Welcome to the most comprehensive list of psychological pricing strategies.
Whether you’re marketing a new product, selling items on eBay, or negotiating a deal on your house, you’ll learn how to choose a price that will maximize your profit.
Table of Contents
This article is broken up into four parts, with each part containing various strategies and tactics.
Step 1: Determine Your Price
Strategy: Use Charm Pricing
- Tactic 1: Reduce the Left Digit By One
Strategy: Use the Proper Amount of Fluency
Step 2: Influence Their Perception
Strategy: Reframe Your Price
- Tactic 4: Keep the Shipping and Handling Separate
- Tactic 5: Offer Payments in Installments
- Tactic 6: Mention the Daily Equivalence
Strategy: Prime a Small Magnitude
- Tactic 7: Position Prices Toward the Bottom-Left
- Tactic 8: Use a Smaller Font Size
- Tactic 9: Remove the Comma When Possible
- Tactic 10: Use “Congruent” Language
- Tactic 11: Be Precise With Large Prices
Strategy: Maximize Their Reference Price
- Tactic 12: Start Negotiations With a High Precise Number
- Tactic 13: Expose People to a Higher “Incidental” Price
- Tactic 14: Expose People to Any High Number
- Tactic 15: Raise the Price of Your Previous Product
Step 3: Motivate Them to Buy
Strategy: Reduce the “Pain of Paying”
- Tactic 18: Remove the Dollar Sign
- Tactic 19: Charge Customers Before they Consume
- Tactic 20: Attribute Bundled Discounts to Hedonic Products
- Tactic 21: Don’t Bundle Expensive and Inexpensive Products
- Tactic 22: Shift the Focus Toward Time-Related Aspects
- Tactic 23: Create a Payment Medium
- Tactic 24: Avoid Connotations With Real Money
Strategy: Use Discounts Strategically
- Tactic 25: Follow the “Rule of 100”
- Tactic 26: Provide a Reason for the Discount
- Tactic 27: Avoid Discounts with Precise Numbers
Step 4: Maximize Your Revenue
Strategy: Make Price Increases Undetectable
- Tactic 28: Use More Frequent (Yet Smaller) Price Increases
- Tactic 29: Downsize a Feature Besides Price
Strategy: Avoid Harmful Pricing Strategies
New Pricing Tactics
Last Updated: December 14, 2015
- Tactic 32: Sort Prices From High to Low
- Tactic 33: Expose Customers to Two Multiples of Your Price
- Tactic 34: Offer Free Trials Toward the Start of the Month
- Tactic 35: Offer Discounts Toward the End of Month
- Tactic 36: Tailor Prices Toward Names and Birthdays
- Tactic 37: Position Sale Prices to the Right of Original Prices
- Tactic 38: Position Prices to the Right of Large Quantities
- Tactic 39: Only Give Discounts on Low-Priced Products
- Tactic 40: End Discounts By Phasing Them Out Gradually
- Tactic 41: Offer Discounts With Low Right Digits
- Tactic 42: Show Product Then Price (for Luxury Items)
- Tactic 43: Show Price Then Product (for Utilitarian Items)
- Tactic 44: Display Red Prices to Men
- Tactic 45: Emphasize the Inherent Costs of Your Product
- Tactic 46: Add Slight Price Differences to Similar Products
Determine Your Price
Large companies have an advantage. They can afford cream-of-the-crop marketing research (e.g., conjoint analysis) to find the optimal price for their product. Small businesses don’t have that luxury.
Fortunately, that’s where psychology can help.
Based on research in cognition and behavior, certain prices are more effective than others. Even if you don’t find the exact sweet spot, you can make small — yet powerful — adjustments to maximize the effectiveness of your price. All for free.
In this section, you’ll learn how people process numerical values (and how to choose the numbers in your price, accordingly).
- 7 Tips for Pricing Your SaaS Product — Scott Gerber
- Scalable Sales Models in SaaS – It Starts With Your Pricing — Steli Efti
- How to Price Your Software — Jim Geisman
- Steal These Tips on the Power of Effective Pricing — Mick Hollison
Use Charm Pricing
For the past couple decades, the marketing world has been inundated with charm pricing — prices that end in 9, 99, or 95.
And the results speak for themselves. Check out Gumroad’s sales:
When people see those positive results, they often credit the 9’s in the price. However, there’s another culprit responsible: the left digit.
