You’ve seen psychological pricing thousands of times, but do you know how to identify and use it to your benefit? You’re about to find out!
One of the most effective ways to increase product sales is developing a specific pricing strategy for your target audience. There are many different strategies to utilize depending on the product or service sold, but psychological pricing is one phenomenon that has continued to expand and adapt along with consumer culture. It’s also one of the easiest strategies to learn and integrate into a business’s current marketing mix.
Psychological pricing is not a new term. Its beginnings stretch back to the late 19th century and is rumored to have been implemented by rival American newspaper firms as a tool to gain greater market share. In today’s world, this strategy has expanded into five main methodologies, each with a specific purpose and target audience.
In this post, we’re going to cover the basic definition of psychological pricing, the five main methods of execution, and why you can utilize these strategies to benefit your business.
What is psychological pricing and how is it different from other pricing strategies?
In a nutshell, psychological pricing is a strategy that focuses on the emotional understanding of numbers, rather than mathematical or rational understanding. By using certain methods of pricing placement, retailers can influence a consumer’s perceived value of a product.
This strategy works to communicate “bargain” pricing by lowering the cost by as little as one penny. It also works for high-end, luxury retailers to align perceptions of high prices with high value. Furthermore, psychological pricing can be used to draw emotional comparisons between two products and their perceived value.
The 5 main methodologies: explanations and examples
1. Odd pricing (or left-digit-effect)
This is the most common method of psychological pricing and, in many cases, the most effective. Have you ever wondered why so many products are priced at .99 instead of a rounded number? It’s an illusion of perceived value, which is vastly different from the real value of the price.
Consumers tend to read from left to right, which means that when a product prices at $6.99, we perceive the value to be closer to six rather than seven. This works for higher priced purchases as well. For instance, automobiles are usually advertised at $14,999.99 with monthly payments of $299.99 for five years.
2. Product bundling
Have you ever subscribed to a publication and observed how they priced their product offerings? Magazines will often show three choices: A, B, and C (A+B combined). This method of psychological pricing is called “product bundling” and refers to the process of making the highest priced product (the bundle) seem to have the best value.
For example, let’s take a look at a common monthly subscription offering:
- Product A: $14.99
- Product B: $24.99
- Bundle C: $34.99
Taking a look at the numbers, the perceived value is easy to see. If you combined Product A and B together, you’d come up with $39.98 in total. But the bundled package offers both A and B for only $34.99. That’s saving a few dollars a month. What a deal!
~ ~ ~ ~ ~ ~
If you’re considering a new pricing strategy, then how would you feel about developing a better sales funnel, too? You’re going to need it with all that new traffic coming in!
~ ~ ~ ~ ~ ~
But the truth is that Product A and B might not be worth their purchase price at all, nor do they cost the publication nearly that amount to publish. They only exist to drive perceived value towards the last offer.
3. Buy one, get one free (BOGOF)
You’ve seen this one hundreds of times before. BOGOF is an extremely effective pricing strategy that focuses on psychological and emotional triggers. Consumers perceive the value of these offers in two ways, predominantly: 1. they respond to being given anything of monetary value for free and 2. they view getting one for free as basically getting the first half off, too.
The first issue is that many BOGOF deals conceal the true value and competitive purchasing price of the product. They may be offering one product at $13.99 and one free, but down the street at the competitor’s store, they offer the same product for $7.99.
The second issue is that BOGOF entices consumers to purchase a product they would not have bought otherwise. So customers are spending money on things they don’t need while believing that they’re saving money by making the purchase.
4. Contrast pricing
The methodology behind this psychological pricing strategy is similar to bundling, but instead focuses on the direct comparison between two similar products, one of which is deliberately made to seem like a more attractive offer.
To demonstrate how this pricing strategy works, let’s say you have one product on the market that’s priced a $69.99. As it stands alone, consumers are forced to weigh its value from a logical and rational standpoint. They consider the features, materials, fees, and more.
But then the retailer releases a similar product, with only a few minor additions regarding use value (i.e., another feature, slightly different materials, etc.) They price the new product at $109.99. Given the nominal additions and less than interesting upgrades, the first product now seems like a more attractive offer simply because of the steep price comparison to the second product.
This can be done in sets of threes, too. In this case, the first price may be $69.99, the second $89.99 and the third $94.99. For only $5 more, you can get the third, newest and best product. In this scenario, the $69.99 product looks like cheap, old news, and the highest priced product looks premier, while also less expensive, compared to the second.
That second product, in other words, only exists to drive up the perceived value of the third.
5. Prestige pricing
The last psychological pricing strategy is unique from all the rest. It’s aimed at the emotional understanding of the consumer, but instead of trying to convey an attractive discount value, prestige pricing establishes the perception of high pricing equals high value. Rather than listing products with fractional numbers ($99.99), this strategy purposefully keeps it pricing at rounded, whole numbers ($100, $1000, $3000).
The point of prestige pricing is to communicate “prestige” value. Products sold under this strategy are typically luxury items made from expensive or rare materials. In the simplest terms, expensive = good. And people will pay top dollar to show off their prestige items.
What can psychological pricing do for you?
Now that you’ve seen the five main methodologies in action, brainstorm which pricing strategies would best attract your target audience. If you’re a business owner, or in real estate or mortgage financing, how can you effectively use psychological pricing to draw attention to your products? Use a few of these strategies and run a test to see how they perform over a set time. The great benefit of psychological pricing is that it costs nothing to use, but you can reap the benefits right away.
~ ~ ~ ~ ~ ~
If you’re considering a new pricing strategy, then how would you feel about developing a better sales funnel, too? You’re going to need it with all that new traffic coming in! Sign up with Blitz today for a 30-day free trial.
~ ~ ~ ~ ~ ~
What are your thoughts on utilizing pricing strategies? Do you feel psychological pricing is necessary to marketing products effectively? Share your story in the comments!