16 Scientific Pricing Strategies

Applying Behavioral Science and Ethical?Persuasion in Pricing Strategies

By Duane “DJ” Sprague??

What You’ll Learn

1. How to think strategically about your pricing to make a higher profit margin??
2. How pricing strategy can create motivation, improve decision-making, and improve the emotional appeal?
3. How some strategies work better on one age group vs another?

Introduction

You can’t take pricing for granted or discount its impact on sales. Offering your category's lowest price can often lead to poor results and even financial ruin. However, charging more than your competitors or offering unique pricing strategies, bundles, or payment options can drive substantially more sales and profits.?

There is no single best pricing strategy because results will depend on your product category, competition, design, copywriting skills, understanding of the psychological principles presented, and target audience.??

As with most everything, the best strategy is to run properly conducted A/B split tests to find what works best for you.?

Discounting?

Generally, the more you discount, the less quality and service you can afford to offer, which diminishes the value of the product even further.?

Discounting also reduces your profit margin and your ability to fund research, develop, and aggressive marketing.?

Once you start discounting, people assume the regular price is too high, making it more difficult to justify the original price.?

Once you start discounting, so too does your competition, creating a race to the bottom, where everyone's margins suffer, and few survive.

The Zappos growth strategy (and grow they did) was not to offer discounts, but to offer better service, free shipping both ways, a one-year return policy, nicer support people, and a larger selection of sizes, and the newest styles.?

1. Add Bonuses and Value vs Dropping the Price?

Avoid the knee-jerk reaction to discounts, and create constant sale events and promotions. This is lazy marketing because it’s easy to drop your price in order to generate some quick sales, but adding more value, and maintaining your price, even increasing it, is often the path to better margins and sales.?

Add more value with bonus items and a stated price (which establishes the value) for each bonus item vs discounting. For example, you can put a price on each of the products and services that you currently offer for free, and thereby creating a much higher perceived value.?

Delivery: $67

Setup: $193

Training: $125

Total Bonus Value: $385 Free with Purchase by ____

1. Show the Savings?

Was $539 - Now $479 - Save $60?

• vs Save 12%. Why save $60 vs 12%? Because $60 is a larger number, AND a percent off is not as easy to establish real dollar savings??
• Don’t make people do the math
• Don’t make people think?

1. Charm Pricing

Charm pricing ends with a 99 vs a round number: $6.99 vs $6.00 or $7.00.? When you add the .99 to the $6, you make an extra 99 cents, and most people see the price as $6.?

When you use $6.99 vs $7.00 the perceived price is one-dollar less ($6 vs $7), because people have a left digit bias, where they focus on the 6 and not the 6.99.??

1. Left Digit Bias

The digit furthest to the left is more influential and remembered than any other digit.?

You can test not using a dollar sign so that the price is represented as a number, vs real money, and making the charm digits smaller to reduce their mental impact.?

1. Exact Pricing

Exact & Sharp Price vs rounded $4.93 vs $5.00 typically works best in discount environments or where people expect savings down to the penny. Walmart for example uses exact pricing when they end in .48 or .67.???

1. Extreme Price Aversion

People generally avoid the cheapest and the most expensive options, as they don’t want to look like either a cheap-skate or extravagant. They also tend to believe that the best value is in the middle. The best value is not typically seen as the lowest price, rather it’s the biggest bang for the buck.? This strategy typically works best on utilitarian products and older adults.

Look at these examples, and what you will see is that these vehicle models were strategically created and priced to provide 3 price and feature options.??

• S $27,999?
• SE $31,999
• SEL $34,999?

It’s the SE model in the middle that will sell more than either of the extremes.?

• S $27,999?
• SE $31,999
• SEL $34,999

In this scenario, when a super-premium model is added at the top-end, the SEL will sell more. Manufacturers and service providers will often introduce a super-premium offering, for the primary purpose of driving more sales to the premium option. For the small percentage of people who choose the super-premium offer, the manufacturer has the profit maximum margins built-in.?

• S $27,999?
• SE $31,999
• SEL $34,999?
• SEL Touring $44,999

In addition to generating higher margins and driving more premium model sales with a super-premium offer, the brand also creates a “halo effect” for the brand, by showing that they are capable of producing really awesome, envy-evoking, aspirational products.?

For example, the Chevy Corvette sells very few units, but the awe-inspiring technology, styling, performance characteristics, and price cast a more positive halo effect over the entire brand.?

1. Decoy Effect

When you use a decoy option that causes the consumer to compare the target item with one you really want to sell at volume) to a poor value option, with the same or higher price, but with less overall value, features, or benefits, you are creating a decoy that makes the target look like a great value. The decoy strategy works best with younger adults.???

1. Anchoring

The first fact, example, price, or number presented is what people typically remember, and use as a comparison, reference, and anchor point.???

Exotic and ultra-luxury cars are often sold at plane and yacht shows, not car shows, and they are shown after the more expensive products are displayed.? So when you see a $7 million dollar yacht, and then you see a $500,000 Rolls Royce, the normally expensive car looks quite cheap in comparison.??

