Retailers everywhere work hard to carefully price their products and services in order to generate more sales and keep customers happy. But implementing a good pricing strategy involves having a deep understanding of your customer base.
Once your business has this understanding, it’s easier to know which pricing strategies aren’t worth your time and effort, and which could be the revenue boost you’ve been waiting for.
What Is Psychological Pricing?
Picture this: you’re in a supermarket and all you need to buy is toilet paper. You keep your head down so as not to get distracted by any other items.
However, as you’re waiting in line to check out, you see some candy on a nearby shelf that’s buy-one-get-one. You think “Why not?” and grab a couple. You have just given in to one example of psychological pricing.
There are many ways to utilize this type of pricing strategy, but they all revolve around appealing to a shopper’s emotional perception of a product, rather than their rational one. In this case, you view the BOGO offer as a great deal and are excited by the price. It also probably helps that there’s a sweet treat in it for you.
Psychological Pricing Strategies
There are many things consumers consider when making a purchase. Some may be rational, looking for the best quality or value, and some a bit “non-rational,” or driven by the lowest price or quantity of what they are buying.
With every shopper looking for something different, a few psychological pricing strategies (also known as charm pricing) can be used to maximize your selling efforts online.
No. 1: Odd-Even Pricing
Taking a lesson out of the real estate broker’s handbook, Odd-Even pricing can be used to imply the value of a particular item.
$9.99: Uneven or .99 pricing conveys a good value while also potentially being the lowest price. Psychologically, this appeals to a buyer’s familiarity with sale pricing, in that they will associate this number with a discounted price.
This strategy allows a competitive pricing band to keep the price of the item within certain pricing brackets, although the price is only .01 cent less than the whole number. Real estate agents and brokers are notorious for this tactic, pricing a property $1 to $1,000 lower to make the price seem more affordable.
Conversely, the Even or .00 pricing implies a high-value product and a standard pricing structure. These prices are more common when the value of the item is clear. This type of pricing can appeal to both the rational and non-rational buyer, as these buyers will favor an even number when looking for quality goods.
No. 2: Unusual Psychological Pricing
Have you ever seen a price at Walmart or H&M that seems to be the lowest price you can get? Most likely it is due to the uneven numbers, particularly four or seven. When you see a pack of Energizer batteries priced for $3.77, it stands out in a big way. This is because the buyer expects a low-priced brand name item to fall into the .99 category.
Walmart has this pricing structure locked down. Everything in their online store is priced uniquely. This pricing strategy is interpreted by the consumer as being precise, cutting the excess fat off the normal $3.99 you would pay for batteries.
No. 3: Price Lining
This pricing strategy can produce a variety of results, mainly because it is the strategy of options. Some online retailers are very effective with this strategy because they pair several mediocre options with one great option. This option always floats to the top, implying that the consumer can be directed to choose one price or product over another.
Other retailers, namely bigger, popular brands, can offer their customers a variety of options so they aren’t boxed in to choose one product over the other. For example, Apple offers similar technologies at various price points. You can get an iPhone that costs $799 to $1,000-plus and benefit from the same OS, applications, and user interface. It opens their brand up to several price brackets in the market, providing quality products and services to the masses.
L’Oreal is another great example, providing the public with three different segments at different prices. They have positioned themselves in the luxury market, professional market, and consumer market, allowing open purchasing throughout. They give consumers the option to buy Kiehl’s Shampoo for $55, Redken for $29.50 or Garnier for $5.49.
They even employ the Odd-Even pricing strategy addressed above.
No. 4: Limited-Time Sales
Ever got one of those email blasts telling you that the best sale is happening right now, but you only have 48 hours to make the most of it? But then you get it once every two weeks? Retailers are marketing using artificial time constraints—more commonly known as flash sales—to draw in consumers. Flash sales are promotions that only last within a certain timeframe. From in-store banners that say “1-day only,” to emails that promote online-only deals, flash sales tap into a consumer’s sense of urgency.
