Price Management

Does Psychological Pricing Work?

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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.

Strategy 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 cents less than a 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.

Shopping bags on floor

Strategy 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 4 or 7. 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.

Strategy 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.

Busy mall crowd

Strategy No. 4: Limited-Time Sales

Ever gotten 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 promotions are sales 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.

Strategy 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 of 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.

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.

Editor’s Note: Contributing writers are 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.

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