Tactic 1: Reduce the Left Digit By One
Charm pricing is most effective when the left digit changes. A one-cent difference between $3.80 and $3.79 won’t matter. However, a one-cent difference between $3.00 and $2.99 will make a huge difference.
Why is the left digit so important? It involves the way our brain encodes numerical values.
Our brains encode numbers so quickly (and beyond consciousness) that we encode the size of a number before we finish reading it. Thomas and Morwitz (2005) explain that:
“…while evaluating “2.99,” the magnitude encoding process starts as soon as our eyes encounter the digit “2.” Consequently, the encoded magnitude of $2.99 gets anchored on the leftmost digit (i.e., $2) and becomes significantly lower than the encoded magnitude of $3.00” (pp. 55).
Bonus Tip: You could emphasize the new base digit by visually minimizing the digits after the decimal.
Use the Proper Amount of Fluency
When determining the numbers in your price, you should also consider processing fluency.
Processing Fluency – The ease in which we process information.
We can infer certain characteristics about a price, based on the ease of processing (i.e., easy vs. difficult). This section will teach you how to choose numbers with the proper amount of fluency.
Tactic 2: Use the Right Amount of “Roundedness”
One aspect to consider is the “roundedness” of your price. Round prices (e.g., $100) are processed fluently, whereas non-rounded prices (e.g., $98.76) are processed disfluently.
Could one choice generate more sales? Researchers think so.
Wadhwa and Zhang (2015) found that round prices — because they are fluently processed — work better for emotional purchases. When consumers can process the price quickly, the price “just feels right.”
The researchers also found the opposite to be true. Consumers need to use more mental resources to process non-rounded prices. So those prices seem more fitting with rational purchases.
Despite the direct evidence, I’ll propose a caveat.
Even if your purchase context is emotion-based, you should still avoid rounded price intervals (e.g., $100, $5,000). People assume that those prices are artificially higher, as if they were plucked from thin air (Janiszewski & Uy, 2008).
So where can roundedness help? That principle can help you determine whether to add cents to your price.
If your purchase is based on emotion, then leave out the cents.
If your purchase is based on rationale, then add some cents.
Tactic 3: Choose Numbers With Fewer Syllables
Our brain uses more resources to process phonetically longer prices (which triggers a fluency effect). Since we use a larger amount of mental resources, we falsely infer that those prices must be larger.
The flipside is more important. People will perceive your price to be lower if it contains fewer syllables.
But Nick! When I see a price, I don’t say it out loud. I just read it.
Same here. But according to research…that doesn’t matter. When you read a price in written form, your brain nonconsciously encodes the auditory version of that price (Dehaene, 1992). You don’t even need to verbalize the price in your mind — your brain encodes it either way.
Still skeptical? Coulter, Choi, and Monroe (2012) found a positive relationship between syllabic length and perceived magnitude. Even if two prices have the same written length (e.g., $27.82 vs. $28.16), people perceive the phonetically longer price to be higher in magnitude.
Influence Their Perception
“All our knowledge has its origin in our perceptions.”
–Leonardo da Vinci
Nothing in this world has concrete meaning. Everything we know results from our perception. At the end of the day, price is merely a perception. Nothing more. Nothing less.
And that’s good news for you. There are no universal standards that dictate whether a price is high or low — it all depends on perception.
In this section, you’ll learn some clever tactics to alter people’s perception. You’ll learn how to make your price seem even lower (without changing the actual price).
- Pricing Experiments You Might Not Know, But Can Learn From — Peep Laja
- Designing Effective Pricing Tables — Bryan Eisenberg
- Inside the Mind of the Shopper — Terry Lin
- What Does a Persuasive Pricing Page Look Like? — David Moth
In order to appreciate the strategies in this section, you need to understand how people develop their perception of prices.
I explain that process in this quick video.
Reframe Your Price
As I mentioned in that video, you can influence people’s memory for your price. When people compare your price to a reference price, you can influence them to pull a lower price into that comparison.
