The Psychology of Pricing

When I was going to college I wanted to major in psychology. My parents wouldn’t let me saying “Those guys are crazy (literally), we’re not paying for you to major in that.”

So I ended up majoring in marketing.

What I really got was the best of both worlds, because the whole field of marketing is based in psychology. And this is especially true when it comes to pricing strategy.

You’re certainly familiar with price tags that read $9.99 or $19.99. Do these really move more product than tags reading $10 or $20? What about adding the decimal and zeros: $10.00 and $20.00? Does any of this make a difference? Research says it does.

Setting the right price can have a powerful effect on the success of your marketing efforts. So let’s look at the factors that determine how to come up with the most attractive price.

CHARMING PRICES

No one knows when marketers first started shaving pennies off their prices, although much of the lore points to events in the 19th century. One story is that doing it required the store clerk to make change. This meant opening the cash register and recording the sale – a big discouragement from stealing.

Another more complex story tells of a clever Chicago newspaper publisher who, in 1875, priced his newspapers at a penny to compete with other newspapers that charged a nickel. Pennies were rarely used at the time, so he got his advertisers to set their prices lower by subtracting a penny from their whole dollar prices. This assured his readers always had the right change to pay for the paper. It sounds like a great story, but no one knows for sure if this really is how “.99” at the end of prices became so popular. It seems a little far-fetched to explain such a universal phenomenon.

It’s a fact that this kind of pricing has a powerful effect on buyer behavior. It’s sometimes referred to as “charm” pricing, fractional pricing, or odd-even pricing. Setting a price even a penny or two below the full dollar amount can increase sales by 21 – 34%, depending on other factors. That’s a huge amount that can make or break your campaign.

Marketers are well aware of this. According to a survey of prices that was published in the Marketing Bulletin, 60% of prices end in a 9; 30% end in a 5, and only 7% end in a 0.

So now the question is, why do these numbers work so well?

WHY LESS IS MORE

We may think we make rational decisions, but we’re all influenced by subconscious parts of our own minds that make us perceive things in ways we’re not aware of. Rationally we know that $9.99 is only one penny less than $10.00 and therefore doesn’t amount to much, but unconsciously we react as though it’s a huge difference. There are a number of theories as to why this is so. Here are a few of the more prevalent ones.

The Reference Price: While it’s a largely unconscious process within us, we’re always placing a value on things. We do it all the time without realizing it. And to help us make more accurate valuations, we use a process of comparison. We set some kind of reference point in our minds, and then we ask ourselves, is this price higher or lower than the reference point I’m comparing it to? If something is priced at $9.95, the reference point we compare it to would most likely be $10, and compared to that, $9.95 looks like a good deal.

Clearly, pricing something at $10.05 in this case would not be a good idea. We would still likely use a reference point of $10 rather than a reference point of, say, $11. But now the price of $10.05 is higher than the reference point, and would not look like a good deal.

So, with the right pricing, you establish in the prospect’s mind a reference point that’s higher than the price you’re asking, and that therefore makes the price look attractive. Shaving off a penny or two does the trick nicely.

Ignoring the “Insignificant”: We tend to gloss over things that seem insignificant to us. Dollars seem important to us. Cents not so much. So we focus on the dollar amount, and don’t notice that 99 cents is essentially another dollar.

This illusion is strengthened by taking what we want to appear insignificant, and making it physically smaller. That’s why the “.99” part of a price is often made small and superscript, so it’s lifted out of view where it can be more easily ignored.

The Appearance of Being the “Lowest Price”: Using fractional prices gives the impression that the company has really fine-tuned their pricing to give you the best price. A price of $6.94 says “bargain.” Whole store chains work on this principle. Walmart always lists prices with odd amounts of change: .88, .94, .96. By contrast, Macy’s usually lists its prices with a “.00” at the end – unless the item is on sale. Then it usually ends with “.99” or something like it.

The Anchor of the Left-Most Digit: We read from left to right, and the first thing we see when we look at a price is the left-most digit. As a result, that first digit carries the greatest psychological weight.

It’s easy for us to understand that $1.99 may feel like a significantly lower price than $2.01. But it goes even further. If people are asked how they perceive the difference between, say, $4.99 and $6.00 (without actually doing the math), they will perceive the difference to be closer to $2.01 rather than $1.01. That left-most digit commands the way we see a price, and shaving a penny or two off a price to change it fro $20.00 to $19.98 can make a huge difference in sales.

The Item Falls Into a Different Price Point: An additional reason for using fractional pricing is that is may seem to put the item into another category. This has to do with an item’s price point – where it falls in relation to other competitive prices. Many people have a price point in mind. For example, $20 is a price point many consumers have. If an item is below $20 it seems inexpensive; if it’s more than $20 it seems more expensive and purchasing it would require more thought.

If you can keep the price of your product below a common price point so it falls in the less expensive category, you can boost your sales. And even a few pennies, at the critical point, can make a huge difference. A price of $19.99 means the item fits in the right category. Making the price $20.19 raises it into the next category in the mind of the consumer, and can reduce sales.

WHEN MORE IS MORE

Some businesses don’t want to look like the cheapest choice out there. Their success is based in appearing to be expensive – and worth it.

Businesses like these use something called “prestige pricing.” They deliberately make their prices higher, and the people who choose to buy from them love it. They will rarely shave off the penny. They will price in full dollars.

I do this with my coffee & smoothie catering. My packages start at $575 – pricing them at $574.99 doesn’t give it the same “prestige” and “experience” they’re ultimately buying.

This is something you also see a lot on menus in fine restaurants. They’ll just say:

Grilled Caesear Salad  15

They may not even use a dollar sign. That way it doesn’t feel like money.

You have to know who your best consumers are. If they want to see themselves as being so wealthy and elegant that they just want the best, regardless of the cost, then more may be more.

PRICE TESTING IS ESSENTIAL

As always, you have to test. You can’t guess at the best price – the price that will bring the most sales. You have to experiment and find out.

You can bet that Walmart has a whole team of marketers who are always testing prices. I have clients who are always running split tests online and offline with different prices. And the results are often surprising. Sometimes the higher price does better.

But you never know until you do the testing to find out.

(NOTE: If you struggle with figuring out what marketing campaigns to do every month, check out the Silver Platter Marketing Membership – it’s like having marketing handed to you on a silver platter!)

About Stacey Riska

Stacey Riska, aka “Small Business Stacey” is a serial entrepreneur who is passionate about saving small business and rebuilding Main Street. She helps small and local business owners become a #SmallBizMarketingWiz by teaching them marketing strategies that get MORE: MORE leads, MORE customers/clients, MORE sales, and MORE money. Stacey is the founder of Small Biz Marketing Specialist, THE go-to place for marketing tips, techniques and strategies that get results. Stacey is also the creator of the Daily Deals for Massive Profits Training Program, an online video training program that teaches small and local business owners how to use daily deal sites like Groupon to skyrocket their business growth and get massive profits. In this program she teaches from experience, as it was the key strategy that transformed her coffee and smoothie business from being $500K in debt to a 7-figure profitable business. When not saving the small business world, she enjoys sipping red wine, eating chocolate (who doesn’t!) and spending time with her amazing husband.