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Marc Roche

Master Price Psychology: Pricing Strategies, and Examples

Updated: May 5, 2023

by Marc Roche

Price Psychology Marc Roche

Your customer's expectations are the most important thing to consider before planning your pricing strategy.


While research can be expensive for large companies, we can use guerrilla tactics to apply psychology to our written proposals, reports and emails whenever we have to discuss price.


"Context is key. This is why a $1 bottle of water from a vending machine seems relatively cheap, even when we know that we can buy the same bottle from a supermarket for half the price. Customers perceive prices subconsciously."

What is Psychological Pricing? (Also Known as Charm Pricing)


Psychological pricing is a type of pricing strategy used to influence consumers’ perception of a product or service’s value through the use of different price points.


One example of the use of price psychology in writing is setting prices with decimals, such as $19.99, instead of an amount like $20, making the lower price seem disproportionately more attractive than the higher price.



It's All About Perception: Why Psychological Pricing Strategies are so Important.


When you buy something, several psychological factors come into play. According to Harvard Business School professor Gerald Zaltman, 95% of our purchase decisions are subconscious. Therefore, how consumers perceive your offer is of vital importance.

Psychological pricing methods are crucial as they can help you and your business increase your profits and sales by influencing buyer behavior. Your prices are set in such a way that your prospective clients perceive them as more attractive or favorable, thereby driving more sales.



Odd-Even Pricing


Exactly what is Odd-Even Pricing, and how does it work? The odd-even pricing method focuses on the last digit of the price.


A price that ends with an odd number, such as $3.99 or $14.39, is categorized as an odd pricing strategy, whereas a price ending with an even number, such as a pen that has been rounded to $4 or a shirt for $40.98, is classified as an even pricing strategy.

Here is a really interesting article on this strategy from The Harvard Business Review.



Decoys: Also Known as the Psychology of Popcorn Pricing.


Popcorn Pricing

If someone sells boxes of cookies in two sizes: a small one for $4 and a large one for $9, people are more likely to go for the small one just because it's the cheapest of the two options. However, if the person offers you a medium box for $8, it makes more people want to buy the large box, as it now seems like a better deal. This has also become known as 'popcorn pricing strategy' because it's how cinemas tend to price their popcorn.


Using the decoy effect ethically is about seeking a win-win with clients so that the most useful product or service for them becomes the most profitable for the business.


It is one of the simplest ways to change people's price perceptions. To sell what they're trying to sell, the communicator creates different prices for similar products.

Another study by National Geographic found that people chose the priciest option more often when there were three options instead of two. As a result of the minor price difference, consumers thought the highest-priced item was a deal. The middle price may have had no purpose, but it got readers to switch from looking for the cheapest deal to looking for the best deal.


Again, this pricing technique needs to be used responsibly. The idea behind it is that we encourage customers to seek the highest value and most useful product or service.


Item Bundles


Shopping and spending release dopamine, a chemical that produces pleasure, but it can also cause pain. In 2007, Carnegie Mellon and Stanford found that prices considered too expensive stimulated the part of the brain that processes pain. Additionally, they found that lower prices were processed in the decision-making region of the brain.

By selling multiple items under one price tag, you remove the buyer's ability to judge the value of an individual item, and you're less likely to cause them pain.


Bundles are a common industry practice for everything from software suites (such as Microsoft Office and Adobe Creative Cloud) to cars (features like GPS are bundled into the regular price) and fast food (combo meals).

The key is not to bundle items that reduce perceived value. Studies have shown that a low-

cost item attached to a high-cost one will reduce its value in the consumer's eyes.


Penetration Pricing


Penetration pricing is used as an alternative to traditional fixed-price strategies. It involves setting the initial price at a significant discount and then gradually increasing it over time to maximize profits.


This method relies on the idea that buyers are more likely to purchase a product or service when it is offered at a lower price, but with the understanding that prices will increase in the future.

The goal of penetration pricing is to attract more customers early on and then capitalize on increased demand by raising prices later. By leveraging this strategy, you can increase your business' profits while still offering competitive prices relative to your competitors.



The Foot-in-the-Door Approach to Compliance

Scott Fraser and Jonathan Freedman published a study introducing this method in 1966. In their study, Fraser and Freedman divided participants into two groups.


They asked Group 1 to place a small sticker for safe driving on their cars (small request), and then a big sign on their property (big request).


Meanwhile, they went straight ahead and asked Group 2 for the big request (to place a big sign on their property), without warming them up with a small request.


The study showed that those who had accepted the small request first before being asked for more, were more likely to accept the big request.


The precise reason why this works isn't clear, but there are theories. One theory states that people's image of themselves changes based on the small favor they completed. Thus, the odds are higher that they'll consent to requests that align with the values of that previous request.


There are several ways to take advantage of this as a writer. A small request can be as simple as asking for a prospective partner or client's email address. You can entice them into complying by giving them something of value, such as a helpful report, consultation, or a coupon code.

Another example of this tactic is the free trial period. Whether a streaming service like Netflix or a subscription software from Adobe, they offer trial periods to entice prospective customers. They're more likely to pay for the full service when the trial is up since they already use it.


Keep It Simple


As in all areas of your writing when it comes to price, keeping things simple is key. It can be intimidating to see prices with commas and decimal points intact. For instance, $2,112.00 seems more expensive than $2112.


Take this into account when listing prices and combine it with other pricing practices.



Comparative Pricing: Establishing Anchors & Reference Prices


Potential customers and clients have a subconscious price in mind when determining if a product is worth the investment. Through anchoring, you can influence the reference point and improve how your prices are perceived.

As an example, it is common to draw a line across an older price and replace it with the new price (e.g. $16.95 $12.95). The customer will use the higher listing as their reference point, making the lower value look like a bargain.

Another simple form of anchoring is to create a price table, listing your highest costing product first, which makes that price the buyer's reference point. Think about what number you want your customers to focus on and anchor it by making it the first one they encounter.

By mentioning the most expensive product first, we draw attention to this price. This high price becomes the reference point against which the reader compares other prices on the list. The subsequent prices seem more reasonable to the reader, encouraging them to spend more by making all the other products look much better.


Conclusion


So there you have it.

Price psychology is a vital tool to add to your business writing arsenal;

  • it makes prospective customers and clients more likely to buy.

  • Use Price as a Tool: Through price psychology and persuasive writing, you can set the perceived value of what you offer, and then use evidence and facts to explain why your proposal should be accepted.

  • This type of writing involves careful structuring and planning, as well as excellent delivery of arguments when sending written price quotes or proposals.

Start applying these five price psychology principles to your writing whenever you have to discuss money to skyrocket your business writing skills.


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