http://www.nickkolenda.com/psychological-pricing-strategies/
Welcome to a massive list of psychological pricing strategies.
Whether you’re launching a new product, selling items on eBay, or negotiating a deal on your house, you’ll learn how to choose a price that will maximize your profit.
This article is pretty beastly. To help you find the pieces that are most relevant to you, I recorded this quick video.
Step 1: Determine Your Price
Fortunately, that’s where psychology can help.
Based on research in cognition and behavior, certain prices are more effective than others. Even if you don’t find the exact sweet spot, you can make small — yet powerful — adjustments to maximize the effectiveness of your price. All for free.
In this section, you’ll learn how people process numerical values (and how to choose the numbers in your price, accordingly).
And the results speak for themselves. Check out Gumroad’s sales:
When people see those positive results, they often credit the 9’s in
the price. However, there’s another culprit responsible: the left digit.
Why is the left digit so important? It involves the way our brain encodes numerical values.
Our brains encode numbers so quickly (and beyond consciousness) that we encode the size of a number before we finish reading it. Thomas and Morwitz (2005) explain that:
Could one choice generate more sales? Researchers think so.
Wadhwa and Zhang (2015) found that round prices — because they are fluently processed — work better for emotional purchases. When consumers can process the price quickly, the price “just feels right.”
The researchers also found the opposite to be true. Consumers need to use more mental resources to process non-rounded prices. So those prices seem more fitting with rational purchases.
Despite the direct evidence, I’ll propose a caveat.
Even if your purchase context is emotion-based, you should still avoid rounded price intervals (e.g., $100, $5,000). People assume that those prices are artificially higher, as if they was plucked from thin air (Janiszewski & Uy, 2008).
So where can roundedness help? That principle can help you determine whether to add cents to your price.
If your purchase is based on emotion, then leave out the cents.
If your purchase is based on rationale, then add some cents.
The flipside is more important. People will perceive your price to be lower if it contains fewer syllables.
But Nick! When I see a price, I don’t say it out loud. I just read it.
Same here. But according to research…that doesn’t matter. When you read a price in written form, your brain nonconsciously encodes the auditory version of that price (Dehaene, 1992). You don’t even need to verbalize the price in your mind — your brain encodes it either way.
Still skeptical? Coulter, Choi, and Monroe (2012) found a positive relationship between syllabic length and perceived magnitude. Even if two prices have the same written length (e.g., $27.82 vs. $28.16), people perceive the phonetically longer price to be higher in magnitude.
–Leonardo da Vinci
Nothing in this world has concrete meaning. Everything we know results from our perception. At the end of the day, price is merely a perception. Nothing more. Nothing less.
And that’s good news for you. There are no universal standards that dictate whether a price is high or low — it all depends on perception.
In this section, you’ll learn some clever tactics to alter people’s perception. You’ll learn how to make your price seem even lower (without changing the actual price).
I explain that process in this quick video.
Why would people pull a lower price into the comparison? This strategy takes advantage of our brain’s laziness for encoding numerical values. Adaval and Monroe (2002) explain that:
Here are a few tactics that can help.
When you use “partitioned pricing” (i.e., breaking up your total cost into multiple components), you anchor people on your base price, rather than the true total cost (Morwitz, Greenleaf, & Johnson, 1998). When people compare your price to a reference price, they’ll be more likely to pull your base price into the comparison.
Hossain and Morgan (2006) tested that possibility with eBay auctions. They set up auctions for music CDs, and they analyzed different bidding structures.
Suppose that you’re selling an online course for $499. By offering payment installments (e.g., 5 payments of $99), you taint people’s comparison process. They’ll be more likely to compare your installment price ($99) to a competitor’s lump sum price (e.g., $500) — a huge difference that makes your offering much more appealing.
But you shouldn’t get the wrong idea. People aren’t stupid. They know that comparing $99 and $500 isn’t an accurate comparison.
Luckily, it doesn’t matter. Since people usually compare reference prices subconsciously (Muzumdar & Sinha, 2005), your installment price has a good chance of sneaking into their comparison.
Often referred to as “pennies-a-day” pricing, that strategy influences people to perceive a lower overall price (Gourville, 1998).
You should still make your regular price the primary focus. Simply mention the daily equivalence. That low number will anchor people toward the lower end of the price spectrum.
Don’t worry if you have trouble reframing your price into a specific daily cost. You can achieve the same effect by comparing your price to a petty cash expense, such as a cup of coffee (Gourville, 1999).
For example, Oppenheimer, LeBoeuf, and Brewer (2007) found that people made lower numerical estimates if they were asked to draw a short line (compared to a long line).
If you want people to perceive your price to be smaller, you need to associate all of its related features with a small magnitude.
Here are some tactics that can help.
It sounds odd, but hear me out.
Research shows that directional cues are associated with certain concepts. For example, your spatial concept for “up” is metaphorically associated with good qualities:
The same principle applies to numbers. Dehaene, Bossini and Giraux (1991) found that people conceptualize numbers on an imaginary horizontal line, with numbers growing larger from left to right.
In their study, they presented participants with digits ranging from 0 and 9, and they asked participants to indicate its parity (i.e., whether it was odd or even). As expected, people responded faster to smaller numbers when using their left hand (and vice versa). In other words, people responded faster with the hand that matched the same side of their mental ruler.
How does that finding relate to pricing?
Since we conceptualize smaller numbers as belonging on the left, positioning prices toward the left can trigger people’s conceptualization for a smaller magnitude, thus altering their perception of your price (Coulter, 2002).
Since we can also associate numbers with a vertical magnitude (with smaller numbers positioned toward the bottom), you might want to position your prices toward the bottom-left.
Thanks to processing fluency, people will perceive your price to be smaller if you display that price in a smaller font. This tactic is particularly effective when you contrast your price with a larger sized reference price (Coulter & Coulter, 2005).
And don’t forget about the font’s kerning — the spacing between letters. Fonts with smaller kerning should also influence people to perceive your price to be lower.
Why does that happen? Although physical length plays a role, there’s another principle involved. We’ve already discussed it.
Can you think of it? When you remove the comma, you reduce the phonetic length of your price.
For example, Coulter and Coulter (2005) presented participants with various descriptions for an inline skate. Some descriptions emphasized a “Low Friction” benefit. Other descriptions emphasized a “High Performance” benefit.
Even though participants rated those benefits as equally important, participants were more favorable toward the price when the description contained “Low Friction.”
When you choose the language near your price, choose words that are “congruent” with a small value (e.g., “low,” “small,” “tiny”).
Is it because of the negotiation aspect? If someone asks for a very specific price, wouldn’t potential buyers perceive less room to negotiate?
That’s what I thought. But nope. Researchers ruled out that possibility. Surprisingly, the real culprit involved priming a small magnitude.
Think about it. When are you more likely to use a precise value? Answer: when you’re dealing with small numbers (e.g., 1, 2, 3).
Due to the association between precise numbers and small values, precise numbers trigger an association with small values, thus influencing people’s perception.
Bonus Tip: Since a house is a rational purchase, you could enhance the psychological impact by using a precise, non-rounded number (e.g., $362,798.76)
This section offers a few tactics.
