16th February, 2021
Whether you’re selling a new product or thinking about repricing your existing products, choose a price that will maximise your profit with these pricing psychology tips.
Pricing psychology involves more than assigning a dollar amount to a product. It’s about understanding the psychology of your buyers, and creating a price point or pricing architecture that satisfies cognitive needs and creates a sense of value.
Jon Manning, chief economist for MYOB sees the understanding of behavioural economics as fundamental to understanding how to set the best pricing for products and services.
And many of the concepts in behavioural economics, as opposed to more traditional schools of thought, harks back to an oft-cited study known as the ‘Beer on the Beach’ experiment, which was published by US economist Richard Thaler in the early 80s. Thaler asked participants to rate their willingness to purchase a cold beer on a hot day from a 5-star hotel versus a rundown grocery shop.
‘Traditional economics says there should be no difference in their willingness to pay. It’s the same beer – why should there be a difference? Thaler however, found otherwise. There was a difference, and traditional economics couldn’t explain why,’ Manning writes in his recently-released book, Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services.
As a result, studying the behaviour that underlies purchase decisions has become of increasing interest to economists, psychologists and business at large ever since.
To help you start to think about consumer behaviour when it comes to your pricing, here are eight practical tips that work.
Some price points are better than others, and this goes beyond coming up with a competitive price point that still maintains your margins.
Creating price points that end in .99 is popular in the retail industry for the simple reason buyers’ perceptions favour the smaller dollar amount, even if the actual price difference is miniscule.
For example, the one-cent difference between $6.80 and $6.79 doesn’t have much impact on the eye, but a one-cent difference between $10.00 and $9.99 seems significant.
“This is also called ‘the left-digit effect and well-utilised in retail environments,’” said Manning. “But there’s a warning here: price points ending in nines can be interpreted as discounted or on sale.
“If you’re a premium brand, you may prefer to use price points ending in zero (or no decimals at all) as this is perceived as an indicator of quality.”
Scroll down for more on price as an indicator of value or quality.
Are your prospective customers saying your prices are too high?
Consider these two explanations:
They can’t afford your product and aren’t part of your target market. This is not a situation you can fix.
They don’t see the value. This is a problem you need to address.
If customers are struggling to see value in your product and services, there may be a problem in the way you’re communicating their features and benefits. In this case, it’s time to revisit your marketing strategy and perhaps conduct additional market research.
When it comes to bringing this back to your pricing strategy, consider how you’re communicating your value throughout sales and marketing journeys — especially at the checkout.
“When a customer sees the price of what they’re buying, are they also presented with a summary of the value they’re buying into?” asks Manning.
People have a habit of placing intrinsic value on purchases based on how much they spent. For many consumers, this often means your $499 pair of shoes won’t see nearly as much wear as your $89 pair.
For the sellers or products and services, this is a clear call to have a clearly articulated strategy when it comes to pricing
“If you’ve got a revolutionary product that no one is aware of, or first-time customers that knows nothing about your product of service, then in the absence of that knowledge, price is going to be an indicator of quality,” said Manning.
“A high price will be perceived as applying to a high quality product and vice-versa. But, if the quality doesn’t live up to the price, you run the risk of offering a ‘rip off’ product — and that can be a brand-killer.”
The ‘anchoring effect’ happens when a buyer compares one thing against another. The first thing – whether it be a product, feature or price, is now the benchmark against other things of its kind,
For example, if your buyer is considering one product’s price over another’s, they’re anchored by the first product they see, and it applies just as much to your website as it does to a customer walking into your shop or showroom, Manning advised.
“Think about this for a minute,” he said. “If the customer sees the most expensive (of three) prices first, the other two prices seem cheaper.
“If the customers see the cheapest (of three) prices first, everything else is more expensive. Research has found that the former will yield a higher average selling price than the latter.”
And that means even if you’re going on sale, you won’t necessarily move as much product if you’re putting your ‘best sellers front-and-centre’ which may be your gut instinct. Instead, consider setting customers’ expectations by presenting some higher-end offerings first.
In contrast to the prior point, there is good reason for putting something you really want to sell in the most obvious position.
You can also take this to the enth degree with further staging, as Manning describes:
“An example of the centre-stage effect is where a restaurant places the dish they most want to sell in the middle of the menu where it will naturally draw the eye.
“In some cases, they’ll go further by putting a fancy border around it — similar to placing a product on a pedestal in the middle of the showroom,” he said.
Everybody loves options (especially when they mean avoid an instant hit to the hip pocket). In retail, systems like layby or layaway have quickly been overtaken by microfinance offerings like Afterpay, but the psychology behind why these concepts work all comes down to behavioural psychology — and they can be used in any business model.
For example, when you give people the option to pay for your product in smaller increments (rather than one lump sum), you’re breaking the larger, overall cost into much more management numbers for a consumer to perceive (ever subscription costs being broken down by ‘weekly coffees’?).
“Just make sure you give customers visibility of the total purchase price to avoid buyer’s remorse,” said Manning. “The overall cost of purchase may not be the way you advertise your wares, but it needs to be explained prior to purchase.”
READ: Pricing in difficult economic times
Ever paid money for a membership, subscription or otherwise and felt compelled to spend more money via said program in order to ‘get your money’s worth’? Doesn’t make much sense, does it?
This is what’s known as the ‘sunk cost fallacy’ and it’s one that Amazon uses to great effect with Amazon Prime.
“Amazon Prime gives subscribers access to digital products and faster deliveries for a modest monthly subscription,” said Manning. “On Amazon Prime Day, these subscribers get access to exclusive, discounted prices.
“Perhaps it should be known as ‘sunk cost fallacy day,’ as Amazon Prime members buy stuff they don’t necessarily need, just to maximise the return on investment they get from their existing cost of membership.”
Consider how the sunk cost fallacy could be used in your upselling and cross-selling efforts in order to grow customer value over time.
No matter what type of business you’re in, your clients and customers will be more happy to spend with you if they know you’ll accept their money easily.
And, while the trend in retail is turning away from cash payments, depending on your business location and clientele, this could end up costing you in the long run.
Instead, investing in a point of sales system that can accept and process the widest variety of payment types will offer you and your customers the most flexibility when it comes to landing the deal.
For businesses that invoice their customers, online systems can allow payments from Amex, Mastercard, BPay and more directly to your accounting software. Check out how invoice payments work with MYOB software, here.
Find pricing tips like these and many more in Jon Manning’s book, Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services.