Extensive research has been done to understand consumer buying patterns, and how certain pricing techniques can influence people’s perception of value. There are a number of moving parts that go into how people evaluate prices, and much of that decision-making is subconscious.
We’ve bundled up the research, and outlined six ways to use psychology in your pricing strategies:
Eliminate Dollar $igns
We discussed this trick in our menu engineering article, as a way to optimize a menu. But all verticals can apply this concept to drive sales. A study by Cornell University reported that even “twenty dollars” spelled out led diners to spend more, ridding the strong correlation between the dollar sign ($) with spending money.
Across verticals, items’ prices often end in “9”, and this concept is a widely adopted pricing strategy. Characterized as “the power of 9,” researchers have put this theory to the test. Researcher, William Poundstone, found that on average, charm prices increased sales by 24% as compared to the rounded numbers. And even to researchers surprise, when women’s clothing item was tested at the prices of $34, $39, and $44, the item that sold best was at $39.
It’s not just about numbers and symbols, messaging also plays a crucial role in your products’ perceived value. People make purchases based on feelings, and there’s a positivity correlated with ‘time spent’ over ‘money saved.’ Stanford researcher, Jennifer Aaker, cites Miller Lite’s slogan as an example of successful messaging. “It’s Miller Time!”, fosters favorable feelings by using the positive and deeper relationship people have with time over that with money.
This is touted as one of the most effective pricing strategies. It is used to directly contrast one price against another. By having two similar products with drastically different price points, the higher priced product will be seen as “premium.”
The famous case study by The Wall Street Journalis the Williams-Sonoma bread maker. They introduced a bread maker for $275 and saw virtually no sales, and in response introduced a slightly better model for $415. This is dubbed the “decoy effect,” which uses one model to anchor the perceptions of another model. After introducing this higher priced model, sales for the $275 model skyrocketed.
For this study, people either viewed the product first and then the price or visa versa. When shoppers previewed the product first, their purchase decision was based on the product qualities, begging the question “do I like this product?”. And when they were exposed to the price first, the shoppers based their purchase decision on economic value, begging the question “is this product worth it?”.
There are different situations where each strategy can best be applied. If the product is at a low price point, you want shoppers to base their decision on the value they are getting. And for higher priced products, you want shoppers to base their decision on the quality of the product.
In this example, from NeuroScience Marketing, Tiffany highlights the quality and design of its luxury watches, and takes the user through multiple touch points before they can view the price.
This is a concept that can best be played out for quick service establishments or fast casual restaurants. Having customers pay prior to receiving the product reduces the pain of paying. Customers finish the payment looking forward to receiving the product, and their lasting impression is that of enjoying the product, not having to pay.