Not only should you start with a high initial price, but you should also use a precise value. In one study, Janiszewski and Uy (2008) asked participants to estimate the actual price of a plasma TV based on the suggested retail price — either $4,998, $5,000, or $5,012.
When participants were given precise values ($4,998 and $5,012), they estimated the TV’s actual price to be closer to that range. When the suggested price was rounded ($5,000), participants believed the actual price to be much lower.
When an anchor is precise, we adjust our estimate past fewer units. Why? You can thank your mental ruler. As Thomas and Morwitz (2002) explain:
Nunes and Boatwright (2004) tested that possibility. On a popular boardwalk in West Palm Beach, the researchers sold music CDs. Every 30 minutes, the adjacent vendor alternated the price of a sweatshirt on display — either $10 or $80.
What happened? You guessed it. The sweater’s price anchored people toward the respective ends of the price spectrum. When the price of the sweatshirt was $80, shoppers paid higher prices for the CDs.
If you’re selling items on eBay, you might want to mention some of the other items you have for sale (the more expensive items, of course).
Here’s a striking example. Ariely, Loewenstein, and Prelec (2003) showed participants various products (e.g., cordless keyboard, rare wine, Belgian chocolates). They asked participants whether they would purchase each product at the dollar amount equal to the last two digits in their social security number.
After receiving a YES/NO answer, researchers then asked participants to state the exact dollar amount they would be willing to pay.
Remarkably, the researchers found a direct correlation between the social security number and the price that participants were willing to pay. Here’s the data for one of the products, a cordless keyboard:
How can you apply that finding? Should you simply ask customers to contemplate a high number? Not quite. Luckily, your job is easier.
Anchoring effects occur subconsciously, so consumers don’t need to contemplate a numerical anchor. In fact, Adaval and Monroe (2002) subliminally exposed people to a high number before displaying a price. That exposure caused people to perceive the subsequent price to be lower.
The takeaway? Even if potential customers don’t consciously notice your numerical anchor, they just need to be exposed to it.
If you run an online store, you could simply mention your total number of customers near your price. When people generate their reference price, that high number will trigger an anchoring effect (and their reference price will be even higher).
Some businesses will lower the price of their old product to gradually phase it out of the market. Surprisingly, though, that strategy is often the wrong approach.
Baker, Marn, and Zawada (2010) suggest raising the price of your old product. By raising the price, you raise people’s reference price (thereby enhancing the perceived value of your new product). You’ll be releasing the new product into more favorable conditions.
Conversely, if you lower the price of your old product, you set yourself up for failure. You’ll reinforce a lower reference price, which will make your new product seem more expensive.
But here’s a neat psychological trick to enhance that comparison.
If you visually distinguish your price from a reference price (e.g., using a different font color), you trigger a fluency effect. Consumers will misattribute that visual distinction to a greater numerical distinction (Coulter and Coulter, 2005).
That fluency effect not only works with font color, but it also works with physical distance. When your price is horizontally farther away from a reference price, people perceive a greater numerical distance (Coulter & Norberg, 2009).
And don’t forget about font size. Smaller font sizes are especially effective when they’re positioned next to a larger reference price (Coulter & Coulter, 2005).
You might be familiar with the infamous study. In Predictably Irrational, Ariely (2008) describes a strange offering from the Economist magazine. One day, he noticed three subscription options:
But Ariely noticed an underlying motive. He conducted a study to test his hunch. And he was right. The “print only” option made a huge difference.
Without the “print only” option, people couldn’t accurately compare the options. How much should you pay for a web and print subscription? Who knows. Most people chose the web option because it was cheaper.
However, the “print only” option helped people compare those two options. Because it was a similar, yet worse, version of the “web and print” option, people could easily recognize the value of the web and print subscription. With more people choosing “web and print” (a more expensive alternative), the Economist generated 43% more revenue.
When you offer different versions of your product, people will naturally compare those options. To guide people toward the more expensive version, you can take the same approach.
By adding a similar, yet worse, version of your expensive product, you influence the comparison process. Suddenly your expensive product becomes more appealing.
This section will teach you some pricing tactics that can motivate people to buy. You’ll learn (1) how to reduce the “pain” that we associate with paying and (2) how to properly use discounts to drive purchases.
More specifically, the pain emerges from two factors:
In traditional taxi rides, the saliency of payment is very high. You see a meter constantly rising. Each minute evokes an increasingly painful sensation. Plus, at the end of the ride, the taxi driver makes you pay by cash or credit card. So. Much. Pain.
Uber is different. No visual meter. No physical payments. Everything is automatically charged to your card. Much less pain.
Credit card processing is one tactic to reduce the pain of paying, but you can reduce that pain in other ways too. This section will give you a few ideas.
But don’t get too trigger-happy. Before you start removing dollar signs, you should consider the overall clarity of your price.
Oftentimes, you need a dollar sign to indicate that your number is, indeed, a price. In those cases, don’t risk losing clarity by removing the dollar sign. Only use this tactic in formats where customers will expect a price to appear (e.g., restaurant menus).
For one, you won’t be delivering your product or service without being compensated. You’ll be more likely to get paid. Pretty helpful.
Second, people will be happier with your product. When people prepay, they tend to focus on the benefits they’ll be receiving, which numbs the pain of paying. If they’ve already experienced the benefits of your product, their payment becomes significantly more painful (Prelec & Lowenstein, 1998).
That insight can be helpful with monthly subscriptions. If you charge customers monthly payments, you should charge them at the beginning of the month (and frame your message in a forward-looking manner).
Avoid sending receipts at the end of a month (or summarizing the previous month’s payment). You’ll just be rubbing salt in the wound.
Let’s look at each scenario.
First, your product should be hedonic (emotional), rather than utilitarian (rational). Since hedonic purchases trigger more guilt (Khan & Dhar, 2006), a bundle reduces that guilt, especially when you attribute the discount to the hedonic product.
As Khan and Dhar (2010) explain:
Second, avoid bundling expensive and inexpensive products. Inexpensive products reduce the perceived value of expensive products.
Brough and Chernev (2012) asked people to choose between a home gym and a 1-year gym membership. Roughly 51 percent of people chose the home gym — a pretty even split. However, when the researchers bundled the home gym with a free fitness DVD, only 35% of people chose it. The fitness DVD reduced the perceived value of the home gym.
Mogilner and Aaker (2009) conducted an experiment with a lemonade stand. They alternated three signs advertising the stand, each emphasizing a particular quality:
The results were clear: the “time” sign outperformed the others. Those people paid twice as much (and that sign attracted twice as many people).
The researchers attributed those results to a personal connection with the product:
By creating a separate medium between your customers’ money and their payment, you distort the perception of paying. They’ll know that they’re paying, but it won’t feel like it.
Why won’t it feel like paying? Researchers find that, with the presence of an additional medium, people are too lazy to calculate the conversion between those currencies (Nunes & Park, 2003).
Here’s a cool idea. When new customers open an account with your business, you could require them to deposit a refundable $10 into their account (to be used for your services).
Since the money is refundable, customers might not give too much additional resistance. More importantly, that payment medium will distort the essence of that money. Once it enters a separate medium, it won’t feel like money (and people will be more willing to spend it).
You could also strengthen that perception by referring to that money as “[Your Company] Balance” (or any other name that avoids connotation with real currency).