Why would people pull a lower price into the comparison? This strategy takes advantage of our brain’s laziness for encoding numerical values. Adaval and Monroe (2002) explain that:
“…price information about a product is unlikely to be coded into memory in terms of exact numerical digits but, rather, is coded spontaneously in more general magnitude terms (e.g., “low,” “high”). Thus the numerical price is susceptible to the influence of its original context when people attempt to reconstruct it later.” (pp. 585)
With such a hazy memory, you can influence how people recall your price. How? You just need to reframe your price into a lower numerical value. Exposing people to that lower value will cause them to encode a smaller magnitude.
Here are a few tactics that can help.
Tactic 4: Keep the Shipping and Handling Separate
If you sell products online, you should usually separate the shipping and handling fees.
When you use “partitioned pricing” (i.e., breaking up your total cost into multiple components), you anchor people on your base price, rather than the true total cost (Morwitz, Greenleaf, & Johnson, 1998). When people compare your price to a reference price, they’ll be more likely to pull your base price into the comparison.
Hossain and Morgan (2006) tested that possibility with eBay auctions. They set up auctions for music CDs, and they analyzed different bidding structures.
- Some auctions offered a low opening bid with a shipping cost (e.g., $0.01 with $3.99 shipping).
- Some auctions offered a higher opening bid without a shipping cost (e.g., $4 with free shipping).
In the end, auctions with low opening bids (plus shipping charges) attracted more bidders and generated more revenue. Oh…and Clark and Ward (2002) found similar results with auctions for the “Charizard” Pokemon card.
Tactic 5: Offer Payments in Installments
Likewise, when you give people the option to pay for your product in smaller increments (rather than one lump sum), you anchor people on the smaller price.
Suppose that you’re selling an online course for $499. By offering payment installments (e.g., 5 payments of $99), you taint people’s comparison process. They’ll be more likely to compare your installment price ($99) to a competitor’s lump sum price (e.g., $500) — a huge difference that makes your offering much more appealing.
But you shouldn’t get the wrong idea. People aren’t stupid. They know that comparing $99 and $500 isn’t an accurate comparison.
Luckily, it doesn’t matter. Since people usually compare reference prices subconsciously (Muzumdar & Sinha, 2005), your installment price has a good chance of sneaking into their comparison.
Tactic 6: Mention the Daily Equivalence
Similarly, you can achieve the same effect by reframing your price into its daily equivalence (e.g., $0.87/day).
Often referred to as “pennies-a-day” pricing, that strategy influences people to perceive a lower overall price (Gourville, 1998).
You should still make your regular price the primary focus. Simply mention the daily equivalence. That low number will anchor people toward the lower end of the price spectrum.
Don’t worry if you have trouble reframing your price into a specific daily cost. You can achieve the same effect by comparing your price to a petty cash expense, such as a cup of coffee (Gourville, 1999).
Prime a Small Magnitude
The previous strategy explained how numerical anchors can influence people’s perception of your price. However, anchoring effects stem beyond numerical values. You can also influence people’s perception through general magnitudes.
For example, Oppenheimer, LeBoeuf, and Brewer (2007) found that people made lower numerical estimates if they were asked to draw a short line (compared to a long line).
If you want people to perceive your price to be smaller, you need to associate all of its related features with a small magnitude.
Here are some tactics that can help.
Tactic 7: Position Prices Toward the Bottom-Left
If you want people to perceive your price to be smaller, you should physically position your price to be on the left (Coulter, 2002).
It sounds odd, but hear me out.
Research shows that directional cues are associated with certain concepts. For example, your spatial concept for “up” is metaphorically associated with good qualities:
“…the righteous go ‘up’ to Heaven, whereas sinners go ‘down’ to Hell. In the media, movie critics give good movies ‘thumbs up’ and bad movies ‘thumbs down.’ …people who smoke marijuana ‘get high,’ but when the euphoria diminishes, they ‘come down’…” (Meier & Robinson, 2004 pp. 243)
Due to our association between “up” and “good,” priming the spatial concept of “up” can trigger associations with “good.” Meier and Robinson (2004) found that people recognized positive words faster when those words were positioned toward the top of a screen (and they recognized negative words faster when they were positioned toward the bottom).
The same principle applies to numbers. Dehaene, Bossini and Giraux (1991) found that people conceptualize numbers on an imaginary horizontal line, with numbers growing larger from left to right.
In their study, they presented participants with digits ranging from 0 and 9, and they asked participants to indicate its parity (i.e., whether it was odd or even). As expected, people responded faster to smaller numbers when using their left hand (and vice versa). In other words, people responded faster with the hand that matched the same side of their mental ruler.
