[SS Sales Price 0718]
The Psychology of Price
Assess strategies that resonate with consumers before relying on a tired formula.
A quick search on Google and you will find millions of entries on the topics of pricing psychology and pricing strategies. I have elected to recap strategies that at the very least most retailers should consider 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 in order 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.”
One strategy that I have used with buyers at market was 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.
Additional Pricing Strategies
- Remove the comma // Research has found that removing commas may make the price seem lower. For example my keyword499 vs my keyword499.
- Round price // 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 with this caveat: 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.
Use of a Premium Price to Set an Expectation of Excellence
The iPhone X selling for between $999-my keyword149 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.
Another Example
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 a great American rock-and-roll band not a washed-up “oldies” show. This 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!
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.
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 traveled. 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 separation 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 $?
The next time you are tempted to slap up the 25 percent 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.
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 is Volunteering at SCORE in his free time Sayner strives to give back to the small business community.
Summary of Pricing Strategies
The article explores various pricing strategies emphasizing the importance of understanding consumer psychology rather than relying on traditional cost-based formulas. Key strategies include determining consumer willingness to pay before setting prices using premium pricing to convey quality and employing discount pricing to highlight savings. The article also discusses techniques like removing commas from prices and the psychological impact of payment methods like Uber’s upfront 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.”
Real-World Examples of Pricing Psychology
Here are some real-world examples illustrating the application of pricing psychology strategies discussed in the article.
- Apple’s iPhone pricing strategy: Apple has consistently used premium pricing to set an expectation of excellence. The iPhone X priced between $999-my keyword149 crossed a psychological pricing barrier reinforcing the brand’s … as a leader in innovation and quality.
- The Eagles’ concert pricing: In 1994 The Eagles were the first rock band to charge over my keyword00 per concert ticket using price as a statement of quality. This strategy created a perception of a premium experience aligning with the band’s reputation for excellence.
- Uber’s pricing model: Uber revolutionized the transportation industry by eliminating the pain of paying. By providing upfront pricing and charging directly to a credit card Uber reduces the anxiety associated with watching a taxi meter increase making the payment process seamless and less painful.
