I walked into the supermarket in my town to buy some sauce. One brand had a price of $12.99, while the other was priced at $13.00.
Do you know what sauce I choose? The one with $12.99! And it was not only me; many people unconsciously make similar choices. So, did the $0.01 make the first sauce cheaper? That is hardly the case.
This made me remember one phrase I learned in my sales class- the psychology of pricing.
If you wonder what that is, worry not. This article will define the psychological pricing strategy and how businesses employ it as a marketing technique to enhance their sales. Let’s dive in.
If you are interested in starting a successful eCommerce site, I wrote a detailed article with Step-By-Step Guide on Building an eCommerce site.
What Is Psychological Pricing?
Psychological pricing is a technique that plays with prices to influence a customer’s shopping or spending habits, allowing the seller to make higher sales. The goal is to trigger a shopper’s subconscious response so that they can buy. It bridges the gap between the real price and what it should be in a way that the customers feel they are gaining from the purchase.
When customers want to buy, they have different psychological needs. For instance, some are looking for ways to save money, others are looking for the best deal in the market, and others want to buy the highest quality item. Your pricing strategy can address these needs.
Most e-commerce store owners have found that adopting psychological pricing is a game changer that increases profits across their entire venture.
BIG font = BIG price
— Katelyn Bourgoin ⚡️ (@KateBour) July 6, 2022
Our brains confuse the visual size of a number for numeric size
If we see $25 in large font, our brain notices how BIG the font is and assumes the price is big
Lesson: display prices using small fonts (not large ones)
Like this ✅ Not this ❌ pic.twitter.com/2KgohNbKY1
Why Do Many Businesses Employ Psychological Pricing Strategies?
Since merchants know that consumers rarely know the real prices of what they want to buy, they capitalize on psychological pricing.
Have you ever bought a product for $7,59 only to find that the same price costs $5.99 in another store?
So how do you know if something is an excellent deal?
If you get it at a lower price than what you normally pay or if it costs less than a similar product in the same category.
You are probably visualizing different ways online stores are using this pricing strategy. Let’s highlight some of these strategies.
You might also enjoy reading: How Much Money Do You Really Need To Get Started In eCommerce?
E-commerce Psychological Pricing Strategies
In this section, we discuss types and examples of psychological pricing strategies. Let’s go.
1- Charm Pricing/ The Power of 9
Have you ever wondered why most items (if not all) on Apple’s website end with a 9? Stay with me, and I will tell you in a few seconds.
This pricing strategy is called ‘charm pricing,’ where e-commerce store owners end the prices of their products in “9” or “99.” (Source: business.com)
This is where you reduce the left digit by one cent.
So, what is exactly Charm Pricing? Charm Pricing is a pricing technique that claims how you price a product will impact how well it sells.
You have probably encountered this pricing technique in your daily shopping, but we rarely notice it.
Consider this example of a business that uses psychological pricing strategy.
You can see the Argos store owner used the power of 9 in this instance. The brain processes £200.00 and £199.99 as different values. Your brain perceives £199.99 as £190.00, which is cheaper than £200.00.
How effective is this pricing strategy? One experiment by MIT and the University of Chicago used women’s clothing to test the left-digit effect. They set the prices as follows $44, $39, and $34.
Which clothes do you think sold the best?
The researchers were surprised that the clothes priced at $39 sold higher than $34, which is relatively cheaper.
You also notice that 9 is an odd number, and the reason for that is that the human mind loves odd than even numbers. So, store owners would rather have their prices end in odd numbers.
2- Reducing Manufacture Suggested Retail Price (MSRP)
Manufacturers often set an MSRP for their products sold across different retail stores. This price is called the standard price tag.
While some e-commerce store owners sell their products at the MSRP, others choose a lower price but cross out the MSRP.
Often you see online stores run 40% or 30%-off the MSRP sale on some products to attract consumers. The MSRP is an anchor price to make shoppers believe they are saving money on that item.
Consider this psychological pricing strategy example from an e-commerce store that uses slashed MSRP.
You can see that the MSRP is crossed out, and the retail price is relatively lower. Who will not be enticed by this “reduced price?” It makes you feel that you have saved money on what you buy.
3- Comparison Pricing
Psychological pricing does not necessarily initiate a change in prices. You can also use it by comparing your product to something similar. Although this strategy is often seen in brick-and-mortar stores, you can also use it in your e-commerce store.