How does that finding relate to pricing?
Since we conceptualize smaller numbers as belonging on the left, positioning prices toward the left can trigger people’s conceptualization for a smaller magnitude, thus altering their perception of your price (Coulter, 2002).
Since we can also associate numbers with a vertical magnitude (with smaller numbers positioned toward the bottom), you might want to position your prices toward the bottom-left.
Tactic 8: Use a Smaller Font Size
In addition to directional cues, the physical size of your price can also influence people’s perception.
Thanks to processing fluency, people will perceive your price to be smaller if you display that price in a smaller font. This tactic is particularly effective when you contrast your price with a larger sized reference price (Coulter & Coulter, 2005).
And don’t forget about the font’s kerning — the spacing between letters. Fonts with smaller kerning should also influence people to perceive your price to be lower.
Tactic 9: Remove the Comma When Possible
Besides font size and kerning, another consideration is punctuation. Researchers found that removing commas (e.g., $1,499 vs. $1499) can influence people to perceive your price to be lower (Coulter, Choi, and Monroe, 2012).
Why does that happen? Although physical length plays a role, there’s another principle involved. We’ve already discussed it.
Can you think of it? When you remove the comma, you reduce the phonetic length of your price.
- $1,499: One-thousand four hundred and ninety-nine (10 syllables)
- $1499: Fourteen ninety-nine (5 syllables)
Consistent with fluency, that adjustment can cause people to perceive your price to be lower.
Tactic 10: Use “Congruent” Language
Be careful when choosing the language near your price. Certain words can taint people’s perception.
For example, Coulter and Coulter (2005) presented participants with various descriptions for an inline skate. Some descriptions emphasized a “Low Friction” benefit. Other descriptions emphasized a “High Performance” benefit.
Even though participants rated those benefits as equally important, participants were more favorable toward the price when the description contained “Low Friction.”
When you choose the language near your price, choose words that are “congruent” with a small value (e.g., “low,” “small,” “tiny”).
Tactic 11: Be Precise With Large Prices
Thomas, Simon, and Kadiyali (2007) analyzed 27,000 real estate transactions. What did they find? Buyers pay more money when prices are specific (e.g., $362,978 vs. $350,000).
Is it because of the negotiation aspect? If someone asks for a very specific price, wouldn’t potential buyers perceive less room to negotiate?
That’s what I thought. But nope. Researchers ruled out that possibility. Surprisingly, the real culprit involved priming a small magnitude.
Think about it. When are you more likely to use a precise value? Answer: when you’re dealing with small numbers (e.g., 1, 2, 3).
Due to the association between precise numbers and small values, precise numbers trigger an association with small values, thus influencing people’s perception.
Bonus Tip: Since a house is a rational purchase, you could enhance the psychological impact by using a precise, non-rounded number (e.g., $362,798.76)
Maximize Their Reference Price
The past two strategies helped you lower the perceived magnitude of your price. However, you can achieve the same effect by maximizing the perceived magnitude of reference prices.
This section offers a few tactics.
Tactic 12: Start Negotiations With a High Precise Number
Due to anchoring, it’s no shocker that sellers can get more money by starting negotiations with a high initial offer (Galinsky & Mussweiler, 2001). That high number establishes an anchor point, pulling the final settlement closer to that range.
Not only should you start with a high initial price, but you should also use a precise value. In one study, Janiszewski and Uy (2008) asked participants to estimate the actual price of a plasma TV based on the suggested retail price — either $4,998, $5,000, or $5,012.
When participants were given precise values ($4,998 and $5,012), they estimated the TV’s actual price to be closer to that range. When the suggested price was rounded ($5,000), participants believed the actual price to be much lower.
When an anchor is precise, we adjust our estimate past fewer units. Why? You can thank your mental ruler. As Thomas and Morwitz (2002) explain:
“If adjustment is viewed as movement along a subjective representational scale, then the resolution of this scale might also influence the amount of adjustment. X units of adjustment along a fine-resolution scale will cover less objective distance than the same number of units of adjustment along a coarse-resolution scale.” (pp. 121)
That insight works particularly well in eBay auctions. When creating your auction, you can generate more revenue by establishing a high reserve price — a price that needs to be met in order for the item to be sold. Higher reserve prices anchor people toward the higher end of the price spectrum, resulting in more revenue (Kamins, Dreze, & Folkes, 2004).
