What is psychological pricing? (With 10 strategies)
By Indeed Editorial Team
Published 12 April 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Pricing psychology relates to how customers feel and what they are likely to buy in the future. One psychological pricing strategy is anchoring, which establishes a higher initial price point to compare with the actual selling price. It's also common for retailers to set a price below a whole number so that consumers think the price is lower than it is. In this article, we discuss psychological pricing strategies, other pricing strategies sellers use to increase sales, and how the company you work for can create pricing strategy frameworks.
10 psychological pricing strategies
If it's your responsibility to price merchandise at work, you may want to learn the 10 most popular psychological pricing strategies in marketing:
1. Use smaller fonts for prices
Display all numbers in smaller fonts to take advantage of the overlap between visual and numerical size. When a customer sees the numbers in small print, their brain interprets them as being lower. If you want to draw attention to discounts or significant savings, use larger fonts.
2. Remove commas
You can remove commas from long numbers. Instead of writing out £1,699, put £1699 instead. There are fewer characters to read, and it takes less physical space, making the number seem smaller.
3. List shipping and handling costs separately
Use a separate line item for shipping and handling costs. The anchoring concept comes into play here. Base price comparisons are typically more important to consumers than total costs.
4. Offer an option to pay in instalments
Many people may choose to pay in instalments. Publicise both a lump-sum price and a payment plan for an item. For example, a professional development course may be available for a one-time payment of £899 or four payments of £300.
5. Calculate the per-day price of a monthly fee
Besides the low monthly fee, provide customers with information on how much the service costs per day if it's a subscription service.
Example: TheaterStream is a new entertainment streaming service. New customers may sign up for £8.99 per month. For just £0.30p per day, customers can enjoy thousands of beloved movies whenever they want.
6. Raise the price before issuing a new version of your product
Before releasing a new version of your product, raise the price of the current one. This establishes a higher reference point to compare to the price of the new version. The difference between the two then seems more acceptable.
Example: Super Thrills Video Games is releasing a new version of their popular racing video game. In January, the company increased the price of their current racing game from £45 to £48. In April, the company released the new version for £55.
7. List the price after large quantities
Before putting a price on something, list the item in a lot. You might record the cost of 100 pens at a stationery shop as £39. It draws customers' attention to the price when listed first in the product description. Buyers' attention may focus on product advantages first when they see the quantity.
8. Free-with-purchase offers
Offer freebies to customers as part of promotions. Examples of promotions that fall into this category include:
buy one to get one free
buy two, get a third with 25% off
buy one, get 50% off your next purchase
9. Create a sense of urgency.
You can use flash sales to create a sense of urgency, encouraging customers to buy now rather than later. Typically, these sales inspire customers to spend. It's possible to dilute the effect of artificial time constraints if you use them too frequently, reducing the quality of your product or brand or encouraging customers to buy during these sales.
10. Use words related to small things
To convey a low price, use words that refer to small things. Use words like low, one and just. In addition, this may help to minimise additional costs. Some examples of this are:
You can order today for only £19.99.
This service is available for just £19.99.
You can purchase the entire set for the low amount of £19.99.
Other types of pricing strategies
Some common pricing strategies that organisations use include:
Economy pricing: Low prices and low production and distribution costs are the primary goals of an economic pricing strategy.
Premium pricing: Companies that produce and distribute luxury goods use these strategies because of their high prices for the perceived value.
Price skimming: Using a price skimming framework, a company can enter the market with high product prices and lower them later.
Penetration pricing: Penetration pricing is a strategy companies use to enter new markets at low prices. Businesses frequently raise prices over time to reflect improved quality and value.
Version-based pricing: It's common for companies to offer varying product and service tiers with different prices in a versioning framework.
Competitive pricing: A business may set competitive prices while ensuring that its service quality is better than its competitors.
Value pricing: Businesses that use value-based pricing first learn what consumers want, then produce goods and services that meet those value standards.
Sandwich pricing: Sandwich pricing encourages customers to buy the middle-priced item by offering versions at three different price points.
Promotional pricing: Promotional pricing uses one-time discounts, ongoing sales and limited-time offers to entice customers to make purchases.
Cost-plus pricing: This simple pricing strategy adds a markup percentage to production costs. Companies often use the cost-plus approach to raise the price of their products for more profit.
Dynamic pricing: Dynamic prices can go up or down according to the current market and demand levels. Companies can take advantage of times when demand is at its highest by employing dynamic pricing strategies to adjust their prices quickly.
How to create a pricing strategy framework
Use the following steps to create a practical pricing strategy framework for your marketing:
1. Establish goals
Clearly understanding your goals is essential before deciding on a pricing strategy. Improving overall cash flow, outperforming rivals in new markets and increasing customer conversion are just some goals you can consider. Once you've decided what you want to accomplish, you can start mapping out a plan to get there.
2. Perform a pricing analysis
Pricing analysis is necessary to see where your offerings stack up against the competition. The results help your company compete with many businesses that offer similar products so you can reach a larger market. To develop effective pricing strategies, ensure you conduct a thorough market analysis.
3. Identify target markets
You can identify target customer groups by conducting a market analysis. For example, assess how buyers perceive your products and services and whether they find them useful. Consider which of your company's products or services can meet the needs of your target markets in terms of value and quality.
4. Conduct a competitor analysis
Compare your direct and indirect competitors' products and services to your own. When your direct competitors cannot supply a product or service, your customers may turn to indirect competitors for the same or a similar product or service. With this information, you can determine which pricing strategy is best suited to your business model.
5. Develop an action plan
After having a clear understanding of your competitors' pricing strategies and your customers' needs, create an action plan for implementing your pricing strategy. Consider, for example, the various pricing models to see which one is best suited to your company. Plan how to publicise the new prices and create awareness of them.
6. Track and modify as necessary
Over time, monitor your pricing strategy framework performance as you implement it. Set key metrics, such as revenue, sales and conversion rates, as you monitor competitor pricing and product launches. It's critical to keep tabs on shifting consumer preferences and the overall state of the economy.
How to choose a pricing strategy
Follow these guidelines for an effective pricing strategy:
Know your customers: Knowing what your customers want and can afford helps you provide them with goods and services that are appealing and affordable. Sending out customer surveys is one way to learn more about your target audience.
Know your products: To achieve this, your company might devote significant resources to market research. Producers can only execute profitable pricing strategies if they are aware of the value of their goods and services.
Consider your industry: Different industries have different pricing strategies and it's impossible to generalise them all. You may have a much better chance of succeeding by learning from other people's successes and failures.
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