How we change what others think, feel, believe and do

Pricing Psychology

Disciplines > Sales > Sales articles > Pricing Psychology

Expectation | Boundaries | Proximity | Rounding | Preferred numbers | Specific prices | Sound duration | Comma effect | Coinage | See also

How do you set the price of something you are going to sell. There are a number of approaches and some important psychology to consider.

http://en.wikipedia.org/wiki/Psychological_pricing (see references here also)

http://blog.kissmetrics.com/5-psychological-studies/

http://www.strategy-business.com/blog/The-Psychology-of-Pricing-Customers-Prefer-Round-Numbers?gko=f4877

http://www.cbc.ca/undertheinfluence/season-3/2014/01/11/the-psychology-of-price-1/

http://www.cbsnews.com/news/pricing-psychology-7-sneaky-retail-tricks/

http://blog.tiptaplab.com/3-Ways-to-Optimize-Product-Pricing-with-Psychology

http://www.fastcompany.com/1826172/psychology-behind-sweet-spots-pricing

http://psychologyformarketers.com/price-points/

http://www.slideshare.net/leader443/consumer-psychology-and-pricing

http://www.slideshare.net/phyxsiuss/chapter-14-developing-pricing-strategies-and-programs-9186948

http://www.slideshare.net/mbavalerio/pricing-strategies-14275252

http://www.wisebread.com/party-like-its-1999-the-psychology-of-pricing

http://fstoppers.com/properly-taking-advantage-of-the-psychology-of-pricing

http://www.theatlantic.com/business/archive/2015/01/the-psychological-difference-between-1200-and-1167/384993/

http://timharford.com/2012/06/pound-for-pound-99p-is-worth-every-penny/

http://www.huffingtonpost.com/gregory-ciotti/10-classic-academic-studi_b_6182498.html

Expectation

Price has to take account of customer expectation, which is highly variable, depending on what customers have seen and heard. Advertising, competitors communications, hearsay and the promises you make all have an effect on what they consider to be an acceptable price.

Fairness is a particularly important concept. If they think you are taking advantage of them by charging well above your cost price, then many will not buy, just to 'punish' you, or otherwise demand a much greater discount.

Boundaries

Why are things on sale priced at amounts such as 19.99 rather than 20.00? Even houses priced at hundreds of thousands are set at figures just below a natural rounded figure.

The reason for this is that we think in terms of boundaries. This is even more significant when an additional digit is added. If something is 100.00 it just seems much more than 99.99. This is why it can be better to price at 19 rather than 19.99, especially if above the 19 you put 20.00 with a line through it.

Another reason why 19.99 sounds cheaper than 20.00 is the 'left digit effect', where we put extra weight on the first digit we meet, so in this case '1' is half of '2', helping to make 19.99 sound cheaper than ever.

Proximity

There is a proximity effect around boundaries where people subconsciously or even consciously round to the boundary. Sometimes 19.99 is just too close, which is why 19.95 gets used quite often. Even 19.00 may be seen as close and 18.75 might result in significantly more sales.

Proximity in time is also significant. If you show them an expensive item then a cheaper item, then the contrast effect may well make the cheap item seem seem much better value.

Rounding

Although we tend to use proximity, we also get used to sellers using this principle and consciously round off numbers to the nearest whole, ten or hundred value. This can make boundary strategies less effective.

For this reason, 16.00 can seem a lot more than 14.00. The reason for this is that we mentally tend to round off things even when they are not near a boundary, so 14.00 is closer to 10.00, while 16.00 is closer to 20.00.

Preferred numbers

Why do you see things priced at 19.97 rather than 19.99 or 19.95? Or even priced at 19.77?

The simple reason for this is that if you gave a large group of people the choice of any number, a disproportionate set of people would choose seven. This pleasure at the number seven means people stick with it and are less likely to mentally round the number up to 20.00.

Seven has long been associated with magic and power. The reason that James Bond was assigned the number 007 is that in the sixteenth century, John Dee acted as a spy for queen Elizabeth the first of England. His number was also 007, but written with the horizontal bar of the 7 protectively over the top of the 00, which represented the eyes of the queen.