Tactic 13: Expose People to a Higher “Incidental” Price
Given our tendency to assimilate toward an anchor point, could exposure to high prices — even for unrelated products — anchor people toward the higher end of the price spectrum? Would those people pay a higher price for your product?
Nunes and Boatwright (2004) tested that possibility. On a popular boardwalk in West Palm Beach, the researchers sold music CDs. Every 30 minutes, the adjacent vendor alternated the price of a sweatshirt on display — either $10 or $80.
What happened? You guessed it. The sweater’s price anchored people toward the respective ends of the price spectrum. When the price of the sweatshirt was $80, shoppers paid higher prices for the CDs.
If you’re selling items on eBay, you might want to mention some of the other items you have for sale (the more expensive items, of course).
Tactic 14: Expose People to Any High Number
Anchoring not only works for prices, but it also works for any number, regardless whether that number is a price.
Here’s a striking example. Ariely, Loewenstein, and Prelec (2003) showed participants various products (e.g., cordless keyboard, rare wine, Belgian chocolates). They asked participants whether they would purchase each product at the dollar amount equal to the last two digits in their social security number.
After receiving a YES/NO answer, researchers then asked participants to state the exact dollar amount they would be willing to pay.
Remarkably, the researchers found a direct correlation between the social security number and the price that participants were willing to pay. Here’s the data for one of the products, a cordless keyboard:
How can you apply that finding? Should you simply ask customers to contemplate a high number? Not quite. Luckily, your job is easier.
Anchoring effects occur subconsciously, so consumers don’t need to contemplate a numerical anchor. In fact, Adaval and Monroe (2002) subliminally exposed people to a high number before displaying a price. That exposure caused people to perceive the subsequent price to be lower.
The takeaway? Even if potential customers don’t consciously notice your numerical anchor, they just need to be exposed to it.
If you run an online store, you could simply mention your total number of customers near your price. When people generate their reference price, that high number will trigger an anchoring effect (and their reference price will be even higher).
Tactic 15: Raise the Price of Your Previous Product
If you’re launching a new (more expensive) version of your product, how should you price the old product?
Some businesses will lower the price of their old product to gradually phase it out of the market. Surprisingly, though, that strategy is often the wrong approach.
Baker, Marn, and Zawada (2010) suggest raising the price of your old product. By raising the price, you raise people’s reference price (thereby enhancing the perceived value of your new product). You’ll be releasing the new product into more favorable conditions.
Conversely, if you lower the price of your old product, you set yourself up for failure. You’ll reinforce a lower reference price, which will make your new product seem more expensive.
Emphasize the Gap Between Reference Prices
The previous strategies either minimized the perceived size of your price or maximized the perceived size of reference prices. This next strategy will help you maximize the perceived distance between your price and higher reference prices.
Tactic 16: Visually Distinguish Higher Price Comparisons
When you compare your price to a higher price, people are more likely to buy your product because they feel less motivated to research the decision (Urbany, Bearden, & Weilbaker, 1988). They’ve already done their homework.
But here’s a neat psychological trick to enhance that comparison.
If you visually distinguish your price from a reference price (e.g., using a different font color), you trigger a fluency effect. Consumers will misattribute that visual distinction to a greater numerical distinction (Coulter and Coulter, 2005).
That fluency effect not only works with font color, but it also works with physical distance. When your price is horizontally farther away from a reference price, people perceive a greater numerical distance (Coulter & Norberg, 2009).
And don’t forget about font size. Smaller font sizes are especially effective when they’re positioned next to a larger reference price (Coulter & Coulter, 2005).
Tactic 17: Offer a Decoy Product
Oftentimes, people use your own products for reference prices. To ensure that their comparisons are conducive for your bottom line, you should consider adding a “decoy product.”
You might be familiar with the infamous study. In Predictably Irrational, Ariely (2008) describes a strange offering from the Economist magazine. One day, he noticed three subscription options:
- Web Only: $59
- Print Only: $125
- Web and Print: $125
At first glance, it seemed like the “print only” option was a mistake. Who would choose that option when you could choose a web and print subscription for the same price?
