THE PSYCHOLOGY OF PRICING

THE PSYCHOLOGY OF PRICING

Discover the Power of Psychological Pricing?????????

????????? ? “Price is what you pay. Value is what you get”– Warren Buffet

There are numerous psychological pricing strategies and tactics currently available to influence your customers’ perceptions of price and increase their willingness to buy. ?This article presents collection of strategies and tactics that are easily implementable, therefore you can use them in your business to maximize your sales. All strategies and tactics presented below were taken from the book I recently read - ?“Handbook on the Psychology of Pricing” by Dr. Markus Husemann Kopetzky.

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PRICE PRESENTATION

This section will show you techniques you can use to subconsciously influence people to perceive your maximize willingness to pay. They are very simple and easy to implement.

I.??????????????????? Odd Price Effect Refined: .95 vs .99

This is the oldest and most widely used tactic, known as “charm pricing”. In fact, if a price is $7.99, we perceive it as $7 rather than $8, because we round to the nearest whole number even thought it is closer to the rounded up figure.

However, should price ends in 99 cents or 95 cents? Gendall Fox, and Wilton (1988) ran an experiment with fast-moving consumer goods (fly spray, cheese) and durables (electric kettles). They found that prices with endings in 99 cents are more attractive for low- priced, fast moving consumer goods (FMCG) than 95 endings. In contrast, prices that end in 95 cents have a stronger impact on demand for higher-priced products (>50$) than endings in 99 cents. These results are particularly interesting for low-priced products, as consumers actually prefer slightly higher prices.

Recommendation:

For low-priced products, it is better to use 99 cents; for high-priced products let prices end at 95 cents.

II.???????????????? Right Digit Effect

When deciding about digits on the right-hand side of a price, psychological effects go beyond off versus even pricing.

Coutler and Coutler (2007) let participants to evaluate perceived discounts and purchase likelihood for different pairs of regular and sale prices. Consumers were more likely to buy when prices ended in small right digits (less than five; regular price: $244, sale prices: $233) and reported higher perceived savings than for prices ending in higher right digits (larger than five, $199, vs $188). The reason is that people can more easily differentiate smaller numbers (less than five) than larger numbers (higher than five) – this effect is called the magnitude effect.

Recommendation:

Choose regular and sale prices so that the sale price’s right digit is below the regular price’s and that both right digits are smaller than five.

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III.?????????????? Comma effect

Have you ever thought about whether the same price ($1645) appears smaller when pronounced as sixteen forty-five instead of one thousand six hundred forty-five)?

In the experiment, a comma into the same four-digit price was introduced and let it mentioned in a radio commercial as, for example, $1,645 (one thousand six hundred forty-five: 9 syllables) vs $1645 (sixteen forty-five: 5 syllables). Participants rated the magnitude of the price with a comma higher than the same price without a comma.

The same effect occurred when participants were not verbally but visually presented with the different versions of the same price and asked to remember the price for a few seconds. In this experiment, participants rated a comma price higher than the same price without a comma.

Recommendation:

Leave out the comma in a four+ digit price to reduce customers’ price magnitude perception.

IV.?????????????? Cents effect

The syllables effect described above also applies to the cents effect: the more syllables a price number requires, the larger the perceived price. As commas and cents independently increase magnitude perception, the combination of both lets customers perceive prices as higher than with a comma or cents alone. For example, $1662 (no comma, no cents) perceived as the lowest price vs $1662.91 (no comma cents), $1,662 (comma, no cents) and $1,662.91 (comma and cents). The last one (comma and cents) perceived as the highest price.

Recommendation:

Keep your four+ digit numbers simple by avoiding decimal places.

V.???????????????? Font Size Effect

A common marketing tactic is to stress a low sale price with a larger font size. However, is this practice well-advised? This might sound crazy, but consumers show a higher purchase likelihood if the smaller sales price is displayed in a smaller rather than larger font.

In an experiment, Coutler and Coutler (2005) showed participants advertisements with a standard price and a reduced sale price. When the lower price was actually set in smaller font, participants perceived the sale price as significantly lower and were more willing to buy the product than in the opposite condition – smaller sale price in larger font size.

Recommendation:

Reduce font size to display price to increase likelihood of purchase.

