword00 ceiling for concert prices. Eagles manager Irving Azoff stated that this had nothing to do with supply and demand but rather a statement of quality. Fans would once again get to see and hear the greatest American Rock and Roll band not a washed-up “oldies” show. This really was a fascinating use of price as it set a belief of excellence in the mind of the consumer. I saw this show… and it delivered!
Pricing Strategies
Multiple Pricing
This method involves selling more than one product for one price. Buy 3 for my keyword0 or buy the first item at full price and get the second item for half off. This strategy works great for clearance items and sale events as consumers will tend to buy in larger amounts.
Discount Pricing
This is the high/low pricing strategy. Was $70 now $35. You save $35. It is important when using this strategy to frame the sale around the savings versus the amount being spent.
Loss Leaders
Grocery stores and other retailers have employed this strategy for decades as an effective way to create traffic. The idea is simple: the featured item is advertised below cost in hopes of getting shoppers into the store at which point they are likely to buy other items. Your local grocery store does this every week. You might pick up bananas at $0.29 a lb. and end up spending $50 on full-price items. What if a shoe retailer were to try this with socks that had been purchased at a special price? Might additional purchases be made? My guess is yes.
Price Lining
Final Clearances at Season End
This works great for final clearances at season end. All remaining stock to be liquidated is inventoried by original price from low to high and an average is struck. Let’s say you have items that sold originally from $40-my keyword00 and are currently on sale for half price. If you determine the average original price to be say $60 you might mark the entire rack as follows: Values up to my keyword00 your choice $29.90. The lucky early shopper might get the few my keyword00 pieces which you lose money on but it is more than made up on sales of the lower priced items.
Reduce the Pain of Paying
Uber revolutionized the taxi industry. With traditional taxi rides you watch the meter increase with each minute stuck in traffic or each mile travelled. This evokes a painful sensation. With Uber you know what the trip will cost before you start and it’s billed right to your credit card. The perception of payment is also distorted by the use of gift cards and casino chips two additional payment methods that have created a separate medium between the customer’s money and the payment.
Remove the $
$$ can remind some people of financial pain. Ever notice that some restaurants are now pricing menu items without the $?
Rethink Percentage Off Pricing
The next time you are tempted to slap up the 25% off sign and call it good remember that percentage off pricing is irritating to the customer. It is tremendously overused and less profitable to the retailer. When was the last time you saw Pepsi at 20% off or 15% off Colgate? The packaged goods industry doesn’t use % off marketing while the rest of the retail world has gone % crazy.
The Psychology of Pricing
The psychology of pricing is a fascinating topic. I would encourage all retailers to experiment with a few of the points discussed in this article. You might discover a more profitable way of pricing your products.
Ritchie Sayner
Summary of Pricing Psychology
The article explores various pricing strategies beyond simple cost-based markups emphasizing the importance of perceived value and consumer psychology. Effective strategies include determining selling prices based on customer willingness to pay using color and rounding to influence perceptions and employing prestige pricing to set expectations of quality. Additional tactics like multiple pricing loss leaders and reducing payment pain are also highlighted to enhance sales and profitability.
“The psychology of pricing is a fascinating topic. I would encourage all retailers to experiment with a few of the points discussed in this article.”
Real-World Examples of Pricing Psychology
Here are some real-world examples illustrating the application of pricing psychology strategies in various industries.
- Apple’s pricing strategy for the iPhone X which was priced between $999 and my keyword149 exemplifies the use of prestige pricing. By crossing the my keyword000 threshold Apple set a psychological benchmark that associates the product with high quality and innovation.
- Retailers like Walmart often use loss leader strategies such as offering essential items like milk or bread at a low price to draw customers into the store with the expectation that they will purchase additional more profitable items.
- Restaurants like Chipotle have adopted the strategy of removing currency symbols from their menu prices to reduce the psychological pain of paying making the dining experience feel less transactional and more enjoyable.