But Ariely noticed an underlying motive. He conducted a study to test his hunch. And he was right. The “print only” option made a huge difference.
Without the “print only” option, people couldn’t accurately compare the options. How much should you pay for a web and print subscription? Who knows. Most people chose the web option because it was cheaper.
However, the “print only” option helped people compare those two options. Because it was a similar, yet worse, version of the “web and print” option, people could easily recognize the value of the web and print subscription. With more people choosing “web and print” (a more expensive alternative), the Economist generated 43% more revenue.
When you offer different versions of your product, people will naturally compare those options. To guide people toward the more expensive version, you can take the same approach.
By adding a similar, yet worse, version of your expensive product, you influence the comparison process. Suddenly your expensive product becomes more appealing.
Motivate Them to Buy
Even if you reduce the perceived magnitude of your price, customers might be stagnant. You should give them a nudge.
This section will teach you some pricing tactics that can motivate people to buy. You’ll learn (1) how to reduce the “pain” that we associate with paying and (2) how to properly use discounts to drive purchases.
- SaaS Pricing: Features that Make People Upgrade — Jason Shah
- 8 Psychological Triggers to Optimize Your Pricing Page — Talia Wolf
- 26 Pricing Page Examples and Best Practices — Talia Wolf
- How to Use Urgency to Increase Conversions — David Rosenfeld
- How to Increase eCommerce Conversion Rate With Personalization — Ryan BeMiller
Reduce the “Pain of Paying”
Each time we purchase something, we feel a sense of pain — often referred to as the “pain of paying” (Prelec & Loewenstein, 1998).
More specifically, the pain emerges from two factors:
- The saliency of the payment (e.g., we feel more pain if we see money leaving our hands)
- The timing of the payment (e.g., we feel more pain if we pay after we consume)
Considering those two factors, you can see why Uber — a ride-sharing service — revolutionized the taxi industry.
In traditional taxi rides, the saliency of payment is very high. You see a meter constantly rising. Each minute evokes an increasingly painful sensation. Plus, at the end of the ride, the taxi driver makes you pay by cash or credit card. So. Much. Pain.
Uber is different. No visual meter. No physical payments. Everything is automatically charged to your card. Much less pain.
Credit card processing is one tactic to reduce the pain of paying, but you can reduce that pain in other ways too. This section will give you a few ideas.
Tactic 18: Remove the Dollar Sign
The pain of paying can be triggered pretty easily. In fact, the dollar sign in your price can remind people of that pain, and it can cause people to spend less (Yang, Kimes, & Sessarego, 2009).
But don’t get too trigger-happy. Before you start removing dollar signs, you should consider the overall clarity of your price.
Oftentimes, you need a dollar sign to indicate that your number is, indeed, a price. In those cases, don’t risk losing clarity by removing the dollar sign. Only use this tactic in formats where customers will expect a price to appear (e.g., restaurant menus).
Tactic 19: Charge Customers Before They Consume
When possible, your customers should pay before they use your product or service. Prepayments benefit all parties involved.
For one, you won’t be delivering your product or service without being compensated. You’ll be more likely to get paid. Pretty helpful.
Second, people will be happier with your product. When people prepay, they tend to focus on the benefits they’ll be receiving, which numbs the pain of paying. If they’ve already experienced the benefits of your product, their payment becomes significantly more painful (Prelec & Lowenstein, 1998).
That insight can be helpful with monthly subscriptions. If you charge customers monthly payments, you should charge them at the beginning of the month (and frame your message in a forward-looking manner).
Avoid sending receipts at the end of a month (or summarizing the previous month’s payment). You’ll just be rubbing salt in the wound.
Tactic 20: Attribute Bundled Discounts to Hedonic Products
To reduce the pain of paying, you might consider bundling your product. When you offer a packaged product, people can’t attribute a specific dollar value to the items within your bundle.
- Five Ways to Use Psychological Pricing — Arie Shpanya
If you decide to bundle your offering, you should follow two important rules. Whichever product you add, it should be (1) hedonic, and (2) similarly priced.
Let’s look at each scenario.
First, your product should be hedonic (emotional), rather than utilitarian (rational). Since hedonic purchases trigger more guilt (Khan & Dhar, 2006), a bundle reduces that guilt, especially when you attribute the discount to the hedonic product.
