Psychological Pricing

Have you ever wondered why most supermarket prices end by .99? Tricking the human brain is easy. Our brain often interprets a price of 9.99 as nine rather than ten. Marketers take advantage of this and many similar pricing tactics. It is psychological marketing. Keep reading to learn about different psychological pricing strategies and techniques. We have also prepared some real-world examples of companies using psychological pricing strategies!

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Table of contents

    Psychological Pricing Definition

    Psychological pricing is a way businesses set prices to influence how customers perceive the value of a product or service. They do this by using tactics like pricing just below round numbers or choosing prices that sound appealing to make products seem more affordable or attractive.

    Psychological pricing is a pricing strategy that employs various tactics, including setting prices slightly below whole numbers or using specific price points, to manipulate consumers' cognitive biases, making them perceive a product or service as more affordable, attractive, or valuable.

    In a town where shopkeepers use psychological pricing, one store prices a shirt at $19.95, while another offers a similar shirt at a "limited-time offer" of $25, down from $30. Both tactics make customers feel like they're getting a deal, with the first store making the shirt seem cheaper and the second creating a sense of urgency and savings, even though the price difference is minimal.

    Marketers consider pricing art in this age where markets are volatile, and competition is high -considering economic theories and calculating costs are not enough to set a price that motivates consumers to buy. It is the understanding of consumer behaviour that guides suitable pricing for any successful product.

    Psychological pricing is often referred to as the 'irrational' effect of pricing on consumers' purchasing behaviour1.

    The task in front of marketers is to make consumers think they are getting a better deal or additional value if they go ahead with the purchase.

    Psychological Pricing Techniques

    Psychological pricing techniques can be divided into four categories: framing, congruency, context, and signalling. Those categories are called psychological principles for pricing.4

    Framing principle

    Marketers must frame product offerings to highlight positive product attributes as positive.5 Some examples of framing principles are using the word 'free' in pricing - giving a gift with a high-valued item or offering bundle pricing instead of discounts. For example, 'buy one get one free' gets a better response than '50% off', even though both offers are the same. Offering discounts raise quality concerns.

    Another framing principle is multi-unit buying. 2 for £10 is better framing than £5 each. You may have heard about scarcity-creating campaigns like 'offer valid until stock lasts' or 'limited edition'. However, this framing principle usually only works for high-priced, quality products.

    The last framing principle is emotional framing. An example of emotional framing is 'pay an upfront price of £50 for a new iPhone and the remainder in simple instalments'.

    Congruency principle

    Congruency principles combine pricing information with other messages to improve the chances of purchase. Some examples include changing fonts, striking out old prices and highlighting lower prices, making the packaging more attractive, and providing prices in fractions. For instance, writing prices in a smaller font may be perceived as more attractive than writing prices in bold font.

    Customers get demotivated when they realise that others have paid less for the same product. Perceived price fairness is essential for consumers. Hence, congruency techniques like 'price freeze for a month' or 'fixed low prices always' are implemented.

    Context principle

    Consumer buying preferences may change according to the surroundings and location of the product. Researchers found that customers prefer buying the middle option when given a choice between three items. Hence, adding a third option in the display increases sales of the mid-size item.6

    Other context techniques are listing competitor prices and keeping price thresholds. Listing a competitor's prices is beneficial for improving sales, as it provides a point of comparison for customers. The price threshold indicates the standard price around which a product must be sold. Selling a product at a lower price than the threshold may reduce sales.

    If the average price of a T-shirt in a store is £25, selling a T-shirt for £8 may concern buyers about its quality.

    Bundle pricing can also come under context principles. Sales increase considerably if the prices of individual components are mentioned. Regarding shipping and handling costs, researchers believe it is better to use partitioned pricing rather than bundling them with product prices.7

    Signalling principle

    Signalling principles consider the message received by people from the pricing. Researchers have studied how we perceive numbers:

    1. Prices ending in odd numbers are effective (especially 9). 5 is the most frequent number appearing in high-selling items. Numbers just below the whole number give the illusion of a lower price.4

    2. Prices in red are perceived as more savings.8 In contrast, consumers perceive prices with many zeros or commas as expensive. The number of syllables in a price value also matters. More syllables are treated as costly pricing.

    Psychological Pricing Strategies

    We have seen different principles and types of psychological pricing. Let's focus on marketers' main psychological pricing strategies to motivate customers.

    Charm pricing

    Charm pricing is also called odd pricing. Consider the image below. The price of papayas, 1.99, is perceived as cheaper than 2. Hence, slashing a penny from the price may increase sales exponentially. Another reason why charm pricing works is that we read numbers from left to right; we consider the first digit the main price number.

    Consider the price of a TV is £899. The first digit from the left is 8. Thus, the number 8 is associated with the price.

    On the contrary, marketers should not use charm pricing for high-quality items. Odd prices give an impression of lower quality. Hence, many such premium items end with the digit '0'.