In this way, if you put the price at a number with which people are happy or like for some reason, whether it is their door number or the age of their son, they will accept it more easily.

Specific prices

Rather than pricing at 19.99 or 19.97, an effective alternative is to price at an odd amount such as 23.47. Why do this?

One reason is this works is that it is a bit harder work to round it off. A more significant effect is that when faced with a boundary-set figure such as 19.99, people know that this is a deliberate ploy with which they are very familiar and probably quite cynical. So when they are faced with an odd number, they surmise that this is a 'real' price that has a direct connection with the original cost. In consequence they accept the anchor of the specific price.

Some supermarkets use this as a signal price, for example pricing sale items at 'X.94'. When customer realize this, they will often buy items priced in this way without checking if this really is a bargain or just a small reduction.

Prices that are an odd number are easier to increase, at least by small amounts, as customers are less likely to remember the original price (they may remember it as 'fifteen something' rather than 'fifteen' or 'about sixteen').

Janiszewski and Uy told subjects that the retail cost of an item was $4998, $5000 or $5012, and then asked them to estimate the wholesale price. Those who were told $5000 estimated a much higher price. They also found that house sellers who priced at an odd amount got a final offer much closer to their original price than those who set it at or near a round figure.

Odd-number pricing

Price an item with a final odd number, such as 19.99 or 19.97 rather than 19.98.

This is related to the way that when asked for favoured numbers, people tend to odd number, most particularly 7, 5 and 3. Even numbers, it seems, have less arousal potential. They have even balance as they can be divided by two and so may seem 'calmer'. The imbalance of odd number, on the other hand, is more 'interesting'.

Sound duration

The longer it takes to say a sum, the greater the sum will seem to be. This can act against some of the principles above, for example 'nineteen-ninety-nine' takes far longer to say than 'twenty'. This is due to the size heuristic, where bigger names are taken as meaning bigger everything else.

This principle can be used when speaking sums, so rather than say 'one thousand, two hundred and fifty', instead say 'twelve-two-fifty'.

Comma effect

If you price something at '1,200' then people will usually read it as 'one thousand, two hundred'. If, however, you remove the comma ('1200'), then they will likely read it as simply twelve hundred'. This invokes the duration effect as 'one thousand two hundred' takes longer to say and hence seems more. It also uses the 'thousand' word, which is a word that makes things seem more than saying 'hundred' and is a barrier beyond which many will not go.

The general principle with high sums in the thousands is hence to remove the comma.

Easy Coinage

The number and amount of coins and notes that we would pay for something also affects our perception. 20.00 is a single note and makes for a quick transaction. 16.25 would need more fiddling and handling of change. In situations where speed is important, such as grabbing a coffee, then a simple rounded figure may be better.

Simple pricing

Pricing an item at a price that is easy to pay, for example 20.00 makes it easier for the customer to pay with a single note or set of coins and reduces the hassle for them in handling change. It also sends a message that the store is being honest and not trying to deceive customers by pretending the product is cheaper by reducing it only by a small amount.

Change

Some stores deliberately price away from simple pricing so that change must be given. This increases the duration of the interaction with customers during which the relationships may be deepened.

Forcing change to be given also ensures that store attendants have to engage in the transaction and use till. This makes them less likely to quietly pocket the notes or coins handed over.

Adaptive pricing

Pricing can be varied to adapt to threats, opportunities and other situations where a simple change can increase sales, profit or both.

Pricing may be developed to adapt to situations, for example price-matching with competitors (many retail customers accept a 'price promise' without checking up).

Legends can build up around pricing techniques. For example a British store became known as pricing items with a four, such as 19.94 when they had been reduced. Customers noticed this and bought more at this price, so the store started pricing non-reduced items like this.

See also

Pricing Strategy

Janiszewski, C. and Uy, D. (2008). Anchor Precision Influences the Amount of Adjustment, Psychological Science, 19, 121-127