Many people often compare prices in your store before they buy a product. Sometimes they can also compare your store prices with that of your competitors.
Here is a common trick you can employ.
- Put the premium option next to the standard-priced products to determine the one that sells more.
- If the standard product shows a larger percentage of the original price, it will likely sell more.
Comparison forces buyers to create an ideal picture in their minds of the service they want and how much they are willing to pay for it.
You can also woo your customers to buy the premium option if you put it within reach and show its benefits.
4- Price Appearance
In my psychology class, I learned something about appearance and reality. The way something appears determines how we feel about it.
I will tell you how this idea finds itself in pricing psychology. For instance, some buyers feel that $13.00 is more expensive than $13 because the latter isn’t a long number, even if they are the same in value.
One article published in the New York Times also highlighted that including the dollar sign next you your prices could trigger the “pain of paying” in your customers.
So, what is the most effective psychological pricing technique in this case? The article recommended reducing the price by removing the cents and the dollar sign.
So, your prices may look like this.
5- Use Fear Of Missing Out (FOMO)
Fear of missing out is a powerful psychological pricing strategy influencing purchases. Nobody wants to feel left out is once in a lifetime sale.
You see e-commerce stores with words like these on their landing pages ‘Only a few hours left!’, weekend sales only, and ‘One day only!’ to excite shoppers to participate.
This artificial time constraint does not necessarily mean that the product will run out of stock; it is intended to create a sense of urgency.
Check out this example from ContedAced.
If consumers see that their favorite product sells at a cheaper price and with a constrained time, they will likely rush to buy while the offer still lasts.
Sometimes these artificial time constraints reset after expiry and begin to run again. The goal is to make shoppers believe that the sale is ending in hours so that they can purchase.
6- Innumeracy
You walk into any supermarket in your area and may see an offer labeled “Buy one…you guessed it right, get one free.”
I must admit I always buy colligate with this offer in our area!
So, how as eCommerce stores use innumeracy in their marketing strategies? Let’s assume you see one brand of pasta offering 50% off the price if you buy two. At the same time, you see another brand with the offer of buy one get one free.
Which one will you choose without doing the math? Many customers will buy one get one free, even though these offers are just the same. Consumers go with what they feel is a better deal. They may not do the math because buying decision is an emotional decision.
7- Decoy Pricing Strategy
Decoy pricing is a subtle psychological pricing technique that e-commerce merchants use to upsell their products. It is often easy for consumers to choose between two options automatically, but when you throw in the third option, they will likely change their preference.
This third option is the decoy. It aims to make the highly-priced product look attractive.
For example, if a coffee shop sells a small cup of 7oz at $2.50, a medium cup of 12oz at $3.50, and a big cup of 16oz at $4.00, which one do you think most customers will buy?
You can see that the medium cup offers more value than the small cup, but the larger cup is even better. Since the bigger cup is only 50 cents more, most consumers will reason that it offers more value than the medium cup.
Therefore, the medium cup is a decoy that pushes customers to spend more on the larger cup.
Let’s wrap up this discussion by enumerating the pros and cons of psychological pricing strategies.
Advantages Of Psychological Pricing
- Psychological pricing increases sales: Many e-commerce owners employ this pricing strategy because it works.
- It boosts customers’ attention: Even if your target customers don’t purchase your goods, your brand will get noticed through psychological pricing strategy.
- It simplifies customers’ decision: making process- promotions, discounts, and a sense of urgency will help sway undecided consumers.
- It is less expensive: You don’t need to spend much money on this strategy because it works subtly.
Disadvantages Psychology Pricing
- There is a risk of misperceived product value: if you trick customers by lowering products’ prices, some consumers may think you are selling low-quality products.
- It is challenging to change: consumers may continuously expect these reduced prices if you do not use a sense of urgency.
- It is not a long-term solution because customers may not trust you.
Final Thoughts
To build a profitable pricing formula, it is essential to include customer behavior in the strategy. Psychological pricing is one technique that can help you influence your customers’ buying decisions.
And one way to know if your customers will respond to this pricing strategy is to observe their onsite behavior, how they respond to ads, and what makes them buy from you.
The psychology of pricing can appeal to your customers to stop sitting on the fence and make a purchase.
What is the most effective psychological pricing strategy you have employed in your business?
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