    Psychological pricing, charm pricing, StuysmarterPrices in Supermarkets, Pexels

    Prestige pricing

    This approach sets high prices to give the impression of exclusivity and quality. For example, a luxury watch brand may price its timepieces at $5,000 to convey a sense of prestige and appeal to status-conscious consumers.

    Price lining

    This involves setting a limited number of price points for a range of products within a category. For example, a clothing store may offer shirts at three price points: $29, $49, and $69, making it easier for customers to compare and choose.

    Bundle pricing

    This approach involves offering a group of related products or services for a single, lower price than if purchased separately. For example, a fast-food restaurant might offer a meal deal that includes a burger, fries, and a drink for $5.99, while buying each item individually would cost more.

    Innumeracy

    Our brain does not like to perform unnecessary tasks. Instead of giving numbers or percentages on labels, it is better to use framing techniques. Consider the following example.

    Which offer would you choose? The first offer is '25% off and the second is 'buy one get the other half price'. Well, both offers are the same. The only difference is that the second offer saves us from doing mental maths. Additionally, mentioning the word 'half' creates an illusion that we are receiving 50% off the original price.

    Price appearance

    The price appearance strategy is based on signalling techniques. A long number gives an impression of expensive goods. Hence, many retailers remove currency symbols and zeros after the decimal point to keep numbers shorter.

    Compare these two price tags; £99.00 and £99. Does it feel like the first price tag is more expensive than the second? The first number is longer than the second. You may have even seen price tags like .99 in the supermarket. No zeros, no currency symbols.

    Time constraints

    This psychological pricing strategy is based on the framing technique - a framing approach in which artificial time constraints are introduced. It creates a sense of urgency by limiting the availability of a product or the duration of a promotion.

    For example, 'offer valid until the 31st August only'. Many e-commerce websites offer flash sales or lightning deals. This is a novel implementation of time constraint psychological pricing. Another example of a time constraint is framing the offer as 'for the first 50 customers only'.

    Psychological Pricing Advantages and Disadvantages

    Psychological pricing strategies can be powerful tools for businesses to influence consumer behavior and drive sales. Companies can tailor their pricing to create perceived value and encourage purchases by understanding how customers perceive prices and make purchasing decisions. However, these strategies also come with potential drawbacks that can impact a business's reputation and long-term success. The table below summarises the main advantages and disadvantages of psychological pricing strategies.

    Table 1. Advantages and disadvantages of psychological pricing.
    AdvantagesDisadvantages
    Increased salesMisperception
    Improved product perceptionUnsustainable competitive advantag
    Ease of comparisonPrice wars

    Advantages of psychological pricing

    1. Increased sales: Psychological pricing can create a perception of better value, leading to higher sales. For example, charm pricing, where items are priced at $9.99 instead of $10.00, can make customers feel they're getting a bargain, which can boost sales.
    2. Improved product perception: Certain strategies, such as prestige pricing, can enhance a product's perceived quality and exclusivity. For example, a high-end handbag priced at $2,000 may be seen as more desirable and luxurious than a similar one priced at $200.
    3. Ease of comparison: Price lining simplifies the decision-making process for customers by offering a limited number of price points. For example, a clothing store that offers shirts at $29, $49, and $69 helps customers easily compare and choose based on their budget and preferences.

    Disadvantages of psychological pricing

    On the other hand, psychological pricing has some disadvantages.

    1. Potential negative perception: Consumers may misperceive the product's value if it is always on discount. If a brand offers regular discounts, customers will expect the same every time they purchase.
    2. Unsustainable competitive advantage: Over time, consumers may become aware of these tactics and be less influenced by them. For example, if customers realize that "limited-time offers" are frequently extended or reintroduced, they may become less inclined to make immediate purchases.
    3. Price wars: Competitive pricing strategies can lead to price wars, reducing profit margins for all businesses involved. For example, if several retailers engage in aggressive promotional pricing, they may drive down prices across the market, making it harder for businesses to maintain profitability.

    Psychological Pricing Examples in Real Life

    Apple's charm pricing:

    Apple often uses charm pricing for its products, such as the iPhone 11, which was launched at a starting price of $699. By pricing just below the whole number, Apple creates the perception of a more affordable and attractive price for consumers

    Starbucks' price lining

    Starbucks employs price lining in their menu by offering drinks in three standard sizes: tall, grande, and venti. By setting specific prices for each size, customers can easily compare and choose a drink based on their preferences and budget (Source: https://www.starbucks.com/menu).

    Amazon Prime Day's time constraints

    Amazon's annual Prime Day event features a wide range of products with significant discounts, available exclusively for Amazon Prime members. By offering limited-time deals and promoting a sense of urgency, Amazon encourages customers to make purchases during the event (Source: https://www.aboutamazon.com/news/retail/amazon-prime-day-2021-results).

