The Psychology of Pricing


Pricing is a game of the mind.

It’s true that someone, somewhere, at some time, plucked a figure out of the hat and decided that this would be the price. (Yes, there was probably more thought to it than this, but nevertheless someone decided on a final number.)

Because there is no real science behind pricing, your customer thinks pricing becomes negotiable and this is especially true in certain circumstances. No-one bids full price for a house, or accepts the ticket price of a car. B2B buyers are always jostling suppliers to reduce their prices.

Partly this is the fault of the salespeople who invite customers to argue price.

Partly it’s because customers figure businesses are going to use techniques that make their prices seem cheaper than they are.

Does everyone want a bargain?

There are those experts that will tell you that everyone wants a bargain. A better explanation, perhaps, is that everyone wants to feel that they are getting value for money and if they are lucky enough to get it for a reduced price, it’s a bonus.

Value for money and being cheap, though, are very different.

Plenty of buyers steer away from buying cheap goods. The simple fact is that most people believe you get what you pay for and cheap = junk.

Value for money occurs when the buyer derives a sense of benefit from the purchase – and that benefit outweighs the price paid for the product.

The Psychology of Price

The psychology of price really relates to how a customer perceives the price rather than the actual price itself. The belief is that price changes must reach a certain point before the customer becomes aware of it.

My local gift shop owner supports this theory. The store has successfully operated for many years, carries a range of eclectic products not easily found elsewhere that suit all types of people and budgets. The owner told me that her customers do not think about gifts under $50. The moment, however, the price is higher than $50, the customers pay attention to the price. This means that the store focuses heavily on product with a retail price of under $50 to maximise sale volume.

Here are some of the techniques used so that price appears to be more favourable:
Some marketers believe that buyers react more favourably to prices that end with a 3,5,7 or 9 when products are priced under $50. With products priced over $50, the price is typically set at $1 below an even dollar figure (i.e $99, $199 or $349.) Conversely, round the price up if you want to give the impression of quality.
“Buy 3 for the price of 1” or “buy one and get one free” are both examples of quantity discounts. You can use any combination that makes sense to your business.
The bundling of 2 or more complementary products together for a fixed price. The price is normally lower than if the items were bought individually. This can also take the form as additional “free” bonuses bought as part of the product purchase. For example, buy this product and get this other product free,
The classic examples of this are lay-bys from department stores where the customer pays the product off over a defined period of time. Because it costs less than the entire amount upfront, it seems cheaper. Other examples include TV Home Shopping channels which offer regular monthly instalment payment terms.
The higher the price, the more exclusive people think the product is. To pull off prestige pricing, everything about your brand strategy needs to support the image of quality. If the price is too low on a prestige product, sales are likely to be lower because the customer will assume the product is not high quality.
Certain industries are expert at hidden charges and fees. These can take the form of penalties if contracts are broken or early termination fees if you pay off your loan early.
READ: More about pricing strategy.


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