No one wants to miss out on a good deal, so if you could get the same shirt at a discount today, why wait, right? However, with every perk, there’s a catch. While many sales are said to last for a set number of hours, the inventory may not last that long.
Consumers know that during many flash sales, there is a limited supply of the product up for grabs. This adds additional psychological pressure for them to snatch it up while they can. Not only does this further their want to buy, it also signifies to them that they’re one of the lucky ones if they get to buy it.
An online retailer that has successfully implemented this pricing strategy is Zulily. A merchant targeting mothers and children, Zulily thrives on flash sales. Centering its business around flash sales, Zulily posts sales every day for selected brands or vendors.
Many retailers spread the word about online flash sales by coupling email marketing with loyalty programs. Have customers sign up for loyalty points with an email address and encourage them to earn more points during sales.
No. 5: BOGO or 50% Off Two
If you had to pick between “Buy one get one free,” or “50% off two items,” which one would you choose? It actually doesn’t matter. Buying two of the same items at half off is the same as paying full price for one item and getting another free.
However, most customers don’t perceive it that way. A study conducted at the University of Minnesota Carlson School of Management found that consumers are more likely to buy something if they get something else in return. In other words, customers would rather receive something free instead of paying for another item at a discount, even if it all means the same at the end of the day. This psychological pricing trick plays off the common inability to understand discount percentages, also known as innumeracy.
Retailers, in turn, have started marketing their promotions with BOGO, boosting conversion rates and sales.
Psychological Pricing Pros & Cons
Just like any pricing strategy, psychological pricing can come with both advantages and disadvantages. Here are a few to consider:
- Increases Attention for Certain Products – Nobody can resist a sale. When a shopper passes by a product with a sign showing a discounted price in big red letters, it’s almost impossible to pass it up. This increases how much attention these products are getting, so be careful when choosing which products you’d like to receive more purchases for. Even just marking an item down from $50 to $49.97 can make a huge difference in a shopper’s perception of the product’s price.
- High Return on Investments – Many retailers find that having these one-time sales or decreasing the price of a product by even a few cents can yield a much higher revenue than they’re losing with the sale. This is especially true during holiday seasons when consumers are more likely to make big-ticket purchases, especially if they think it’s a good deal.
- Eases Consumer Shopping Decisions – Most shoppers consider price to be a key contributing factor when deciding which products to buy. By playing on their emotional reaction to price, it makes it easier for them to feel comfortable with their decision to buy your product.
- Primarily an American Strategy – Studies show that while prices ending in .99 or .97 might work better on American shoppers, European shoppers prefer a rounded price for their products. This is likely because sales tax functions differently in Europe.
- Can Be Viewed as Deceptive – Though most big retailers regularly engage in some form of charm pricing, many still view it as being manipulative towards consumers. Because of this, there is a possibility that you will lose some shoppers and may even tarnish your reputation if customers experience negative interactions with your business.
- No Profit Guarantee – The psychological pricing strategy is not a long-term effective strategy and does not always guarantee profit back. In order for this strategy to work, you need to target the products that are most likely to yield a high return and be careful how low you are willing to price, and how often. If a customer comes across your product and it is priced exorbitantly low, they may assume that the quality is no longer good and shop elsewhere.
Most shoppers consider price to be a key contributing factor when deciding which products to buy.
Your Psychological Pricing Goals
Psychological pricing can and does work. The goal of this tactic is to provoke an emotional response, whether excitement (low price), fulfillment (of a need or good value) or intrigue (ideal price).
While no one wants to admit that psychological pricing strategies are designed to manipulate, they most definitely do. It just all depends on who or what your end goal is. Look closely at your customer base and determine which pricing strategies are right for your business.
Editor’s Note: Contributing writers are Alexandria Flores, Arie Shpanya, Min-Jee Hwang, and Amanda Lin. This post was originally published in September 2012 and has since been updated and refreshed for readability and accuracy.