VI.?????????????? Myth Debunked: Currency Sign Effect

Common believe is that absence of currency sign next to a price reduces the pain of paying. Ever noticed that restaurants, particularly higher end restaurants very often employ this technique on their menus? The researchers conducted an experiment in a restaurant context, where two kinds of menus were handed out to guests: identical content, but differed in the way prices were displayed. Half of the menus contained just figures (e.g “20”), the other half added a dollar sign to the price (e.g “$20”).

????????????? Results showed an increase in spending of 8.15% (from $23 to $24.87) per person when the menu contained no currency sign but this difference turned statistically insignificant.

Recommendation:

You may use a tactic of removing a dollar sign as picking the low-hanging fruit when it comes to squeezing every last cent from an existing business: the yield ma not be large, but it is easy to do.

2. SALE PRICE AND DISCOUNTS

This section will show tactics that can be used to increase the perceived value of a sale promotions and discounts.

I.??????????????????? Discount vs Bonus Pack

When you are considering running a promotion, should you provide price discount or increase product content at the same price?

A price discount of 20% is economically equal to a volume increase of 25%. The researches observed that consumers prefer a larger percentage to a small percentage. This means consumers prefer a bonus pack to an economically identical price discount when both are expressed as percentage. Vica versa, consumers also prefer a size decrease to a price increase when presented as a percentage. However, consumers react economically more rationally to high-prices products and favor the price discount over the bonus pack.

Recommendation:

Instead of running a price discount, increase product content and express discount as percentage (e.g +25% volume vs 20% discount). Vica versa, instead of increasing price, reduce a pack size.

II.???????????????? Relative vs Absolute Discounts

If you take a $50 product. Which sounds better to you? A 20% discount or $10 off? Both have the same value in terms of actual money but people will feel like the 20% discount is better simply because it’s a bigger number. So how do you decide what type of discount to give... absolute or percentage? Here’s where Jonah Berger’s “Rule of 100” comes in. So when you’re dealing with price, the aim was to reduce their perceived size. With discounts, you want to do the complete opposite – you want to maximize it so people feel like they’re getting a better deal. As a result, if the regular price is below $100, express the discount as a percentage otherwise present the absolute amount of the discounts.

Recommendation:

Use percentage discounts for products priced under $100. Use absolute discounts for products priced over $100.

III.?????????????? Sequential Discounts

Imagine you have to decide between two offers: “25% off list price plus a special bonus of 25%” or (40% off list price) Which discount is more appealing?? Generally, consumers add up percentages and are less likely to calculate the exact percentage of discount. Researchers and experiments proved that consumers prefer multiple discounts (25% plus additional 20% vs economically identical but lower percentage-wise discount of 40%).

Recommendation:

Split discounts (XX% plus additional XX%) to make it more appealing for customers. ??

Comparison to Regular Price vs. Competitor price.

IV.?????????????? Comparison to Regular Price vs Competitor Price

Imagine you are about to create an advertisement for an upcoming sale. You have to decide whether to contrast your sale price to your regular price or to a competitive price. Which of the following you think increases the perceived value of a deal.

·?????? “Circuit City Price $349, Our price $299”: concrete, between store

·?????? “Regular price $349, Sale Price $299”: concrete, within-store

·?????? Seen Elsewhere for $349, Our Price $299: abstract, between store

·?????? “A $349 value, Sale Price $299: abstract, within store

The researches found that when customers are in a store, comparing a sale price to a regular price ?increases (“Regular price $349, Sale Price $299”) the perceived value of a deal relative to a between-store comparison. ?When customers shop online or between store, in this case contrast to a competitive price appears to be more favorable (Circuit City Price $349, Our price $299)

Recommendation:

In physical stores, compare your current sale price to the regular price; outside your physical store (advertisement, online shop), compare your prices to competitors. When comparing to competitors, be concrete.

V.???????????????? Multi-Item Sales Prices

When you put an item on sale, does it matter whether you promote it as a single unit price (“on sale – 50 ents”) or multi-unit price (“on sale – 6 units for $3)?

Wansink, Kent and Hoch (1998) ran an experiment involving 86 supermarket stores. They found when prices were expressed as multi-unit prices, sales went up by 32% on average compared with single-unit prices, despite the same discount per-unit price. The context of this experiment was FMCG products with single unit prices ranging from $0.50 to $2.50.