If you implement that strategy, you might also want to match customer deposits by a certain percentage. For example, if a customer deposits $10 into their account, you could match it by 10% (which would bring their account value to $11).
By matching their deposits, you trigger two benefits.
First, you incentive customers to deposit more money. With the psychological impact of payment mediums, you should enhance the appeal of deposits as much as possible.
Second, you create an off-balance conversion between their money and their account value. Dreze and Nunes (2004) explain that payment mediums become more effective when consumers have trouble converting the values:
That advice is pretty extreme. You can use discounts…you just need to use them properly.
Where can you go wrong? If used too frequently (or too deeply), discounts can make people more price conscious moving forward. They’ll keep waiting for the next discount.
Discounts can also lower people’s internal reference price for your product, causing them to buy less in the future (because your price will seem too high).
Reducing the frequency and depth of your discounts can help. However, this section will give you a few additional tactics to maintain the strength of your discounts.
Discounts are no different.
When you offer discounts, you want to maximize the perceived size of them. That way, people feel like they’re getting a better deal.
Consider a $50 blender. Which discount seems like a better deal: 20% off vs. $10 off?
If you do the math, both discounts are the same monetary value. However, one discount has an advantage over the other.
How do you pick? Jonah Berger (2013) suggests following the “Rule of 100.”
For example, every-day-low-pricing stores often refer to supplier price cuts:
With discounts, you want to maximize the perceived magnitude. Choosing discounts with precise numbers can actually hurt you. Those precise numbers will make your discount seem smaller.
Supporting that notion, Thomas and Morwitz (2006) found that people perceived the difference between 4.97 – 3.96 to be smaller than the difference between 5.00 – 4.00, even though the difference is roughly the same (1.01 vs. 1.00).
To maximize the perceived magnitude of your discount, use rounded values. Customers should be able to compute the general magnitude pretty easily.
This section will teach you a few pricing strategies that play a role in your long-term revenue. You’ll learn (1) how to make price increases more undetectable and (2) which pricing strategies can damage your reputation.
Since most people are familiar with inflation, they’ll be forgiving, right? Surely, they’ll understand.
Unfortunately, it’s not that easy. Despite inflation and other valid reasons, most consumers don’t see the justification for price increases.
Bolton et al. (2003) analyzed that perception. They found that consumers “underestimate the effects of inflation, overattribute price differences to profit, and fail to take into account the full range of vendor costs.” Welp, that’s unfortunate.
Although you won’t be able to eliminate all negative effects from price increases, you can make those price increases more undetectable (without being manipulative).
Duh.
In theory, that concept is really intuitive. Obviously people will notice larger price increases.
In practice, however, that principle is very counter-intuitive. Since businesses are afraid of increasing their prices, they often save that tactic as a last resort. They wait until it’s absolutely necessary to do it.
However, if you reach that point, then you’ll usually be desperate for revenue. You won’t be able to increase your price by a tiny amount. You’ll need to increase it by a noticeable amount.
What should you do?
If you know that you’ll need to increase your price eventually, you should use more frequent (yet smaller) changes. Avoid waiting until the moment of desperation.
With more frequent price increases, you also avoid reinforcing a concrete reference price. If your price stays the same for years, then people will become accustomed to your price at that specific level. Once you change your price, people will be more likely to notice.
Food marketers know that consumers are pretty familiar with prices, so they often avoid price increases by reducing the physical size of their products (e.g., potato chip bags, candy bars, etc.).
By reducing physical size by a small amount, food marketers lower their costs and increase their margin. More importantly, they increase their revenue without increasing their price (or alerting people to any negative changes).
If you decide to downsize your product, you should reduce the size of all three dimensions — height, width, and length — by an equal amount. Consumers are less likely to notice a change in all three dimensions (Chandon & Ordabayeva, 2009).
Downsizing a feature in your product can be risky. If consumers detect a mischievous intent, you can lose trust and lower sales.
To maximize your revenue, you need to maintain and cultivate customer loyalty. The next strategy will describe certain pricing strategies that could damage your reputation.
Unfortunately, my starry-eyed naiveté didn’t last long. The deal was too good to be true. The price from the listing was a blatant lie — the cheapest apartment in the entire complex was an additional $250/month. Yep, I was a victim of bait-and-switch pricing.
Even if it were legal, that deception triggers a negative response, which can often lead to lower sales (Ellison & Ellison, 2009).
That trend is known as dynamic pricing. Even though it seems appealing, you should usually avoid it. While it can boost sales in the short-term, Dai (2010) found that it can lower sales in the long-term:
Dynamic pricing becomes harmful when adjustments are based on a customer’s willingness to pay. You should avoid charging different prices based on past behavior, demographics, or any other factor besides natural supply and demand.
Did you trudge through the entire article? Then you’re a brave soul, my friend. And you deserve a huge pat on the back. I spent a ton of time researching and writing, so I hope you found the insights helpful.
Before parting ways, let’s look at a few final topics.
That’s also why I recommend A/B testing my suggestions. Theory is great. However, theory and practice don’t always align. If you were to A/B test images from my article on stock photos, not every test would be successful.
That means you should test pricing, right? Well…here’s the thing. Pricing is a different animal. If customers see two different images, no problem. If customers see two different prices, uh-oh. You’ve got a problem.
It’ll always depend on the situation. But here’s my usual recommendation: you shouldn’t A/B test your prices.
You could test different features of the price (e.g., color, size, location). However, you should avoid running A/B or multivariate tests on the actual price itself.
If you’re gung-ho about testing your price, then you should run a more controlled experiment. Send customers a survey (ideally, with a conjoint analysis segment). That way, you’re not altering the price for real customers in real-time.
If you still have trouble justifying your price to customers — even after implementing the strategies in this article — then you might not have a pricing problem. You might have a problem communicating the value of your product.
Instead of focusing on a new price, try adjusting your value proposition to better convey the value of your product or service.
With that tactic — and all of the other psychological pricing strategies in this article — you should be able to justify your price much more easily.
Welcome to a massive list of psychological pricing strategies.
Whether you’re launching a new product, selling items on eBay, or negotiating a deal on your house, you’ll learn how to choose a price that will maximize your profit.
This article is pretty beastly. To help you find the pieces that are most relevant to you, I recorded this quick video.
Click to watch the full video.
