Pricing Strategy Part 4: Psychology
The art of pricing involves understanding the psychological aspects that influence customer purchasing behavior from signaling quality, using decoy, anchoring, colours and charm tactics.
This is a continuation from the Pricing Strategy & Psychology - Understanding the Art and Science behind Monetisation article.
Part 3: The Pricing Strategy is here.
The art of pricing involves understanding the psychological aspects that influence customer purchasing behavior.
As Peter Drucker aptly stated,
"Customers don't buy products. They buy the benefits that these products and their suppliers offer to them."
This shows the importance of communicating value beyond the product itself, emphasizing the benefits and solutions that the offering brings to the consumer.
Psychology of Pricing
Decoy Pricing: Guiding Choices with Illusions
Decoy pricing is a clever strategy that involves introducing a less attractive option, or decoy, to influence consumers towards a more favorable choice. The decoy is strategically designed to make another option seem more appealing. This tactic plays on the psychological principle of relativity, where people tend to make decisions based on comparisons rather than absolute values.
The decoy effect, studied by Huber, Payne, and Puto in "Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis" (1982), explains how introducing a less attractive option influences choice preferences. The decoy is a strategic tool to guide consumer decision-making.
Imagine a scenario where a cinema offers two popcorn sizes: a small for $5 and a large for $8. Introducing a medium-sized option for $7 as a decoy makes the large seem like a better deal, even though consumers might have initially considered the small.
We see this with McDonald’s fries. How often do you look at the small, thinking there isn’t enough there. Then look at medium and large and see how much more value you get in the large fries for such a small price difference. Medium is a decoy used to upsell you to the Large.
In the context of subscription plans, a company might present a basic plan, a premium plan, and an overpriced deluxe plan with features unlikely to be chosen, making the premium plan appear as the best value.
For a business, decoy pricing can guide consumers toward higher-margin products or services, enhancing the overall profitability of the product. By shaping the decision-making process, businesses can strategically influence purchasing choices in their favor.
Price Signals Quality: The Perception Game
How many times have you been shopping for a product and seen the huge difference between the cheapest offering versus the most expensive? I did this last week looking at VR headsets for a Christmas gift. The prices varied from ~$20 to a few thousand dollars. Now without having any knowledge about VR headsets, my initial thoughts were surely the $20 VR quality can’t be that good. I wonder if the battery life is short. Will it fall apart once it’s taken out of the box?
The association between price and quality is a well-established psychological phenomenon. Customers often correlate higher prices with superior quality, a concept that businesses leverage to position their products or services in the market.
This phenomenon is rooted in the belief that if something costs more, it must be better. Brands use this perception to differentiate their offerings, emphasizing quality to justify premium pricing.
Consider the pharmaceutical industry, where branded prescription medicines are often priced higher than generic alternatives. Despite containing the same active ingredients, the higher price signals quality and reliability to consumers.
Examples of this are in luxury markets. Luxury brands across various industries, from fashion to technology, deliberately set higher prices to convey exclusivity and superior craftsmanship.
Anchor Pricing: Setting the Stage for Perception
Anchor pricing involves presenting a high-priced item first (the anchor) to influence the perceived value of subsequent options. Consumers use this initial reference point to evaluate the fairness and attractiveness of other choices.
Tversky and Kahneman's seminal work on anchoring, as outlined in "Judgment Under Uncertainty: Heuristics and Biases" (1974), demonstrates how initial exposure to a reference point influences subsequent judgments. The anchoring effect is a robust psychological phenomenon exploited in price presentation.
In the realm of luxury watches, the concept of anchor pricing is vividly illustrated. Consider a prestigious watch boutique where an exclusive, high-end timepiece is prominently displayed in the window as the anchor. Priced significantly higher than the other watches in the collection, this anchor watch sets a benchmark for perceived value and exclusivity.
As customers explore the curated selection of watches, they mentally compare each timepiece to the anchor. The slightly less expensive watches, while still premium in their own right, now appear more accessible and reasonable in comparison to the pinnacle of luxury represented by the anchor.
Real estate agents use the same tactic showing potential buyers a high-priced property initially to set their expectations. This sets a benchmark that can make subsequent, slightly lower-priced homes seem more affordable.
In the hospitality industry, hotels may offer premium suites as the anchor, making standard rooms appear more reasonably priced.
For the watch boutique, the strategic use of anchor pricing serves to guide consumers toward the other, slightly less expensive watches in the collection. By anchoring perceptions to the opulent timepiece, the boutique influences customers to appreciate the value and craftsmanship of the entire range, ultimately driving sales and enhancing the brand's prestige.
Choice Overload: Navigating the Aisles
The abundance of choices can overwhelm consumers, leading to decision fatigue and, in some cases, indecision.
Think about the last time you went grocery shopping and were looking for a Shampoo. The hair care products aisle of the supermarket is a place where dreams are crushed and souls are destroyed as you spend hours picking up multiple shampoo products, reading labels, being dazzled by promises of removing frizzy hair, hydrating dry hair, promoting hair growth and protecting coloured hair. Add the complexity of reviewing the ingredients, scent, brand, sizes and prices.
The options can be paralysing.
The sheer number of options can make the decision-making process daunting, resulting in consumers either selecting a familiar brand or overwhelmed, leaving without making a purchase.