Recommendation:

When promoting FMCG products on sale, create multi-item bundles.

3. SALES TACTICS

I.??????????????????? Odd Pricing: Frame of Promotional Messages

Imagine you are about to sign up for a gym membership for $39 per month. You see two different copy texts: “Don’t miss out on buying your six-pack from us!” and “Buy your six-pack from us!”. ?Which one resonates better with you?

Schnindler and Kirby (1997) suggest that consumers perceive a nine-ending price as a around amount and a small gain. Following this rationale that people infer gains from odd pricing, Choy, Lee (2012) concluded that consumers are more easily influenced by promotional messages that are framed as gains (“gain $X) instead of a reduction in losses (“save $X”)

In the context of health club membership, “Don’t miss out on buying your six-pack from us! With $40/month” is a loss-framed slogan and “Buy your six-pack from us with $39!” is a gain-framed slogan with odd-price ending. Results of the research showed that gain-framed messages were more effective in the case of odd prices, but did not change purchase likelihood when the price was rounded.

Recommendation:

If prices are odd, frame promotions as gains (“gain $x”) instead of reduced losses (“save $x”).

II.???????????????? Temporal Reframing

Imagine you are selling insurance contracts that cost $100 per annum and ae to be paid upfront. How do you think customers would react if you framed the price as 27 cents per day – although the actual piece does not change and the same amount is immediately due?

In fact, stating a price as a smaller mount per time unit increases customers’ purchase intentions. In an experiment, one group was asked for $350 per year, whereas for another group, the amount was framed as “$1 per day”. When asked about willingness to donate, participants showed a higher likelihood when the price was temporarily reframed ($1 per day) instead of aggregated ($350 per year).

Recommendation:

Frame a price as a (smaller) amount per time unit to reduce magnitude perception (“pennies-a-day strategy”).

III.?????????????? Per-unit Pricing

Miyazaki, Sprott and Manning (2000) investigated the question of how prominence of per-unit pricing affects customers’ spending behavior. When retailers prominently displayed prices per unit, the researchers found that customers (a) prefer to buy products with a lower price per unit, (b) buy fewer products with a quantity surcharge for larger pack sizes (i.e larger packs are more expensive per unit than smaller packs), and (c) do not buy more products. Overall, customers spend less on the same quantity of items. This finding is particularly interesting for retailers aiming to shift demand to their own private labels with attractive margins.

Recommendation:

State prices per unit whenever possible.

IV.?????????????? Bottom Dollar Effect

The researches suggested that when you plan your marketing campaigns, you should take into account the level of your customers’ budgets. ??For example, if the goal of your campaign is to acquire new, satisfied customers who try your product, you should start your campaign when budgets are still available – most likely at the beginning ?of a month.

On the other hand, when consumers’ budgets approach depletion near the end of the month, they should become more sensitive to sale or coupon promotion.

Recommendation:

Time your marketing campaigns with regard to your customers’ budget levels. Consumers should accept product trial promotions at the beginning of a month, whereas sale promotions might be more effective at the end of a month.

V.???????????????? Money-Back Guarantees

You are about to buy a mattress. Two models made it to your final round: You do not see any difference after lying down on each of them for a few minutes. The first is $300. The second is $330 but comes with a money-back guarantee. You can return it without any hassles within 30 days if you are not satisfied. In experiments, the researchers observed the following impact of Money-Back Guarantees (MBG):

·?????? MBG reduced the performance risk and the financial risk that customers perceived the purchase.

·?????? MBG reduced emotions of anticipated regret and lifted product liking.

·?????? MBGs raised purchase intentions and willingness to pay.

·?????? MBGs were more effective for experience than for search goods.

·?????? MBGs that allowed consumers sufficient time to evaluate the good were more credible.

·?????? Surprisingly, for experience goods, stricter MBGs increased perceived credibility compared to MBGs that were easier to invoke.

Overall, if an MBG is perceived as fair and credible, consumers are more likely to buy a product even at a higher price.

Recommendation:

Introduce Money-back guarantees (MBGs) to increase purchase likelihood and willingness to pay if consumers perceive them as fair and credible.

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