Table of Contents
This article is broken up into four parts, with each part containing various strategies and tactics.Step 1: Determine Your Price
- Strategy: Use Charm Pricing
- Tactic 1: Reduce the Left Digit By One
- Strategy: Use the Proper Amount of Fluency
- Tactic 2: Use the Right Amount of “Roundedness”
- Tactic 3: Choose Numbers With Fewer Syllables
- Strategy: Reframe Your Price
- Tactic 4: Keep the Shipping and Handling Separate
- Tactic 5: Offer Payments in Installments
- Tactic 6: Mention the Daily Equivalence
- Strategy: Prime a Small Magnitude
- Tactic 7: Position Prices Toward the Bottom-Left
- Tactic 8: Use a Smaller Font Size
- Tactic 9: Remove the Comma When Possible
- Tactic 10: Use “Congruent” Language
- Tactic 11: Be Precise With Large Prices
- Strategy: Maximize Their Reference Price
- Tactic 12: Start Negotiations With a High Precise Number
- Tactic 13: Expose People to a Higher “Incidental” Price
- Tactic 14: Expose People to Any High Number
- Tactic 15: Raise the Price of Your Previous Product
- Strategy: Emphasize the Gap Between Reference Prices
- Tactic 16: Visually Distinguish Higher Price Comparisons
- Tactic 17: Offer a Decoy Product
- Strategy: Reduce the “Pain of Paying”
- Tactic 18: Remove the Dollar Sign
- Tactic 19: Charge Customers Before they Consume
- Tactic 20: Bundle Your Product
- Tactic 21: Shift the Focus Toward Time-Related Aspects
- Tactic 22: Create a Payment Medium
- Strategy: Use Discounts Strategically
- Tactic 23: Follow the “Rule of 100″
- Tactic 24: Provide a Reason for the Discount
- Tactic 25: Avoid Discounts with Precise Numbers
- Strategy: Make Price Increases Undetectable
- Tactic 26: Use More Frequent (Yet Smaller) Price Increases
- Tactic 27: Downsize a Feature Besides Price
- Strategy: Avoid Harmful Pricing Strategies
- Tactic 28: Don’t Use Bait-and-Switch Pricing
- Tactic 29: Be Cautious With Dynamic Pricing
Step 1: Determine Your Price
Large companies have an advantage. They can afford cream-of-the-crop pricing research (e.g., conjoint analysis) to find the optimal price for their product. Small businesses don’t have that luxury.Fortunately, that’s where psychology can help.
Based on research in cognition and behavior, certain prices are more effective than others. Even if you don’t find the exact sweet spot, you can make small — yet powerful — adjustments to maximize the effectiveness of your price. All for free.
In this section, you’ll learn how people process numerical values (and how to choose the numbers in your price, accordingly).
Related Resources:
- 7 Tips for Pricing Your SaaS Product — Scott Gerber
- Scalable Sales Models in SaaS – It Starts With Your Pricing — Steli Efti
- How to Price Your Software — Jim Geisman
- Steal These Tips on the Power of Effective Pricing — Mick Hollison
Strategy: Use Charm Pricing
For the past couple decades, marketers have used charm pricing — prices that end in 9, 99, or 95.And the results speak for themselves. Check out Gumroad’s sales:
Source: Gumroad
Tactic 1: Reduce the Left Digit By One
Charm pricing is most effective when the left digit changes. A one-cent difference between $3.80 and $3.79 won’t matter. However, a one-cent difference between $3.00 and $2.99 will make a huge difference.Why is the left digit so important? It involves the way our brain encodes numerical values.
Our brains encode numbers so quickly (and beyond consciousness) that we encode the size of a number before we finish reading it. Thomas and Morwitz (2005) explain that:
“…while evaluating “2.99,” the magnitude encoding process starts as soon as our eyes encounter the digit “2.” Consequently, the encoded magnitude of $2.99 gets anchored on the leftmost digit (i.e., $2) and becomes significantly lower than the encoded magnitude of $3.00” (pp. 55).Bonus Tip: You could emphasize the new base digit by visually minimizing the digits after the decimal.
Strategy: Use the Proper Amount of Fluency
When determining the numbers in your price, you should also consider processing fluency.Processing Fluency – The ease in which we process information.We can infer certain characteristics about a price, based on the ease of processing (i.e., easy vs. difficult). This section will teach you how to choose numbers with the proper amount of fluency.
Tactic 2: Use the Right Amount of “Roundedness”
One aspect to consider is the “roundedness” of your price. Round prices (e.g., $100) are processed fluently, whereas non-rounded prices (e.g., $98.76) are processed disfluently.Could one choice generate more sales? Researchers think so.
Wadhwa and Zhang (2015) found that round prices — because they are fluently processed — work better for emotional purchases. When consumers can process the price quickly, the price “just feels right.”
The researchers also found the opposite to be true. Consumers need to use more mental resources to process non-rounded prices. So those prices seem more fitting with rational purchases.
Despite the direct evidence, I’ll propose a caveat.
Even if your purchase context is emotion-based, you should still avoid rounded price intervals (e.g., $100, $5,000). People assume that those prices are artificially higher, as if they was plucked from thin air (Janiszewski & Uy, 2008).
So where can roundedness help? That principle can help you determine whether to add cents to your price.
If your purchase is based on emotion, then leave out the cents.
If your purchase is based on rationale, then add some cents.
Tactic 3: Choose Numbers With Fewer Syllables
Our brain uses more resources to process phonetically longer prices (which triggers a fluency effect). Since we use a larger amount of mental resources, we falsely infer that those prices must be larger.The flipside is more important. People will perceive your price to be lower if it contains fewer syllables.
But Nick! When I see a price, I don’t say it out loud. I just read it.
Same here. But according to research…that doesn’t matter. When you read a price in written form, your brain nonconsciously encodes the auditory version of that price (Dehaene, 1992). You don’t even need to verbalize the price in your mind — your brain encodes it either way.
Still skeptical? Coulter, Choi, and Monroe (2012) found a positive relationship between syllabic length and perceived magnitude. Even if two prices have the same written length (e.g., $27.82 vs. $28.16), people perceive the phonetically longer price to be higher in magnitude.
Step 2: Influence Their Perception
“All our knowledge has its origin in our perceptions.”–Leonardo da Vinci
Nothing in this world has concrete meaning. Everything we know results from our perception. At the end of the day, price is merely a perception. Nothing more. Nothing less.
And that’s good news for you. There are no universal standards that dictate whether a price is high or low — it all depends on perception.
In this section, you’ll learn some clever tactics to alter people’s perception. You’ll learn how to make your price seem even lower (without changing the actual price).
Related Resources:In order to appreciate the strategies in this section, you need to understand how people develop their perception of prices.
- Pricing Experiments You Might Not Know, But Can Learn From — Peep Laja
- Designing Effective Pricing Tables — Bryan Eisenberg
- Inside the Mind of the Shopper — Terry Lin
- What Does a Persuasive Pricing Page Look Like? — David Moth
I explain that process in this quick video.
You can watch the full video here.
Strategy: Reframe Your Price
As I mentioned in that video, you can influence people’s memory for your price. When people compare your price to a reference price, you can influence them to pull a lower price into that comparison.Why would people pull a lower price into the comparison? This strategy takes advantage of our brain’s laziness for encoding numerical values. Adaval and Monroe (2002) explain that:
“…price information about a product is unlikely to be coded into memory in terms of exact numerical digits but, rather, is coded spontaneously in more general magnitude terms (e.g., “low,” “high”). Thus the numerical price is susceptible to the influence of its original context when people attempt to reconstruct it later.” (pp. 585)With such a hazy memory, you can influence how people recall your price. How? You just need to reframe your price into a lower numerical value. Exposing people to that lower value will cause them to encode a smaller magnitude.
Here are a few tactics that can help.
Tactic 4: Keep the Shipping and Handling Separate
If you sell products online, you should usually separate the shipping and handling fees.When you use “partitioned pricing” (i.e., breaking up your total cost into multiple components), you anchor people on your base price, rather than the true total cost (Morwitz, Greenleaf, & Johnson, 1998). When people compare your price to a reference price, they’ll be more likely to pull your base price into the comparison.
Hossain and Morgan (2006) tested that possibility with eBay auctions. They set up auctions for music CDs, and they analyzed different bidding structures.
