To get the most out of marketing your product or service, you should know the different ways to price it. One helpful strategy for this is psychological pricing. By using established psychology practices, you can influence how customers view your price. This guide explains the method and offers insight into how you can use it in your business.
To give you a well-rounded view of psychological pricing in marketing, this guide answers:
- What are pricing strategies?
- What is psychological pricing?
- Does psychological pricing work?
- How can you use it?
What are pricing strategies?
The decision of how you should price what you sell should not be taken lightly. It can play a crucial part in the launch and growth of your business. It is not as simple as making sure your price covers the cost and gives you markup you would like to make.
If your price appears too high for the quality, customers may be unlikely to purchase it. If your price is low, that might give customers the impression that it is not a premium product.
There are other pricing strategies as well as psychological pricing. A few others to mention are:
- Premium pricing — higher price than competitors to create the impression of superior quality.
- Penetration pricing — enter a market at a lower price than competitors, then increase as market share grows.
- Economy pricing — bare minimum pricing to keep the price low, to target people on a budget.
What is psychological pricing?
Psychological pricing encourages customers to think about the price in a certain way. By using techniques to influence the appearance of the price, you can change how it is perceived.
By placing a time restriction on a price or sale, you can encourage customers through a sense of urgency. The customer feels more compelled to purchase because of their fear of missing out. For example, a message you could see is ‘January sale is nearly over, two more days before these prices are gone’.
By choosing not to price something as a whole number and instead offer for it a penny less, customers feel like it’s cheaper. For example, instead of charging £2, you would charge £1.99. It appears less than it is, so comes across as more of a bargain.
Another form of psychological pricing is innumeracy and refers to assuming that customers would be unlikely to work out a price promotion mathematically.
For example, instead of creating a sale where ‘all items are 50% off’, you can charge a full price and offer ‘buy one, get one free’. If a customer worked it out, then they would both be the same price if you bought two, but the second sounds more appealing because of the impression of getting something for free.
Does psychological pricing work?
The question of whether it works is going to play a big part in your decision to use psychological pricing in your business. For this, it would help to find out whether there is any evidence to back it up.
According to research from the Quantitative Marketing and Economics journal, ending prices with the number 9 makes it more attractive. Prices that end in 9 even sell better than lower prices for the same products. This research included a study comparing $35 (£25.78) against $39 (£28.73) for clothing and found that 24% more people chose the price with a 9.
In another study, Yale found customers are less likely to buy one product if two of them are priced the same. Their experiment featured two brands of chewing gum. When priced the same, 46% bought one. Though when the two were priced differently with only 2 cents (£0.01) difference between them, 77% bought one. Meaning that if your competitor charges £10, it’s better to charge £9.99 than the same.
Even how the price appears plays a psychological effect, according to research by the Journal of Consumer Psychology. They found customers considered $1,499.00 (£1105.42) and $1,499 to be higher than $1499. Adding more parts made it seem higher to customers. So ultimately, keeping it simple is the best way for your price to appear lower.
How can you use it?
Depending on your business, some ways of using psychological pricing may work better than others. For example, if you sell luxury watches, your price appearing cheaper may mean that it changes how the product is viewed. So would you want to charge a penny less than your competitor or would it be more beneficial to increase the price?
Because this practice is psychological, think about how you want to be perceived. You want to make sure that your pricing follows the identity of the business you aim to put across in your branding. If you would benefit from having an edge over competition in a tight market, use your psychological pricing to build that through your marketing.
For example, often prices like £4.99 can sound catchy when said aloud. If it’s easier for customers to remember your business then you want to take advantage of that. One brand that often does this is JML. Their products are often priced ending in 9 and they use the same voice-over to explain this. They even have videos playing in stores that explain what the product does and the call to action with that price point is reiterated.
Decide prices with clear costs by using Countingup
When it comes to the price of your product or service, it is often dependent on the level of costs that have gone into getting it to the customer. These could include supplies, transport and time. If you are unable to keep track of these, you may find it more difficult to decide how much to charge.
Overcoming this, it would be helpful to set up a separate business account. Countingup is the business current account with built-in accounting software. Its expense categorisation feature allows you to see exactly how much goes into the costs of what you provide, so you can work out your prices easier
By having all of the information accessible and easier to manage, you can make decisions about how to market your product and start using strategies to gain more customers.
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