Choice overload can lead to decision paralysis, causing consumers to opt for simplicity or familiarity over exploring new products. Businesses must strike a balance between offering variety and avoiding overwhelming their customers.
How Presentation of Pricing Matters: Crafting Perceptions
The way prices are presented or framed can significantly impact consumer perceptions. Presenting prices in a certain way can influence perception (price framing). For example, emphasizing the monthly cost of a subscription rather than the annual cost may make it seem more affordable. Clever use of odd pricing, crossing out, and colour choices can sway purchasing decisions.
Odd Pricing
Prices ending in .99 are a classic example of odd pricing, leveraging the left-digit effect. Consumers perceive $9.99 as significantly lower than $10.00, influencing their decision to make a purchase.
The "left-digit effect," is a cognitive bias that zeroes in on the leftmost digit of a number. A product priced at $4.99 feels substantially cheaper than one priced at $5.00, triggering the tendency to round down to the nearest dollar. Research has confirmed that consumers often perceive prices ending in 99 cents as irresistible bargains.
Charm Pricing
The 99 effect is a form of "charm pricing," strategically employing odd numbers like 9 or 5 instead of even, round figures. Odd numbers, it turns out, convey a sense of trustworthiness and are easier to remember. This not only enhances the allure of the price but also fosters customer loyalty, increasing the likelihood of repeat business.
Consumers perceive prices ending in 99 cents as significantly more affordable than those rounded up to the nearest dollar.
In a 1996 study by Rutgers University professor Robert Schindler and Wharton graduate student Thomas Kibarian, the impact of pricing ending in 99 cents was demonstrated. Through a women's clothing catalog experiment, where prices were randomly assigned to end in either 00 cents or 99 cents, the findings revealed that recipients of the 99 cent catalog were more inclined to make purchases. This simple pricing adjustment resulted in an 8% increase in the clothing company's revenue.
To amplify the effect of the .99, use small letters to show the left digits while the right digits are larger.
Crossing Out
When businesses cross out a higher price and display the reduced price, they trigger the perception of a bargain. Consumers feel they are getting a deal, even if the product was never intended to be sold at the initial higher price.
Using Colour
The use of red text in pricing can create a perception that the price is low. This works especially for men who see pricing written in red colour more positively and a greater saving. Limited-time offers or discounts presented in red may catch consumers' attention, encouraging them to act quickly.
Other Pricing Psychology Tactics
Bundling
The perception of a good deal is enhanced when items are bundled at a lower collective price. Consumers feel they are getting more value, and the decision to buy is influenced by the perceived savings.
Savings
Emphasizing potential savings or showcasing what consumers might lose by not making a purchase taps into the psychological principle of loss aversion. Fear of missing out on a good deal can be a powerful motivator. Showing the discount percentage, a countdown on the sale or the mark down tag all tap into the psychological impact of loss aversion
Freebies and Free Trials
Offering free items or trial periods triggers the reciprocity principle. Consumers feel compelled to reciprocate the "gift" with a purchase, and once they've experienced the product, they may be more inclined to buy.
Personalized Pricing
Customizing prices based on individual data aligns with the reciprocity principle. Customers may feel a sense of appreciation for personalized offers, increasing their likelihood of making a purchase.
Flash Sales
Limited-time offers trigger the fear of missing out (FOMO). Consumers are motivated to make quick decisions to secure a deal, driven by the urgency of the time-limited opportunity.
Artificial scarcity, a potent pricing psychology tactic, involves creating a perception of scarcity around items, making them appear rarer than they truly are. Marketers deftly utilize this strategy to tap into the innate fear of missing out (FOMO), enticing customers and boosting sales through a perceived urgency to buy.
Incorporating elements like "Limited offer" or "Only 1 left in stock" tags intensifies the sense of scarcity, prompting consumers to act swiftly. The effectiveness of this tactic is rooted in the 1975 study, "Effects of supply and demand on ratings of object value," conducted by Stephen Worchel, Jerry Lee, and Akanbi Adewole.
In the study, participants evaluated the value and attractiveness of cookies, some presented as abundant and others as scarce. The results revealed a clear trend – cookies in scarce supply were consistently rated as more desirable than their abundant counterparts. Moreover, when participants were informed of the scarcity due to high demand, the perceived value of the cookies soared even higher compared to scarcity caused by an accident.
This research underscores the principle that perceived scarcity, whether due to high demand or deliberate marketing tactics, enhances the perceived value of an object. Artificial scarcity serves as a compelling tool, manipulating consumer perceptions and driving the desire for items that seem elusive or in short supply.
The art of pricing is a dance between psychology and commerce. Decoy pricing shapes choices, price signaling communicates quality, anchor pricing establishes perceptions, and navigating choice overload requires thoughtful curation. The presentation of pricing, whether through odd pricing, crossed-out figures, or strategic colour choices, adds another layer to this intricate dance. Understanding these psychological tactics empowers businesses to not only set prices but also to craft compelling narratives that resonate with the values and perceptions of their consumers.
This is a follow on from the Pricing Strategy Part 3: The Strategy
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Want to know more about Pricing Strategies and what’s the right one for your product and context? Drop me an email at irene@phronesisadvisory.com