- Some auctions offered a low opening bid with a shipping cost (e.g., $0.01 with $3.99 shipping).
- Some auctions offered a higher opening bid without a shipping cost (e.g., $4 with free shipping).
Tactic 5: Offer Payments in Installments
Likewise, when you give people the option to pay for your product in smaller increments (rather than one lump sum), you anchor people on the smaller price.Suppose that you’re selling an online course for $499. By offering payment installments (e.g., 5 payments of $99), you taint people’s comparison process. They’ll be more likely to compare your installment price ($99) to a competitor’s lump sum price (e.g., $500) — a huge difference that makes your offering much more appealing.
But you shouldn’t get the wrong idea. People aren’t stupid. They know that comparing $99 and $500 isn’t an accurate comparison.
Luckily, it doesn’t matter. Since people usually compare reference prices subconsciously (Muzumdar & Sinha, 2005), your installment price has a good chance of sneaking into their comparison.
Tactic 6: Mention the Daily Equivalence
Similarly, you can achieve the same effect by reframing your price into its daily equivalence (e.g., $0.87/day).Often referred to as “pennies-a-day” pricing, that strategy influences people to perceive a lower overall price (Gourville, 1998).
You should still make your regular price the primary focus. Simply mention the daily equivalence. That low number will anchor people toward the lower end of the price spectrum.
Don’t worry if you have trouble reframing your price into a specific daily cost. You can achieve the same effect by comparing your price to a petty cash expense, such as a cup of coffee (Gourville, 1999).
Strategy: Prime a Small Magnitude
The previous strategy explained how numerical anchors can influence people’s perception of your price. However, anchoring effects stem beyond numerical values. You can also influence people’s perception through general magnitudes.For example, Oppenheimer, LeBoeuf, and Brewer (2007) found that people made lower numerical estimates if they were asked to draw a short line (compared to a long line).
If you want people to perceive your price to be smaller, you need to associate all of its related features with a small magnitude.
Here are some tactics that can help.
Tactic 7: Position Prices Toward the Bottom-Left
If you want people to perceive your price to be smaller, you should physically position your price to be on the left (Coulter, 2002).It sounds odd, but hear me out.
Research shows that directional cues are associated with certain concepts. For example, your spatial concept for “up” is metaphorically associated with good qualities:
“…the righteous go ‘up’ to Heaven, whereas sinners go ‘down’ to Hell. In the media, movie critics give good movies ‘thumbs up’ and bad movies ‘thumbs down.’ …people who smoke marijuana ‘get high,’ but when the euphoria diminishes, they ‘come down’…” (Meier & Robinson, 2004 pp. 243)Due to our association between “up” and “good,” priming the spatial concept of “up” can trigger associations with “good.” Meier and Robinson (2004) found that people recognized positive words faster when those words were positioned toward the top of a screen (and they recognized negative words faster when they were positioned toward the bottom).
The same principle applies to numbers. Dehaene, Bossini and Giraux (1991) found that people conceptualize numbers on an imaginary horizontal line, with numbers growing larger from left to right.
In their study, they presented participants with digits ranging from 0 and 9, and they asked participants to indicate its parity (i.e., whether it was odd or even). As expected, people responded faster to smaller numbers when using their left hand (and vice versa). In other words, people responded faster with the hand that matched the same side of their mental ruler.
How does that finding relate to pricing?
Since we conceptualize smaller numbers as belonging on the left, positioning prices toward the left can trigger people’s conceptualization for a smaller magnitude, thus altering their perception of your price (Coulter, 2002).
Since we can also associate numbers with a vertical magnitude (with smaller numbers positioned toward the bottom), you might want to position your prices toward the bottom-left.
Tactic 8: Use a Smaller Font Size
In addition to directional cues, the physical size of your price can also influence people’s perception.Thanks to processing fluency, people will perceive your price to be smaller if you display that price in a smaller font. This tactic is particularly effective when you contrast your price with a larger sized reference price (Coulter & Coulter, 2005).
And don’t forget about the font’s kerning — the spacing between letters. Fonts with smaller kerning should also influence people to perceive your price to be lower.
Tactic 9: Remove the Comma When Possible
Besides font size and kerning, another consideration is punctuation. Researchers found that removing commas (e.g., $1,499 vs. $1499) can influence people to perceive your price to be lower (Coulter, Choi, and Monroe, 2012).Why does that happen? Although physical length plays a role, there’s another principle involved. We’ve already discussed it.
Can you think of it? When you remove the comma, you reduce the phonetic length of your price.
- $1,499: One-thousand four hundred and ninety-nine (10 syllables)
- $1499: Fourteen ninety-nine (5 syllables)
Tactic 10: Use “Congruent” Language
Be careful when choosing the language near your price. Certain words can taint people’s perception.For example, Coulter and Coulter (2005) presented participants with various descriptions for an inline skate. Some descriptions emphasized a “Low Friction” benefit. Other descriptions emphasized a “High Performance” benefit.
Even though participants rated those benefits as equally important, participants were more favorable toward the price when the description contained “Low Friction.”
When you choose the language near your price, choose words that are “congruent” with a small value (e.g., “low,” “small,” “tiny”).
Tactic 11: Be Precise With Large Prices
Thomas, Simon, and Kadiyali (2007) analyzed 27,000 real estate transactions. What did they find? Buyers pay more money when prices are specific (e.g., $362,978 vs. $350,000).Is it because of the negotiation aspect? If someone asks for a very specific price, wouldn’t potential buyers perceive less room to negotiate?
That’s what I thought. But nope. Researchers ruled out that possibility. Surprisingly, the real culprit involved priming a small magnitude.
Think about it. When are you more likely to use a precise value? Answer: when you’re dealing with small numbers (e.g., 1, 2, 3).
Due to the association between precise numbers and small values, precise numbers trigger an association with small values, thus influencing people’s perception.
Bonus Tip: Since a house is a rational purchase, you could enhance the psychological impact by using a precise, non-rounded number (e.g., $362,798.76)
Strategy: Maximize Their Reference Price
The past two strategies helped you lower the perceived magnitude of your price. However, you can achieve the same effect by maximizing the perceived magnitude of reference prices.This section offers a few tactics.
Tactic 12: Start Negotiations With a High Precise Number
Due to anchoring, it’s no shocker that sellers can get more money by starting negotiations with a high initial offer (Galinsky & Mussweiler, 2001). That high number establishes an anchor point, pulling the final settlement closer to that range.Not only should you start with a high initial price, but you should also use a precise value. In one study, Janiszewski and Uy (2008) asked participants to estimate the actual price of a plasma TV based on the suggested retail price — either $4,998, $5,000, or $5,012.
When participants were given precise values ($4,998 and $5,012), they estimated the TV’s actual price to be closer to that range. When the suggested price was rounded ($5,000), participants believed the actual price to be much lower.
When an anchor is precise, we adjust our estimate past fewer units. Why? You can thank your mental ruler. As Thomas and Morwitz (2002) explain:
“If adjustment is viewed as movement along a subjective representational scale, then the resolution of this scale might also influence the amount of adjustment. X units of adjustment along a fine-resolution scale will cover less objective distance than the same number of units of adjustment along a coarse-resolution scale.” (pp. 121)That insight works particularly well in eBay auctions. When creating your auction, you can generate more revenue by establishing a high reserve price — a price that needs to be met in order for the item to be sold. Higher reserve prices anchor people toward the higher end of the price spectrum, resulting in more revenue (Kamins, Dreze, & Folkes, 2004).
