The secrets of psychological pricing tactics

We take a look at the ways companies take advantage of psychological pricing tactics to ensure maximum profits for the products they offer.

Martina Greco
6 MIN|December 7, 2018

We focus on the ways that companies can take advantage of psychological pricing tactics to get the maximum profits for the products or services they offer.

The goal of any business is to achieve the maximum possible profit for their products or services. And to do this, today’s businesses are constantly seeking to innovate how they work, to be more efficient and optimized, in the hope of providing better services to their customers.

Offering better services is fundamental to 21st century business success. But it’s not the only way that organizations can improve the yields they earn from their efforts. For example, there’s more room for variation in the pricing of products and services than many people think.

‘Psychological pricing’ is a pricing and marketing strategy based on the idea that certain prices can have a psychological influence on customers. It can influence how much people are willing to pay for products or services – and you’d be surprised at what some of the studies have found.

A study in psychological pricing

In 2009, the Economist published the results of a rather bizarre experiment. It involved them offering three separate subscription offers:

  • $59 – Web only
  • $125 – Print only
  • $125 – Web & print

Let’s discount the web only subscription for a moment. Which of the other two do you pick? You’d never choose the print only subscription. Why would you choose to sacrifice web access when you can get it for no extra cost? Even someone with no intention of reading the website would think, ‘Well, it’s the same price; I might as well.’

In the study, this proved to be the case – nobody opted to buy the print only subscription. Web & print was better value for the same money, so respondents selected that instead. The real choice here is between web only and web & print.

The study tried it again without the print subscription available and discovered a startling difference: more people opted for web & print when print only was listed as an option than when it wasn’t. The presence of the irrelevant print only subscription served a purpose; it made web & print look like better value by comparison. This is despite the fact that neither the price, nor the value of the subscriptions on offer changed between tests.

All companies, B2B and consumer alike, want to get as much profit from their business as they can. But there’s a broader moral here – that different people value different aspects from your services at different times.

Pricing tactics: It’s all relative

The Economist experiment discovered that pricing doesn’t happen in a vacuum: value is relative. Products can only be cheap or expensive in comparison to something else – and it’s the comparison that informs whether people purchase.

If you’ve ever been online during sales season, you’ll see the same effect in practice, when the retailer takes great care to inform you how much the items have been reduced by. £6 sounds like a lot less money when you know it was £10 the day before. How many times have we all bought something simply because it was on offer? Would we have bought at the same price if we thought that was the usual cost?

Selling by comparing a product to a less attractive option is a technique called ‘anchoring’. The logic follows that, like with the Economist subscription, the best way to sell something is by comparing it to an alternative that’s clearly worse value for money. It’s about making it clear what the value of your product is and bringing that to forefront of your marketing. If the selling point of your product is that it’s better value than the competition, then make that clear. If it’s the best quality product on the market, then your marketing material should reflect that.

Psychological pricing: Left to right

As English speakers, we read from left to right. This influences the way we process information; it means when we read a sentence, or a services page, the leftmost information on a page is processed first, and everything else modifies that.

By now, we’re all familiar with seeing prices ending in ‘.99’, and the psychology behind it. If people see ‘2.99’, they perceive the £2 first, with the remaining 99p simply ‘added’ on top. That fact that it’s virtually the same as £3 is irrelevant, the buyer has already perceived it as a ‘£2’ related price before they get to the 99p. This tactic isn’t new in contemporary psychological pricing methods. But this ‘left to right’ effect can be applied elsewhere.

A recent study by the CXL institute discovered an interesting phenomenon. Much like in the Economist example, they compared the popularity of different subscription packages and measured how long people spent processing them when they were presented in different orders on a webpage. Four separate plans were presented in columns from right to left; free, basic, pro and enterprise. The order was changed, and the results were measured.

In a similar way as with the 99p effect, people spent more time processing the plans on the left side than they did the right.

How you can use pricing tactics to your advantage

Combined with anchoring, this sets an interesting precedent. Everything else is judged by comparison to the left-most option. If your company sells a range of services, products, or subscriptions, it’s worth thinking carefully about how they’re presented on your website. It could have a significant impact on the type of plans your customers choose.

Your online pricing tactics often come down to the kind of website design you employ; layout, quality of content, and particularly structure can make a big difference. If there’s a particular plan you want to encourage, then placing it towards the left hand side of the page could help boost its popularity.

Psychological pricing: The luxury factor

How much would you pay for a can of beer at your local corner shop? £1? £1.50?

And how much would you pay for the same beer at a fancy hotel? This was the central question posed in a well-known 1985 study, which found that, even though the drink wouldn’t be consumed in either venue, there was a distinct difference in the price people were willing to pay. From the hotel, people were willing to spend $2.65 on average, compared with $1.50 at the grocery store. The beer is exactly the same, and it’s consumed in the same place (on a nearby beach), so why does its value change?

People’s perception of prices change depending on the place they’re buying the product from and the buying experience. It seems right that the hotel should charge more for the same beer, even though its value is determined by the same supply and demand factors as the beer in the grocery store.

We see this effect in play every day. This is why luxury department stores still make money charging more for products you can get much cheaper elsewhere. The luxury experience is part of the price tag; and people buy it.

How you can use pricing tactics to your advantage

How does this psychological pricing work in a digital marketplace? You might not be able to treat your customers to the luxury department store experience, but you can make your website the digital equivalent. Investing in a website design that looks classy and expensive will certainly pay off. Combine that with a user experience that sets your company apart as the Harrods of your industry, and you’ll be well on your way to generating more buyers and subscribers.

The takeaway

Businesses are aware of the dangers of overpricing or underpricing a product. Underprice your product, and you lose out on valuable profits. Overprice it, and you risk losing even more money as the price-tag drives customers away. But if there’s anything we can learn from these pricing tactics, it’s that there’s a lot more variation in how you charge for your products and services than you might think. Know your audience, know your market, and, most importantly, know your product – and the rest should fall into place.

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