Psychological pricing is the practice of setting prices to appear subconsciously more appealing to a target market and to therefore positively advance the buying decision. This desired effect on demand is the reason behind establishing price points (like MAP prices, MSRP and so on). However, since there are different types of psychological pricing, it is essential to understand their differences and select the appropriate one for your brand.
- Prestige pricing
- Charm pricing
- Reverse charm pricing
- Innumeracy
- Urgency / limited edition pricing (previously discussed in full in another article)
Prestige pricing refers to setting prices higher than normal because lower prices will turn off the target market. This is therefore common for brands that are associated with luxury, high quality, high performance, exclusivity marketing triggers or some other type of unique value proposition (UVP) or brand position that carries a premium from which you can profit. Be sure to stress the UVP in the sales pitch, whether in packaging quality or words on the package.
Charm pricing is a popular pricing strategy used in retail. Since humans (used to reading from left to right) tend to focus more attention on the digits to the left, retailers often reduce prices like $1.00 to $0.99. $0.98 or 0.97. Although the difference is marginal, people generally consider it a more significant discount than a 1-cent increase to $1.01. In short, consumers perceive the small discount to be larger than it really is.
To test whether this can work for your brand, simply change your price accordingly and compare the market's response.
Needless to say, charm pricing has become so popular worldwide that the market expects a regular, non-luxury product when they see charm pricing. Consequently, avoid charm pricing for luxury products. Specifically, feel free to use whole numbers. In other words, rather than prices like $199, set the price to $200. Using charm pricing inappropriately like with luxury products could be detrimental to your brand.
Innumeracy refers to a pricing approach that takes advantage of the fact that many buyers are either unable or unwilling to understand some mathematical concepts involving numbers as they apply to daily life. This usually involves wording offers in ways that create a favorable illusion. Example(s)
- Consumers respond more favorably to offers to get the 2nd item free over pay 50% off when the 2 offers are essentially the same.
- When shopping for an item priced at $100, consumers easily feel special by the idea of getting not only 1 discount of 25% but an extra one of 20% 'just because the sales person ostensibly thought they were great'. However, the positive emotion deceives them, preventing them from realizing that, if the amount payable were calculated at once on a single summated discount of 45% (as b below), they would pay less ($55) than based on the discount being calculated in 2 parts. As illustrated below (in a), breaking apart the discount into 2 means that, when calculating the second second of the two discounts, that second discount will be calculated based on a price that is less than the original, ie less than the $100. Conversely, the summated total of the discount of 45% is calculated at once based on the higher original price of $100.
- a) $100 x 0.75 x 0.20 = $60 VERSUS
- b) $100 x 0.55 = #55
- If your price can fall between $24 and $29, raise it to $29 without risk of consumers feeling ta significant difference.
Price Appearance refers to the physical way in which your price is displayed. The appearance of prices can be adjusted to support either abovementioned charm pricing or prestige pricing.
- Appearance of prestige pricing. High end retailers who have rounded up their prices (from $1xx to $200) recognize they are forcing upon their customers the pain of parting with more money than normal. For this reason, despite the fact they have clearly raised their prices, they try to make it appear as physically small and with as few characters as possible. In other words, they are trying to trick your mind into somehow thinking that the price is lower. For instance, a fancy clothing store may have prices written in small font and without the extra 0s at the end. Example(s):
- The price will be printed with a small font as '200' and not
$200.00. The $ sign and extra digits reinforce the price. This is further reinforced by the fact that consumers read all the syllables of prices in their minds and would therefore take longer to recite the longer numbers. - Appearance of charm pricing. Non luxury prices that end in .99 like 1.99 for instance may make the 0.99 as small as possible. Needless to say, charm pricing is also typically presented with signage that is loud and large with words like 'sale'.
- 1.99 (versus $1.99)
Final note regarding ethics
Beware as some consumers will find these practices deceptive while others will find them entirely acceptable. You will therefore need to consider your market very carefully.
CONTENT RELATED TO PSYCHOLOGICAL PRICING
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