    Warren James promotional pricing

    When you visit the Warren James e-commerce website, it asks you to select whether you are looking for jewellery for women or men. Consider we choose the women's section. As soon as you click, you see two promotional banners, a summer sale of up to 50% off and up to 4 years of 0% interest-free credit.

    Now, you know that in the first promotion, an artificial time constraint is created by indicating that it is a 'summer sale', while the second offer allows customers to pay in 4 years. It takes out the initial shock of a high price tag, and the customer is excited to use the promotion.

    Now consider the following image. I am sure you are not surprised by seeing the number '9' at the end of the prices of four out of the five items displayed.

    Psychological pricing, Warren James, StudySmarterWarren James e-commerce website, Warren James

    Psychological pricing is effective as it is based on genuine psychology theories. But as customers are bombarded with psychological pricing strategies from every direction, they become immune to it. Hence, businesses must try and iterate their pricing regularly. As you start observing the psychological strategies discussed in this explanation, you will notice them everywhere.

    Psychological pricing - Key takeaways

    • Psychological pricing attempts to influence the emotional behaviour of customers, encouraging them to make purchasing decisions based on their emotions rather than rational responses.
    • Marketers must frame product offerings to highlight product attributes as positive.
    • Congruency principles combine pricing information with other messages to improve the chance of purchase.
    • Consumer buying preferences may change according to the surroundings and location of the product.
    • Signalling principles consider the message received by people from the pricing.
    • The prices that end with the number 9 are called charm prices.

    References

    1. Monroe, Kent B. Pricing: Making profitable decisions. McGraw-Hill College. 1990.
    2. Dibb, Sally, Lyndon Simkin, William M. Pride, and Odies C. Ferrell. Marketing: Concepts and strategies. Houghton Mifflin. 2005.
    3. Naipaul, Sandra. Psychological pricing strategies and consumers response behavior: an empirical investigation in the restaurant industry. The Ohio State University. 2002.
    4. Larson, Ronald B. Psychological pricing principles for organizations with market power. Journal of applied business and economics. 2014.
    5. Gamliel, Eyal. Message framing of products causes a preference shift in consumers' choices. Journal of Consumer Behaviour. 2010.
    6. Simonson, Itamar, and Amos Tversky. Choice in context: Tradeoff contrast and extremeness aversion. Journal of marketing research 29, no. 3. 1992.
    7. Sally Khallash. Never include free shipping - a starter guide to partitioned pricing. Behavioural Strategy. 2018. https://www.behaviouralstrategy.com/post/never-include-free-shipping-a-starter-guide-to-partitioned-pricing
    8. Ye, Hongjun, Siddharth Bhatt, Haeyoung Jeong, Jintao Zhang, and Rajneesh Suri. Red price? Red flag! Eye‐tracking reveals how one red price can hurt a retailer. Psychology & Marketing 37, no. 7. 2020.
    Frequently Asked Questions about Psychological Pricing

    What is psychological pricing?

    Psychological pricing is a way businesses set prices to influence how customers perceive the value of a product or service. They do this by using tactics like pricing just below round numbers or choosing appealing prices to make products seem more affordable or attractive.

    What are the disadvantages of psychological pricing in business?

    The disadvantages of psychological pricing include misperception, whereby consumers may misperceive the product's value, and misjudged quality, when consumers associate lower prices with lower quality. 

    What is an example of psychological pricing?

    An example of psychological pricing is as follows. Marketers may frame one offer as "25% off" and the other one as "buy one get the other half price". Both offers are the same. The only difference is that the second offer saves us from doing mental maths. Additionally, mentioning the word 'half' creates an illusion that we are receiving 50% off the original price. 

    Is psychological pricing an effective strategy?

    Whether psychological pricing is an effective strategy depends on the type of business you are operating and the types of consumers you are trying to serve. However, psychological pricing can ease customer purchase decisions and increase sales when used effectively. 

    What effect does psychological pricing have on you?

    The effect psychological pricing has on a customer depends on the type of psychological pricing used. For example, psychological pricing may save customers from doing mental maths and thus perceive the price as more attractive. 

    What is psychological pricing? Determine its effectiveness. 

    Psychological pricing is a strategy that manipulates prices to influence consumers' perceptions of value, affordability, and attractiveness. Its effectiveness depends on the specific tactic employed, the target audience, and the overall market context, but when applied correctly, it can significantly impact customer behavior and drive sales.

    What businesses use psychological pricing?

    Most companies use psychological pricing, including top global brands like Amazon, Apple, Samsung, and Starbucks.

    Why do businesses use psychological pricing strategies?

    Businesses use psychological pricing strategies because, when implemented correctly, it has many advantages, including a significant increase in sales.

    Test your knowledge with multiple choice flashcards

    Psychological pricing creates an _______effect on consumers' purchasing behaviour.

    Offer framed as '2 for £10' is ______.

    Writing prices in a smaller font may be perceived as more attractive than writing prices in bold font. 

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