Psychological pricing definition
/What is Psychological Pricing?
Psychological pricing is a strategy that uses consumer perception to influence purchasing decisions, rather than focusing purely on cost or value. It leverages behavioral tendencies, such as viewing $9.99 as significantly cheaper than $10.00, even though the difference is minimal. The approach aims to make prices seem more attractive, create urgency, or convey higher quality. By aligning price presentation with psychological cues, businesses can subtly guide consumer choices and increase sales.
Types of Psychological Pricing
There are several variations on the psychological pricing concept; here are several of the more common ones:
Charm pricing. Charm pricing involves setting prices just below a round number, often ending in .99 or .95. This tactic creates the perception of a significantly lower price, even though the difference is minimal. Consumers tend to focus on the leftmost digit, perceiving $9.99 as closer to $9 than $10.
Prestige pricing. Prestige pricing sets higher prices to convey quality, exclusivity, or luxury. It appeals to consumers who associate cost with value and are willing to pay more for perceived superiority. This is commonly used for premium brands, designer goods, and high-end services.
Buy one, get one free (BOGO). BOGO tactics offer customers a free or heavily discounted item when they purchase one at full price. This creates a sense of added value and urgency, often leading to increased sales volume. It also triggers the feeling of getting a deal, which can override logical price evaluation.
Anchoring pricing. Anchoring sets a high reference price near a discounted offer to make the deal appear more attractive. For example, listing an item as "$200, now only $120" makes the $120 seem like a bargain. Shoppers mentally anchor to the original price, influencing their perception of value.
Price bundling. Price bundling combines multiple products or services into a single package at a reduced total price. This tactic increases the perceived value while potentially boosting the sale of less popular items. It also simplifies decision-making by reducing the number of individual purchase choices.
Example of Psychological Pricing
ABC International has created an all-electric car for the urban commuter. Upon investigation of competing price points, ABC finds that there is a cluster of similar vehicles priced at $19,999. Also, many car buyers use on-line price shopping services to evaluate vehicles, and those services present choices to car buyers in $10,000 pricing bands. Thus, ABC decides to price the vehicle at $19,999, not only to match the competition, but also to position itself within the $10,001 - $20,000 pricing band.
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Advantages of Psychological Pricing
The following are advantages of using the psychological pricing method:
Easier changing of price bands. If a customer is accessing information about product prices that are segregated into bands, the use of fractional pricing can shift the price of a product into a lower price band, where customers may be more likely to make a purchase. For example, if a customer only wants to consider automobiles that cost less than $20,000, pricing a vehicle at $19,999 will drop it into the lower price band and potentially increase its sales. This tends to result in prices being parked at the extreme upper end of a price band.
Non-rational pricing. If customers are swayed by the incremental price reductions advocated under psychological pricing (which is a debatable premise) then sales should increase. It may be possible to measure this effect with A-B testing, where prices are left alone in one sales area, and adjusted downward with psychological pricing concepts in another sales area, to see if there are any differences.
Reduced fraud. It is much more difficult for an employee to create a fraudulent sales transaction and remove cash when product prices are set at fractional levels, since it is more difficult to calculate the amount of cash to steal. Conversely, it is easier to steal funds when prices are set at rounded dollar amounts.
Discount pricing identifier. If a company is having a sale on selected goods, it can alter the ending digits of product prices to identify them as being on sale. Thus, any product ending with a ".98" price will receive a 20% discount at the checkout counter. This makes it easier for checkout clerks to apply discounts on an item-by-item basis.
Disadvantages of Psychological Pricing
The following are disadvantages of using the psychological pricing method:
More difficult price calculations. It can be difficult for cashiers to calculate the total amount owed when fractional prices are used, as well as to make change for such purchases. This is less of a problem when credit cards and other types of electronic payments are used.
Customers may ignore fractional pricing. If customers are more rational than psychological pricing gives them credit for, then they will ignore fractional pricing and instead base their purchases on the value of the underlying products. This is especially likely to be the case when products are heavily branded, so that customers are willing to pay substantially more money for them.
Evaluation of Psychological Pricing
The overwhelming use of psychological pricing makes it clear that, whether or not the underlying concept is flawed, businesses are setting prices in this manner in order to compete with each other. Thus, to use the earlier example, setting a price a fraction higher than the prices charged by competitors might indeed lead to an incremental drop in unit sales volume, so a company probably has to use psychological pricing in order to remain competitive.