Tactic 13: Expose People to a Higher “Incidental” Price
Given our tendency to assimilate toward an anchor point, could exposure to high prices — even for unrelated products — anchor people toward the higher end of the price spectrum? Would those people pay a higher price for your product?Nunes and Boatwright (2004) tested that possibility. On a popular boardwalk in West Palm Beach, the researchers sold music CDs. Every 30 minutes, the adjacent vendor alternated the price of a sweatshirt on display — either $10 or $80.
What happened? You guessed it. The sweater’s price anchored people toward the respective ends of the price spectrum. When the price of the sweatshirt was $80, shoppers paid higher prices for the CDs.
If you’re selling items on eBay, you might want to mention some of the other items you have for sale (the more expensive items, of course).
Tactic 14: Expose People to Any High Number
Anchoring not only works for prices, but it also works for any number, regardless whether that number is a price.Here’s a striking example. Ariely, Loewenstein, and Prelec (2003) showed participants various products (e.g., cordless keyboard, rare wine, Belgian chocolates). They asked participants whether they would purchase each product at the dollar amount equal to the last two digits in their social security number.
After receiving a YES/NO answer, researchers then asked participants to state the exact dollar amount they would be willing to pay.
Remarkably, the researchers found a direct correlation between the social security number and the price that participants were willing to pay. Here’s the data for one of the products, a cordless keyboard:
How can you apply that finding? Should you simply ask customers to contemplate a high number? Not quite. Luckily, your job is easier.
Anchoring effects occur subconsciously, so consumers don’t need to contemplate a numerical anchor. In fact, Adaval and Monroe (2002) subliminally exposed people to a high number before displaying a price. That exposure caused people to perceive the subsequent price to be lower.
The takeaway? Even if potential customers don’t consciously notice your numerical anchor, they just need to be exposed to it.
If you run an online store, you could simply mention your total number of customers near your price. When people generate their reference price, that high number will trigger an anchoring effect (and their reference price will be even higher).
Tactic 15: Raise the Price of Your Previous Product
If you’re launching a new (more expensive) version of your product, how should you price the old product?Some businesses will lower the price of their old product to gradually phase it out of the market. Surprisingly, though, that strategy is often the wrong approach.
Baker, Marn, and Zawada (2010) suggest raising the price of your old product. By raising the price, you raise people’s reference price (thereby enhancing the perceived value of your new product). You’ll be releasing the new product into more favorable conditions.
Conversely, if you lower the price of your old product, you set yourself up for failure. You’ll reinforce a lower reference price, which will make your new product seem more expensive.
Strategy: Emphasize the Gap Between Reference Prices
The previous strategies either minimized the perceived size of your price or maximized the perceived size of reference prices. This next strategy will help you maximize the perceived distance between your price and higher reference prices.Related Resources:
Tactic 16: Visually Distinguish Higher Price Comparisons
When you compare your price to a higher price, people are more likely to buy your product because they feel less motivated to research the decision (Urbany, Bearden, & Weilbaker, 1988). They’ve already done their homework.But here’s a neat psychological trick to enhance that comparison.
If you visually distinguish your price from a reference price (e.g., using a different font color), you trigger a fluency effect. Consumers will misattribute that visual distinction to a greater numerical distinction (Coulter and Coulter, 2005).
That fluency effect not only works with font color, but it also works with physical distance. When your price is horizontally farther away from a reference price, people perceive a greater numerical distance (Coulter & Norberg, 2009).
And don’t forget about font size. Smaller font sizes are especially effective when they’re positioned next to a larger reference price (Coulter & Coulter, 2005).
Tactic 17: Offer a Decoy Product
Oftentimes, people use your own products for reference prices. To ensure that their comparisons are conducive for your bottom line, you should consider adding a “decoy product.”You might be familiar with the infamous study. In Predictably Irrational, Ariely (2008) describes a strange offering from the Economist magazine. One day, he noticed three subscription options:
- Web Only: $59
- Print Only: $125
- Web and Print: $125
But Ariely noticed an underlying motive. He conducted a study to test his hunch. And he was right. The “print only” option made a huge difference.
Without the “print only” option, people couldn’t accurately compare the options. How much should you pay for a web and print subscription? Who knows. Most people chose the web option because it was cheaper.
However, the “print only” option helped people compare those two options. Because it was a similar, yet worse, version of the “web and print” option, people could easily recognize the value of the web and print subscription. With more people choosing “web and print” (a more expensive alternative), the Economist generated 43% more revenue.
When you offer different versions of your product, people will naturally compare those options. To guide people toward the more expensive version, you can take the same approach.
By adding a similar, yet worse, version of your expensive product, you influence the comparison process. Suddenly your expensive product becomes more appealing.
Step 3: Motivate Them to Buy
Even if you reduce the perceived magnitude of your price, customers might be stagnant. You should give them a nudge.This section will teach you some pricing tactics that can motivate people to buy. You’ll learn (1) how to reduce the “pain” that we associate with paying and (2) how to properly use discounts to drive purchases.
Related Resources:
- SaaS Pricing: Features that Make People Upgrade — Jason Shah
- 8 Psychological Triggers to Optimize Your Pricing Page — Talia Wolfe
- How to Use Urgency to Increase Conversions — David Rosenfeld
- How to Increase eCommerce Conversion Rate With Personalization — Ryan BeMiller
Strategy: Reduce the “Pain of Paying”
Each time we purchase something, we feel a sense of pain — often referred to as the “pain of paying” (Prelec & Loewenstein, 1998).More specifically, the pain emerges from two factors:
- The saliency of the payment (e.g., we feel more pain if we see money leaving our hands)
- The timing of the payment (e.g., we feel more pain if we pay after we consume)
In traditional taxi rides, the saliency of payment is very high. You see a meter constantly rising. Each minute evokes an increasingly painful sensation. Plus, at the end of the ride, the taxi driver makes you pay by cash or credit card. So. Much. Pain.
Uber is different. No visual meter. No physical payments. Everything is automatically charged to your card. Much less pain.
Credit card processing is one tactic to reduce the pain of paying, but you can reduce that pain in other ways too. This section will give you a few ideas.
Tactic 18: Remove the Dollar Sign
The pain of paying can be triggered pretty easily. In fact, the dollar sign in your price can remind people of that pain, and it can cause people to spend less (Yang, Kimes, & Sessarego, 2009).But don’t get too trigger-happy. Before you start removing dollar signs, you should consider the overall clarity of your price.
Oftentimes, you need a dollar sign to indicate that your number is, indeed, a price. In those cases, don’t risk losing clarity by removing the dollar sign. Only use this tactic in formats where customers will expect a price to appear (e.g., restaurant menus).
Tactic 19: Charge Customers Before They Consume
When possible, your customers should pay before they use your product or service. Prepayments benefit all parties involved.For one, you won’t be delivering your product or service without being compensated. You’ll be more likely to get paid. Pretty helpful.
