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Psychological Pricing

Psychological Pricing

Have you ever wondered why most supermarket prices end by .99? Tricking the human brain is easy. Our brain often interprets a price of 9.99 as nine rather than ten. Marketers take advantage of this and many similar pricing tactics. It is psychological marketing.

Psychological Pricing Definition

Marketers consider pricing art in this age where markets are volatile, and competition is high -considering economic theories and calculating costs are not enough to set a price that motivates consumers to buy. It is the understanding of consumer behaviour that guides suitable pricing for any successful product.

Psychological pricing is often referred to as the 'irrational' effect of pricing on consumers' purchasing behaviour1.

Some definitions of psychological pricing are as follows.

Psychological pricing attempts to influence the emotional behaviour of customers, encouraging them to make purchasing decisions based on their emotions rather than on rational responses.2

Another definition of psychological pricing is:

Psychological pricing is a marketing strategy that influences consumers' perceptions and decision-making.3

All definitions have one thing in common, and that is consumer psychology. Consumers decide whether they want to buy a product or not. The task in front of marketers is to make consumers think they are getting a better deal or additional value if they go ahead with the purchase.

Psychological Pricing Techniques

The human brain prefers logical decisions over rational decisions. Many theories in psychology help marketers understand the buying habits of consumers. Certain theories are implemented as techniques to set attractive prices for customers. Researchers have divided these techniques or psychological principles into four categories: framing, congruency, context, and signalling.4

1. Psychological Pricing: Framing principle

Marketers must frame product offerings to highlight positive product attributes as positive.5 Some examples of framing principles are using the word 'free' in pricing - giving a gift with a high-valued item or offering bundle pricing instead of discounts. For example, 'buy one get one free' gets a better response than '50% off', even though both offers are the same. Offering discounts raise quality concerns.

Another framing principle is multi-unit buying. 2 for £10 is better framing than £5 each. You may have heard about scarcity-creating campaigns like 'offer valid until stock lasts' or 'limited edition'. However, this framing principle usually only works for high-priced, quality products.

The last framing principle is emotional framing. An example of emotional framing is 'pay an upfront price of £50 for a new iPhone and the remainder in simple instalments'.

2. Psychological Pricing: Congruency principle

Congruency principles combine pricing information with other messages to improve the chances of purchase. Some examples include changing fonts, striking out old prices and highlighting lower prices, making the packaging more attractive, and providing prices in fractions. For instance, writing prices in a smaller font may be perceived as more attractive than writing prices in bold font.

Customers get demotivated when they realise that others have paid less for the same product. Perceived price fairness is essential for consumers. Hence, congruency techniques like 'price freeze for a month' or 'fixed low prices always' are implemented.

3. Psychological Pricing: Context principle

Consumer buying preferences may change according to the surroundings and location of the product. Researchers found that customers prefer buying the middle option when given a choice between three items. Hence, adding a third option in the display increases sales of the mid-size item.6

Other context techniques are listing competitor prices and keeping price thresholds. Listing a competitor's prices is beneficial for improving sales, as it provides a point of comparison for customers. The price threshold indicates the standard price around which a product must be sold. Selling a product at a lower price than the threshold may reduce sales.

If the average price of a T-shirt in a store is £25, selling a T-shirt for £8 may concern buyers about its quality.

Bundle pricing can also come under context principles. Sales increase considerably if the prices of individual components are mentioned. Regarding shipping and handling costs, researchers believe it is better to use partitioned pricing rather than bundling them with product prices.7

4. Psychological pricing: Signalling principle

Signalling principles consider the message received by people from the pricing. Researchers have studied how we perceive numbers:

1. Prices ending in odd numbers are effective (especially 9). 5 is the more frequent number to have appeared in high-selling items. Numbers just below the whole number give the illusion of a lower price.4

2. Prices in red are perceived as more savings.8 In contrast, consumers perceive prices with many zeros or commas as expensive. The number of syllables in a price value also matters. More syllables are treated as costly pricing.

Psychological Pricing Strategy

We have seen different principles and types of psychological pricing. Let's now focus on the four main psychological pricing strategies marketers implement to motivate customers.

Charm psychological pricing strategy

In signalling techniques of promotional pricing, we mentioned odd pricing.

Prices that end with odd numbers (often 9) are called charm prices.