The other psychological effect that’s taking place here is the principle of “context”. When the luxury or exotic car is shown with a super expensive luxury item, the car is associated with elitism, luxury, and ultra extravagance, which is exactly what the yacht buyer wants to convey as their persona.???

Anchoring is also why in most situations, a freemium offer is not always the way to go. Research shows that only 1-10% of people upgrade from a freemium because they are often anchored and fixated on free.? I personally am stuck on the free Pandora option, because I can’t justify paying anything after enjoying it for free.?

So unless you have the cash reserves to build and support a freemium product and a solid upsell strategy that simply makes the freemium too painful to use and the upsell too good to refuse, it’s often a path to insolvency.?

So be aware that if you anchor your product to a low price at first, you need to work extra hard to build value and justify a higher price, which usually does not happen. Or, you can anchor your product to a high price, offer a lower price, and look like a bargain.?

Steve Jobs and Apple were very skilled at the art of persuasion, and price anchoring during their product launches, which, quite frankly, were a unique strength of Jobs. In fact, many books have been written about his legendary product launches, presentations, speaking skills, and of course, his mega creative and intuitive business and product insights.

When he presented the iPad launch, for example, Jobs had on the screen a large $999 as he was presenting the features, specs, and attributes of the exciting new product. He never said the price would be $999, or even referenced the price, but it was implied and thus created the mental anchor point.????????

Eventually, after building the immense story and value behind the product and more than justifying the perceived $999 price, he unveiled the actual prices, sending the audience into oohs and awes, even cheering and clapping! Jobs was a master at storytelling, presenting, conveying passion and excitement, and building value.?

In these A/B split tests, which pricing presentation do you think generated more sales??

In the following example, this software company established an anchor price of $99, followed by the target product at $49.?

They also offered a free 30-day trial, 60 second sign-up, the ability to upgrade, downgrade, or cancel at any time, and social proof “Most Popular Plan.” These are known as risk mitigation or “reversibility” strategies, which instill confidence, and allow the user to try and use the product without risk, thereby removing the immense friction and uncertainty that holds people back from buying.?

1. Tripwire

Tripwire marketing is a powerful conversion strategy that convinces target consumers to buy something small from you rather than nothing at all. This could be a sample, a starter pack, or one product in a bundle.?

With tripwire marketing, you are building massive value of your core product and then offering the purchase of a low-cost alternative offer that is sold at a fraction of the price of the entire bundle, or the primary product.??

For example, if you are selling a comprehensive 12-part course for $997, you can offer a single introductory course for $47 just to get them started. This super low-priced item is irresistible compared to the full program price and accomplishes several objectives:

Tripwires work for several reasons:

1. It creates a sale and generates revenue
2. It increases your overall conversion rate
3. It creates a lead for upselling
4. You have already established your credibility and value, but some people are too cheap, or they are uncertain about the quality to take the plunge and want to wade in
5. They get people to open their wallets, which is the hardest part, and once they have opened, it’s easier to spend more (momentum is on your side)
6. It’s like a free trial or a freemium, but better, because they have skin in the game so they will value it more, most likely use it, see the benefit, and come back for more.?
7. There may also be a bit of reciprocity at play, if you give them an incredible value for a very low cost, they may feel compelled to reciprocate the favor and buy the main offering.?
8. You have collected an actual paying customer, who is now a lead, and much easier to upsell, 16x more in fact.?

Some marketers promote the tripwire as an irresistible lead magnet, and others use it as a last-ditch offer (exit pop, for example) if they don’t buy the primary product. Test both to see how it works for you.??

The tripwire can be implemented throughout your funnel, with appropriate tweaks.

Top-of-funnel strategy: Use SEO and content marketing to drive traffic to your landing page, then offer an insane value for an irresistibly low price with a tripwire offer. That’s a great way to drive your conversion rates, generate leads, and build your drip campaigns.

Mid-funnel: Create an email drip campaign to use on your email list of those who converted on your free lead magnet that promotes your tripwire offer.

Retention or cart abandonment: Bring customers back with an irresistible offer on something of immense value, then drop them into a drip campaign that promotes your premium offer.?

This is also a great way to introduce a new product. Rather than just offering the whole product, offer a tripwire version, then use a drip campaign to get them to buy the larger item.??

Pro Tip: Create a tripwire from your most popular product because this is where you will generate the most traffic, conversions, and upsell opportunities.?

10. Bundle

When you bundle products into a single price, it makes decision-making easier, provides a higher perceived value, and makes dissecting the actual price of each individual item difficult, to nearly impossible. Especially if the bundle includes something unique to you.?

You have probably noticed that a decade or so ago, the automotive industry stopped offering cars with multiple options, where you could individually select leather, moonroof, premium sound system, and a higher-performance engine. These days, the desired options are sold as part of a package, or trim level. This makes manufacturing and inventory control easier, decision-making easier for the consumer and provides a higher margin.??