Second, people will be happier with your product. When people prepay, they tend to focus on the benefits they’ll be receiving, which numbs the pain of paying. If they’ve already experienced the benefits of your product, their payment becomes significantly more painful (Prelec & Lowenstein, 1998).
That insight can be helpful with monthly subscriptions. If you charge customers monthly payments, you should charge them at the beginning of the month (and frame your message in a forward-looking manner).
Avoid sending receipts at the end of a month (or summarizing the previous month’s payment). You’ll just be rubbing salt in the wound.
Tactic 20: Bundle Your Product
To reduce the pain of paying, you might consider bundling your product. When you offer a packaged product, people can’t attribute a specific dollar value to the items within your bundle.Related Resources:If you decide to bundle your offering, you should follow two important rules. Whichever product you add, it should be (1) hedonic, and (2) similarly priced.
- Five Ways to Use Psychological Pricing — Arie Shpanya
Let’s look at each scenario.
First, your product should be hedonic (emotional), rather than utilitarian (rational). Since hedonic purchases trigger more guilt (Khan & Dhar, 2006), a bundle reduces that guilt, especially when you attribute the discount to the hedonic product.
As Khan and Dhar (2010) explain:
“…framing the discount on the hedonic item provides a justification required to reduce the guilt associated with the purchase of such items. However, since no such guilt is associated with the purchase of utilitarian items, framing the discount on utilitarian component of the bundle has little additional impact.” (pg. 18)If you can only add a utilitarian product, then describe a hedonic use for that product. Khan and Dhar (2010) tested a bundle that consisted of a $50 lamp and a $50 blender. People were more likely to purchase the bundle when the description emphasized a hedonic use for the blender (e.g., making exotic cocktails) compared to a utilitarian use (e.g., making healthy shakes).
Second, avoid bundling expensive and inexpensive products. Inexpensive products reduce the perceived value of expensive products.
Brough and Chernev (2012) asked people to choose between a home gym and a 1-year gym membership. Roughly 51 percent of people chose the home gym — a pretty even split. However, when the researchers bundled the home gym with a free fitness DVD, only 35% of people chose it. The fitness DVD reduced the perceived value of the home gym.
Tactic 21: Shift the Focus Toward Time-Related Aspects
When describing your product, avoid mentioning any references to money. Instead, mention a concept that has a much greater benefit: time.Mogilner and Aaker (2009) conducted an experiment with a lemonade stand. They alternated three signs advertising the stand, each emphasizing a particular quality:
- Time: “Spend a little time and enjoy C & D’s lemonade”
- Money: “Spend a little money and enjoy C & D’s lemonade”
- Neutral: “Enjoy C & D’s lemonade”
The results were clear: the “time” sign outperformed the others. Those people paid twice as much (and that sign attracted twice as many people).
The researchers attributed those results to a personal connection with the product:
“Because time increases focus on product experience, activating time (vs. money) augments one’s personal connection with the product, thereby boosting attitudes and decisions.” (Mogilner & Aaker, 2009, pg. 1)When writing copy, emphasize the enjoyable time that people will spend with your product or service. Not only will that message make your offer more appealing, but it will also distract people from the pain of paying.
Tactic 22: Create a Payment Medium
What do casino chips and gift cards have in common? They both reduce the pain of paying.By creating a separate medium between your customers’ money and their payment, you distort the perception of paying. They’ll know that they’re paying, but it won’t feel like it.
Why won’t it feel like paying? Researchers find that, with the presence of an additional medium, people are too lazy to calculate the conversion between those currencies (Nunes & Park, 2003).
Here’s a cool idea. When new customers open an account with your business, you could require them to deposit a refundable $10 into their account (to be used for your services).
Since the money is refundable, customers might not give too much additional resistance. More importantly, that payment medium will distort the essence of that money. Once it enters a separate medium, it won’t feel like money (and people will be more willing to spend it).
You could also strengthen that perception by referring to that money as “[Your Company] Balance” (or any other name that avoids connotation with real currency).
If you implement that strategy, you might also want to match customer deposits by a certain percentage. For example, if a customer deposits $10 into their account, you could match it by 10% (which would bring their account value to $11).
By matching their deposits, you trigger two benefits.
First, you incentive customers to deposit more money. With the psychological impact of payment mediums, you should enhance the appeal of deposits as much as possible.
Second, you create an off-balance conversion between their money and their account value. Dreze and Nunes (2004) explain that payment mediums become more effective when consumers have trouble converting the values:
“With increased exposure and experience, the conversion between two or more particular currencies can, in theory, become second nature. If this were the case, we would expect that combined-currency prices across the currencies lose their efficacy.” (pp. 72)
Strategy: Use Discounts Strategically
If not used properly, discounts can actually harm your business. In fact, some people suggest that you should never use discounts.That advice is pretty extreme. You can use discounts…you just need to use them properly.
Where can you go wrong? If used too frequently (or too deeply), discounts can make people more price conscious moving forward. They’ll keep waiting for the next discount.
Discounts can also lower people’s internal reference price for your product, causing them to buy less in the future (because your price will seem too high).
Reducing the frequency and depth of your discounts can help. However, this section will give you a few additional tactics to maintain the strength of your discounts.
Related Resources:
- The Only 3 Acceptable Pricing Page Discounts — Lincoln Murphy
- Data Shows SaaS Discounting Lowers Sales By Over 30 Percent — Patrick Campbell
- The Race You Can’t Win — Tim Peter
Tactic 23: Follow the “Rule of 100”
Earlier, you learned that people can perceive different magnitudes for the same price, depending on the context.Discounts are no different.
When you offer discounts, you want to maximize the perceived size of them. That way, people feel like they’re getting a better deal.
Consider a $50 blender. Which discount seems like a better deal: 20% off vs. $10 off?
If you do the math, both discounts are the same monetary value. However, one discount has an advantage over the other.
How do you pick? Jonah Berger (2013) suggests following the “Rule of 100.”
- When your price is under $100, use a percentage discount (e.g., 25% off).
- When your price is over $100, use an absolute value (e.g., $25 off)
Tactic 24: Provide a Reason for the Discount
To avoid the negative perception of discounts, you might want to avoid the term “discount.” At the very least, you should give a specific reason for the discount.For example, every-day-low-pricing stores often refer to supplier price cuts:
“In advertising rollback prices, EDLP stores (e.g., Wal-Mart) often convey the message that additional cost savings they are able to obtain from suppliers are being passed on to customers… presumably to minimize the negative effects of promotions…” (Mazumdar, Raj, & Sinha, 2005, pp. 88)By providing a reason behind your discount, you reinforce that the new price is unusual. Since the price is abnormal, people will be less likely to incorporate it into their internal reference price.
Tactic 25: Avoid Discounts With Precise Numbers
Earlier, I explained that you should use precise numbers for large prices. Since people associate precise numbers with small values, you can influence people to perceive large prices to be smaller in magnitude (Thomas, Simon, and Kadiyali, 2007).With discounts, you want to maximize the perceived magnitude. Choosing discounts with precise numbers can actually hurt you. Those precise numbers will make your discount seem smaller.
Supporting that notion, Thomas and Morwitz (2006) found that people perceived the difference between 4.97 – 3.96 to be smaller than the difference between 5.00 – 4.00, even though the difference is roughly the same (1.01 vs. 1.00).
