The Psychology of: Pricing $$$

What are consumers willing to pay? How do retailers convince you to view an item at a fair market price?

This is a question that we have asked ourselves since time immemorial, when man began bartering with one another for goods in the marketplace.?

Pricing psychology has been subject to intensive research from the inception of economics, but only in the past hundred years or so have we really seen a scientific push made by companies trying to answer:

“How can I get the most amount of money for the product/service I provide?”

The reality is that pricing is subject to a multitude of factors and forces like supply and demand, the level of market freedom, regulatory forces, etc.

But there is one factor that cannot be worked out mathematically, and instead falls in the anthropology category: pricing psychology.

As businesspeople, it’s easy to determine what the cost of a product or service should be by using simple cost and demand formulas, yet the average consumer looks at pricing completely differently.

An interesting phenomenon seen throughout the consumptive landscape is the concept of coherent arbitrariness, which is that “people don’t really know what anything should cost.”

In fact, most people view the price of something through innate mental models ingrained into our brains for situations where we analyze value.

For example, people make compensatory inferences when checking the price of an item, meaning that we make assumptions about the product based on its price.

This is because the human brain is wired to see relative differences in things rather than the absolute value of each thing independently.

So when you see two products that seem similar in function and quality yet one costs 50% more than the other, you might assume the costlier product is better in some way that you can’t see. Especially because your primal brain assumes something higher in price and more costly to acquire has to be better.

People see pricing as relative when comparing one product to another, and don’t actually make their buying decisions off of absolute values.

Companies take advantage of this by incorporating psychological tactics into their stores that get customers to spend more.?

One of these tactics is something called price anchoring, or having a ridiculously priced item on display which ensures other fairly expensive items (although cheaper than the asinine anchor) seem like a bargain.

For example: Hermes may have a $63,000 purse sitting on a luxurious pedestal as a centerpiece within their store. Hermes actually doesn’t expect that item to move or be sold. What they do expect, however, is that it makes their $520 dollar scarfs look reasonable to purchase in comparison. This is price anchoring.

Through engineering the context in your stores, (with price anchoring), you can increase the margins of your products by influencing the perceived value of “things” in the customer’s mind.

Finally, here are a few notes on the psychology of pricing.

1. We are willing to pay a high premium for the elimination of a small degree of uncertainty within a product.
2. We are willing to pay more when we see costs of production, people running around & effort involved in the making of a “thing”. We value things that are labor intensive. It’s not objective effort, but the appearance of effort which drives what we are willing to pay.
3. You can create scarcity and justification for higher priced items in the same way the French do: through topography and provenance. A 50 year old Bordeaux wine justifies its expensive price point when the area of origin + means of production (along the Garonne river) are pointed out on the label of the bottle.
4. Consumers may have extremeness aversion when it comes to similar products in a category. This is known as the goldilocks effect. Rather than opting for the purchase of the most or least expensive item in a category, items priced between the 2 extremes are compelling in comparison and may receive higher adoption.

Sources:

Co-written by Ashton Nichols and Matthew Bobe

Priceless: The hidden psychology of Value - by: William Poundstone

Alchemy - by: Rory Sutherland