11. Context

It’s the context and the proximity and relationships between things that establish the relativity of everything.??

In the world of retail branding, the context is critical in establishing value and price. Including the retail location, the retail environment, packaging, lighting, displays, service levels, and so on. It’s these elements that create the brand expectations, positioning, and the brand experience.?

Think of how your expectations, satisfaction, and experiences change between the county fair and a Disney theme park, or The Ritz-Carlton and Motel 6. Completely different context, and expectations in terms of cost and experiences.??

It's the context that establishes the perceived value, expectations, and in fact the level of joy or satisfaction the consumer experiences and remembers about the brand.?

A great deal of psychology and attention to detail goes into creating a memorable and powerful brand.?

Price, therefore, is relative to the brand experience or context, in which it is presented.?

For example, $6 for a 12 oz cup of coffee at Starbucks in a Las Vegas resort may seem reasonable given the context of the retail environment, but $2 for the same 16 oz cup at McDonald’s would seem high.?

Or how about $9 for a dinner salad at a fancy restaurant vs $3 at a diner for essentially the same salad???

A classic example of how directly price is affected by context, Payless ShoeSource was able to prove that they could actually sell shoes at a much higher price and margin when they created a fake luxury brand — Palessi — which was actually filled with Payless shoes, when they built a temporary store in a luxury shopping area in Santa Monica California and filled it with fashionistas, and pranked VIP shoppers into paying markups of up to 1,800 percent for the bargain retailer's shoes as part of a viral advertising campaign designed to shift consumers' perceptions of the brand.?

The design, copy, images, fonts, colors, use of negative space, single or multi-columns and the overall UX of a website also provides context for pricing. You simply can't justify a premium price on a low-end-looking website.??

Context is like branding, you need to match the brand image and visual branding with the product, the target audience, and the price category.??

12. One Price

In general, people prefer a monthly flat fee that is predictable and easy to plan and budget for vs paying for individual transactions and having variable costs, as each transaction impacts the budget and requires a decision and payment, all of which are painful.? Every time someone has to make a payment, they are reminded of the cost, which causes them to analyze the value of the product or service and the effort required to make the payments.?

Never underestimate how lazy people are and how little thinking and effort they are willing to put forth.?

My wife and I were at a resort, where they did not accept cash, and they did not have Dollar signs on anything. They even encouraged you to charge everything to your room to receive extra travel points.?

The point of these subtle strategies was to separate the guests as far away from the pain of realizing just how much they were spending as possible. By charging everything to the room and not having a dollar sign on anything, just a number, you were reminded less of the real cost, which reduced anxiety, and increased spending.?

So look for ways, if possible, to offer a single-price strategy:

• All-inclusive?
• Flat rate
• Fixed price?

13. Skimming

When introducing a brand new or unique product, start high and “skim” the market with the early adopters to maximize your profits, then lower the price to get market share as the competition heats up or the newness and novelty wears off.?

As the market becomes more saturated and competitive, you can offer even lower-priced options with fewer features, smaller sizes, lower quality, or less service and support.?

14. Installments

“Enjoy today…Pay later with instant financing or credit card.” A common strategy that works. Make sure that you have made it perfectly clear that payment and financing options are available.??

15. Break it Down

Another way to reduce the perceived pain of the price is to break down the cost into smaller increments, also known as “breaking it down to the ridiculous.”?

• “Just 2.99 per day”
• “Only 19.99 per month”

On the other hand, there are some who feel this has its own negatives, such as:

1)? It takes the focus away from the product – and the buyer’s desire for that product – and focuses attention squarely on the cost.

2) ? What if the buyer doesn’t agree with you? What if they think the daily price is a lot of money? This could cause friction.??

3)? It could make your buyer distrust or dislike you.?

16. Blue Ocean Pricing?

When they zig, you zag.?

In general, you can’t differentiate, stand out, gain appreciable market share, or a premium price, or sustain discount pricing, unless you create a true blue ocean strategy (uncontested, uncrowded space).?

In order to offer a sustainable discount strategy, for example, you will need to eliminate features and services of little benefit to the customer, especially those things that have a high operational cost, and then double down on features and services that people really value, and allow you to differentiate.??

For Southwest Airlines, by eliminating meals, premium airports and gates, class-based seating, VIP lounges, and seat reservations, they were able to offer lower fares, free bags, and no-fee ticket changes.??

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Summary?

This article discusses various pricing strategies for ecommerce businesses to increase profits. It emphasizes the importance of strategic pricing rather than simply offering the lowest price. Discounting can diminish the product's perceived value and reduce profit margins.?

Instead, adding value through bonuses and showcasing savings can be more effective. The article also explores the use of charm pricing, left digit bias, exact pricing, extreme aversion, decoy effect, anchoring, tripwire marketing, bundling, and the influence of context on pricing. Additionally, it mentions strategies like one price, skimming, installments, breaking down costs, and blue ocean pricing to attract customers and increase sales.