To maximize the perceived magnitude of your discount, use rounded values. Customers should be able to compute the general magnitude pretty easily.
Step 4: Maximize Your Revenue
Your job doesn’t end when a customer purchases from you. Whether you want repeat purchases or a continuation of your subscription service, healthy businesses generate multiple streams of revenue from existing customers.This section will teach you a few pricing strategies that play a role in your long-term revenue. You’ll learn (1) how to make price increases more undetectable and (2) which pricing strategies can damage your reputation.
Related Resources:
- 4 Ways to Get Customers to Add More to Their Cart — Tim Ash
- How to Earn Repeat eCommerce Customers — Armando Roggio
- Getting Started With Customer Churn Analysis — Dan Andrews
- Maximizing Your Profits With Pricing — Andrew Youderian
- 3 Ways To Charge More for Your Products and Services — Joseph Putnam
Strategy: Make Price Increases Undetectable
In a world with inflation, it’s inevitable. Your prices will increase at some point.Since most people are familiar with inflation, they’ll be forgiving, right? Surely, they’ll understand.
Unfortunately, it’s not that easy. Despite inflation and other valid reasons, most consumers don’t see the justification for price increases.
Bolton et al. (2003) analyzed that perception. They found that consumers “underestimate the effects of inflation, overattribute price differences to profit, and fail to take into account the full range of vendor costs.” Welp, that’s unfortunate.
Although you won’t be able to eliminate all negative effects from price increases, you can make those price increases more undetectable (without being manipulative).
Tactic 26: Use More Frequent (Yet Smaller) Price Increases
The easiest way to control price perception is through the just noticeable difference (JND).Just Noticeable Difference – The minimum amount of change that triggers detection (i.e., the difference that’s just noticeable)If your price is $11.79, an increase to $14.99 will be more noticeable than a smaller increase to $12.99.
Duh.
In theory, that concept is really intuitive. Obviously people will notice larger price increases.
In practice, however, that principle is very counter-intuitive. Since businesses are afraid of increasing their prices, they often save that tactic as a last resort. They wait until it’s absolutely necessary to do it.
However, if you reach that point, then you’ll usually be desperate for revenue. You won’t be able to increase your price by a tiny amount. You’ll need to increase it by a noticeable amount.
What should you do?
If you know that you’ll need to increase your price eventually, you should use more frequent (yet smaller) changes. Avoid waiting until the moment of desperation.
With more frequent price increases, you also avoid reinforcing a concrete reference price. If your price stays the same for years, then people will become accustomed to your price at that specific level. Once you change your price, people will be more likely to notice.
Tactic 27: Downsize a Feature Besides Price
You can also use the just noticeable difference for other aspects of your product.Food marketers know that consumers are pretty familiar with prices, so they often avoid price increases by reducing the physical size of their products (e.g., potato chip bags, candy bars, etc.).
By reducing physical size by a small amount, food marketers lower their costs and increase their margin. More importantly, they increase their revenue without increasing their price (or alerting people to any negative changes).
If you decide to downsize your product, you should reduce the size of all three dimensions — height, width, and length — by an equal amount. Consumers are less likely to notice a change in all three dimensions (Chandon & Ordabayeva, 2009).
Downsizing a feature in your product can be risky. If consumers detect a mischievous intent, you can lose trust and lower sales.
To maximize your revenue, you need to maintain and cultivate customer loyalty. The next strategy will describe certain pricing strategies that could damage your reputation.
Strategy: Avoid Harmful Pricing Strategies
Certain pricing strategies can leave a bad taste. This section will teach you which ones to avoid.Tactic 28: Don’t Use Bait-and-Switch Pricing
When I was searching for apartments, I noticed an incredibly good deal on Craigslist. I visited the complex the following day, and I was blown away by the luxuriousness.Unfortunately, my starry-eyed naiveté didn’t last long. The deal was too good to be true. The price from the listing was a blatant lie — the cheapest apartment in the entire complex was an additional $250/month. Yep, I was a victim of bait-and-switch pricing.
Bait-and-Switch Pricing – Marketers promote an extremely low priced product to pull people into a store. When people arrive at the store, the product is unavailable (e.g., sold out, nonexistent). Marketers then try to upsell those customers to a more expensive product.Bait-and-switch pricing is not only unethical, it can also be illegal in some cases.
Even if it were legal, that deception triggers a negative response, which can often lead to lower sales (Ellison & Ellison, 2009).
Tactic 29: Be Cautious With Dynamic Pricing
Over the past decade, more businesses have been dynamically adjusting their prices for different customers. Based on a variety of factors, their algorithm spews out a price that should lead to the highest amount of revenue.That trend is known as dynamic pricing. Even though it seems appealing, you should usually avoid it. While it can boost sales in the short-term, Dai (2010) found that it can lower sales in the long-term:
“Although dynamic pricing is attractive because it has the potential to maximize a seller’s profit, the results of this study indicate that charging different prices for the same product can trigger negative price fairness judgments which lead to negative behavioral intentions.” (pg. 86)Is dynamic pricing always bad? Not necessarily. Dynamic pricing can be effective when adjustments are based on supply and demand (e.g., stadiums trying to fill remaining seats).
Dynamic pricing becomes harmful when adjustments are based on a customer’s willingness to pay. You should avoid charging different prices based on past behavior, demographics, or any other factor besides natural supply and demand.
Related Resources:
- Five Dynamic Pricing Issues Retailers Should Consider — Patricio Robles
Conclusion
Did you skip immediately to this conclusion? No worries. I’m guessing you want the main takeaways without trudging through the entire article. If so, then you’d love the 15 min video summary. You can watch it here for free.Did you trudge through the entire article? Then you’re a brave soul, my friend. And you deserve a huge pat on the back. I spent a ton of time researching and writing, so I hope you found the insights helpful.
Before parting ways, let’s look at a few final topics.
Should You A/B Test Your Prices?
My recommendations are often bizarre. I get that. That’s why I always include academic citations.That’s also why I recommend A/B testing my suggestions. Theory is great. However, theory and practice don’t always align. If you were to A/B test images from my article on stock photos, not every test would be successful.
That means you should test pricing, right? Well…here’s the thing. Pricing is a different animal. If customers see two different images, no problem. If customers see two different prices, uh-oh. You’ve got a problem.
It’ll always depend on the situation. But here’s my usual recommendation: you shouldn’t A/B test your prices.
You could test different features of the price (e.g., color, size, location). However, you should avoid running A/B or multivariate tests on the actual price itself.
If you’re gung-ho about testing your price, then you should run a more controlled experiment. Send customers a survey (ideally, with a conjoint analysis segment). That way, you’re not altering the price for real customers in real-time.
Related Resources:
- Should You Test Prices Online? — Linda Bustos
One Final Pricing Tactic
Instead of reiterating all of the pricing strategies, I want to end with one final tactic — the most important tactic in this list.If you still have trouble justifying your price to customers — even after implementing the strategies in this article — then you might not have a pricing problem. You might have a problem communicating the value of your product.
Instead of focusing on a new price, try adjusting your value proposition to better convey the value of your product or service.
- What makes your product special?
- How is it better than other products?
- Why would customers enjoy it?
With that tactic — and all of the other psychological pricing strategies in this article — you should be able to justify your price much more easily.
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