Pricing is more than just about numbers; it is a play on perception. In many cases, the psychology of pricing is more important than the actual price itself. And small businesses that understand how psychology plays with their pricing strategies can come out the winners.
People process numbers differently, and we’ll often never know what is in their minds when they consider prices and how this affects their behavior. Traditional economic thinking assumes that markets are always efficient and participants always rational. However, consumers behave differently, sometimes even irrationally when presented with a variety of triggers. When setting your prices, consider that perception plays a large role in customers’ acceptance.
Price is multi-faceted. In setting your prices, the first crucial question you need to answer is: “What price do I charge?” But you also need to consider the how, what, when, where and what form of pricing by asking the question: “How do I charge?” Customers will react differently if you break the price into parts, bundle the product or service with other items, request for payment late or early. All these factors contribute to what we call the psychology of price.
Here are some ways when perception plays a large role in pricing:
1. Price Perception of Savings
Ever wonder why retailers end their prices with the ubiquitous $0.99, instead of a “0” or “1”? Obviously, $9.99 is not much better than $10.00; after all, that’s a mere $0.01 savings!
Nonetheless, customers look at items with prices ending with “.99” more favorably. People think that they’re getting a bargain with an item priced as $9.99 instead of $10.00 — they look at the 9 and think that they saved that the price is not $10. The perception of savings makes for a powerful pricing strategy.
2. Price Perception of Value
A common ploy of many retailers as well as Internet marketing gurus is to bundle their products, and offer some for free. This strategy gives customers the perception that they are getting way more than what they are paying for. Everybody likes freebies and bonuses! So you see and read catching offers like:
- “Buy Now and Get 1 Free”
- “Buy Today — and Get 4 Valuable Bonuses Valued at $199 For Free!”
If you are in the market for the products offered, then getting $199 worth of widgets for free may seem like a great deal. Others craft their offers by including not one, but four bonuses for the purchase of one product. From TV Shopping Networks to the Internet, this strategy has proven to be very effective in getting customers to buy.
3. Price Perception of Discounts
Discounts — whether from 10% to 90% off — almost always never fail to attract buyers. Of course, the bigger the discount, the better! People just love to feel that they are saving and getting good value for their money (and who wouldn’t?).
This is especially true with the growing acceptance of couponing, with extreme couponers even having their own reality shows! Consumers are enticed by the discounts, and knowing that they are getting a bargain in their purchase.
4. Price Perception of Unbundling
Unbundling of price into routine payments also affects the decision to purchase. Marketers have discovered that price unbundling can make the very same cost trivial to customers, and hence, more attractive.
Take for example life insurance. You’ll hear pitches like: “For only $5 a day, you’ll get a lifetime of assurance.” or “Life Insurance for $1.00.” Pitched this way, the premiums sound very reasonable and within easy reach. The price takes on a different spin if the same insurance company markets their product as “Pay Annual Premiums of $1,825.” Now, the price takes on a “big money” perception, and can actually discourage people from buying the product.
For more information on pricing, read the following articles:
- Pricing Strategies During a Recession
- Surviving the Pricing War
- Understanding How Price Affects Your Customers
- Discounting to Create Cash Flow? Be Careful
Recommended Readings on Price Perception and the Psychology of Pricing:
- Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table
- Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability
- Pricing Strategies: A Marketing Approach
- Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures
- The Strategy and Tactics of Pricing: A Guide to Growing More Profitably
- 15 Pricing Tips for the Small Business Entrepreneur
- 7 Tips In Setting Your Prices
- Why You Should Not Cut Your Prices
- How to Price Your Wedding Photography Business
- The Enthusiastic Employee: 16 Myths on Employee and Performance Management