Psychological pricing, charm pricing, StuysmarterPrices in Supermarkets, Pexels

Charm pricing is also called odd pricing. Consider the image above. The price of papayas, 1.99, is perceived as cheaper than 2. Hence, slashing a penny from the price may increase sales exponentially. Another reason why charm pricing works is that we read numbers from left to right; we consider the first digit as the main price number.

Consider the price of a TV is £899. The first digit from the left is 8. Thus, the number 8 is associated with the price.

On the contrary, marketers should not use charm pricing for high-quality items. Odd prices give an impression of lower quality. Hence, many such premium items end with the digit '0'.

Psychological Pricing: Innumeracy

Our brain does not like to perform unnecessary tasks.

Innumeracy involves removing the maths from prices.

Instead of giving numbers or percentages on labels, it is better to use framing techniques. Consider the following example.

Which offer would you choose? The first offer is '25% off and the second is 'buy one get the other half price'. Well, both offers are the same. The only difference is that the second offer saves us from doing mental maths. Additionally, mentioning the word 'half' creates an illusion that we are receiving 50% off the original price.

Psychological Pricing: Price appearance

Price appearance strategy is based on signalling techniques. A long number gives an impression of expensive goods. Hence, many retailers remove currency symbols and zeros after the decimal point to keep numbers shorter.

Compare these two price tags; £99.00 and £99. Does it feel like the first price tag is more expensive than the second? The first number is longer than the second. You may have even seen price tags like .99 in the supermarket. No zeros, no currency symbols.

Psychological Pricing: Time constraints

This psychological pricing strategy is based on the framing technique - a framing approach in which artificial time constraints are introduced.

For example, 'offer valid until the 31st August only'. Many e-commerce websites offer flash sales or lightning deals. This is a novel implementation of time constraint psychological pricing. Another example of a time constraint is framing the offer as 'for the first 50 customers only'.

Psychological Pricing Advantages and Disadvantages

Considering all psychological pricing techniques and strategies, one may conclude that psychological pricing is implemented to increase customers' willingness to buy. But let's take a closer look at the advantages and disadvantages of psychological pricing.

Advantages of psychological pricing

1. Attractive: Psychological pricing attracts customers to the business. More influx of customers means more sales.

2. Ease of purchasing decisions: As psychological pricing sorts the 'math' part of an offer, it becomes easy for a customer to make a decision.

3. Increased sales: Sales may increase by dropping a penny from the price. Offering a price of £299 compared to £300 does not make much difference to a business, but it feels like a lower price for a customer. Hence, sales increase.

4. Price bands: Psychological pricing puts items in lower price bands. For example, marketers may place a phone priced at £499 in the 'phones below the £500' band.

Disadvantages of psychological pricing

On the other hand, psychological pricing has some disadvantages.

1. Misperception: Consumers may misperceive the product's value if it is always on discount. If a brand offers regular discounts, customers will expect the same every time they purchase.

2. Misjudged quality: A smaller price tag may indicate lower quality.

3. No uniqueness: If all businesses offer similar prices, customers become unresponsive to psychological pricing as they get identical offers everywhere.

Psychological Pricing Example

Let's consider the jewellery brand Warren James and dive deep into the promotional pricing strategy implemented on its e-commerce website.

When you visit the Warren James e-commerce website, it asks you to select whether you are looking for jewellery for women or men. Consider we choose the women's section. As soon as you click, you see two promotional banners, a summer sale of up to 50% off and up to 4 years of 0% interest-free credit.

Now, you know that in the first promotion, an artificial time constraint is created by indicating that it is a 'summer sale', while the second offer allows customers to pay in 4 years. It takes out the initial shock of a high price tag, and the customer is excited to use the promotion.

Now consider the following image. I am sure you are not surprised by seeing the number '9' at the end of the prices of four out of the five items displayed.

Psychological pricing, Warren James, StudySmarterWarren James e-commerce website, Warren James

Psychological pricing is effective as it is based on genuine psychology theories. But as customers are bombarded with psychological pricing strategies from every direction, they are becoming immune to it. Hence, businesses must try and iterate their pricing regularly. As you start observing the psychological strategies discussed in this explanation, you will notice them everywhere.

Psychological pricing - Key takeaways

  • Psychological pricing attempts to influence the emotional behaviour of customers, encouraging them to make purchasing decisions based on their emotions rather than rational responses.
  • Marketers must frame product offerings to highlight product attributes as positive.
  • Congruency principles combine pricing information with other messages to improve the chance of purchase.
  • Consumer buying preferences may change according to the surroundings and location of the product.
  • Signalling principles consider the message received by people from the pricing.
  • The prices that end with the number 9 are called charm prices.

References

  1. Monroe, Kent B. Pricing: Making profitable decisions. McGraw-Hill College. 1990.
  2. Dibb, Sally, Lyndon Simkin, William M. Pride, and Odies C. Ferrell. Marketing: Concepts and strategies. Houghton Mifflin. 2005.
  3. Naipaul, Sandra. Psychological pricing strategies and consumers response behavior: an empirical investigation in the restaurant industry. The Ohio State University. 2002.
  4. Larson, Ronald B. Psychological pricing principles for organizations with market power. Journal of applied business and economics. 2014.
  5. Gamliel, Eyal. Message framing of products causes a preference shift in consumers' choices. Journal of Consumer Behaviour. 2010.
  6. Simonson, Itamar, and Amos Tversky. Choice in context: Tradeoff contrast and extremeness aversion. Journal of marketing research 29, no. 3. 1992.
  7. Sally Khallash. Never include free shipping - a starter guide to partitioned pricing. Behavioural Strategy. 2018. https://www.behaviouralstrategy.com/post/never-include-free-shipping-a-starter-guide-to-partitioned-pricing
  8. Ye, Hongjun, Siddharth Bhatt, Haeyoung Jeong, Jintao Zhang, and Rajneesh Suri. Red price? Red flag! Eye‐tracking reveals how one red price can hurt a retailer. Psychology & Marketing 37, no. 7. 2020.

Frequently Asked Questions about Psychological Pricing

Psychological pricing attempts to influence the emotional behaviour of customers, encouraging them to make purchase decisions based on their emotions rather than rational responses.

The disadvantages of psychological pricing include misperception, whereby consumers may misperceive the product's value, and misjudged quality, when consumers associate lower prices with lower quality. 

An example of psychological pricing is as follows. Marketers may frame one offer as "25% off" and the other one as "buy one get the other half price". Both offers are the same. The only difference is that the second offer saves us from doing mental maths. Additionally, mentioning the word 'half' creates an illusion that we are receiving 50% off the original price. 

Whether psychological pricing is an effective strategy depends on the type of business you are operating and the types of consumers you are trying to serve. However, psychological pricing can ease customer purchase decisions and increase sales when used effectively. 

The effect psychological pricing has on a customer depends on the type of psychological pricing used. For example, psychological pricing may save customers from doing mental maths and thus perceive the price as more attractive. 

Final Psychological Pricing Quiz

Question

What is psychological pricing?

Show answer

Answer

Psychological pricing is a marketing strategy intended to influence consumers’ perceptions and decision-making.

Show question

Question

What are the four categories of psychological principles?

Show answer

Answer

The four categories of psychological principles are framing, congruency, context, and signalling.

Show question

Question

What is the framing principle?

Show answer

Answer

Marketers must frame product offerings to highlight positive product attributes as positive.

Show question

Question

What is the congruency principle?

Show answer

Answer

Congruency principles combine pricing information with other messages to improve the chances of purchase.

Show question

Question

What is the context principle?

Show answer

Answer

Consumer buying preferences may change according to the surroundings and location of the product. 

Show question

Question

What is the signalling principle?

Show answer

Answer

Signalling principles consider the message received by people from the pricing.


Show question

Question

What are charm prices?

Show answer

Answer

Prices that end with odd numbers (often 9) are called charm prices

Show question

Question

Psychological pricing creates an _______effect on consumers' purchasing behaviour.

Show answer

Answer

Emotional

Show question

Question

Offer framed as '2 for £10' is ______.

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Answer

multi-unit framing

Show question

Question

Writing prices in a smaller font may be perceived as more attractive than writing prices in bold font. 

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Answer

True

Show question

Question

Prices written in ____  are perceived as cheaper.

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Answer

Red

Show question

Question

Odd prices give an impression of _____ quality.


Show answer

Answer

lower

Show question

Question

Why do coffee shops do not mention currency symbols on menus?

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Answer

A long number gives an impression of expensive goods. Hence, coffee shops remove currency symbols as well as zeros after the decimal point to keep numbers shorter. 

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Question

What are the disadvantages of psychological pricing?

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Answer

Misperception, misjudged quality, and the lack of uniqueness are disadvantages of psychological pricing.

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Question

Why is charm pricing harmful to premium products?

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Answer

Charm pricing is harmful to premium products because prices ending with an odd digit like '9' give an impression of lower quality.

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