As Khan and Dhar (2010) explain:
“…framing the discount on the hedonic item provides a justification required to reduce the guilt associated with the purchase of such items. However, since no such guilt is associated with the purchase of utilitarian items, framing the discount on utilitarian component of the bundle has little additional impact.” (pg. 18)
If you can only add a utilitarian product, then describe a hedonic use for that product. Khan and Dhar (2010) tested a bundle that consisted of a $50 lamp and a $50 blender. People were more likely to purchase the bundle when the description emphasized a hedonic use for the blender (e.g., making exotic cocktails) compared to a utilitarian use (e.g., making healthy shakes).
Tactic 21: Don’t Bundle Expensive and Inexpensive Products
Second, avoid bundling expensive and inexpensive products. Inexpensive products reduce the perceived value of expensive products.
Brough and Chernev (2012) asked people to choose between a home gym and a 1-year gym membership. Roughly 51 percent of people chose the home gym — a pretty even split.
However, when the researchers bundled the home gym with a free fitness DVD, only 35% of people chose it. The fitness DVD reduced the perceived value of the home gym.
Tactic 22: Shift the Focus Toward Time-Related Aspects
When describing your product, avoid mentioning any references to money. Instead, mention a concept that has a much greater benefit: time.
Mogilner and Aaker (2009) conducted an experiment with a lemonade stand. They alternated three signs advertising the stand, each emphasizing a particular quality:
- Time: “Spend a little time and enjoy C & D’s lemonade”
- Money: “Spend a little money and enjoy C & D’s lemonade”
- Neutral: “Enjoy C & D’s lemonade”
When participants arrived at the stand, they were told that they could choose how much they wanted to pay — anywhere between $1 to $3.
The results were clear: the “time” sign outperformed the others. Those people paid twice as much (and that sign attracted twice as many people).
The researchers attributed those results to a personal connection with the product:
“Because time increases focus on product experience, activating time (vs. money) augments one’s personal connection with the product, thereby boosting attitudes and decisions.” (Mogilner & Aaker, 2009, pg. 1)
When writing copy, emphasize the enjoyable time that people will spend with your product or service. Not only will that message make your offer more appealing, but it will also distract people from the pain of paying.
Tactic 23: Create a Payment Medium
What do casino chips and gift cards have in common? They both reduce the pain of paying.
By creating a separate medium between your customers’ money and their payment, you distort the perception of paying. They’ll know that they’re paying, but it won’t feel like it.
Why won’t it feel like paying? Researchers find that, with the presence of an additional medium, people are too lazy to calculate the conversion between those currencies (Nunes & Park, 2003).
Here’s a cool idea. When new customers open an account with your business, you could require them to deposit a refundable $10 into their account (to be used for your services).
Since the money is refundable, customers might not give too much additional resistance. More importantly, that payment medium will distort the essence of that money. Once it enters a separate medium, it won’t feel like money (and people will be more willing to spend it).
Tactic 24: Avoid Connotations With Real Currency
You could also strengthen that perception by referring to that money as “[Your Company] Balance” (or any other name that avoids connotation with real currency).
If you implement that strategy, you might also want to match customer deposits by a certain percentage. For example, if a customer deposits $10 into their account, you could match it by 10% (which would bring their account value to $11).
By matching their deposits, you trigger two benefits.
First, you incentive customers to deposit more money. With the psychological impact of payment mediums, you should enhance the appeal of deposits as much as possible.
Second, you create an off-balance conversion between their money and their account value. Dreze and Nunes (2004) explain that payment mediums become more effective when consumers have trouble converting the values:
“With increased exposure and experience, the conversion between two or more particular currencies can, in theory, become second nature. If this were the case, we would expect that combined-currency prices across the currencies lose their efficacy.” (pp. 72)
Use Discounts Strategically
If not used properly, discounts can actually harm your business. In fact, some people suggest that you should never use discounts.
That advice is pretty extreme. You can use discounts…you just need to use them properly.
Where can you go wrong? If used too frequently (or too deeply), discounts can make people more price conscious moving forward. They’ll keep waiting for the next discount.
Discounts can also lower people’s internal reference price for your product, causing them to buy less in the future (because your price will seem too high).
Reducing the frequency and depth of your discounts can help. However, this section will give you a few additional tactics to maintain the strength of your discounts.
- The Only 3 Acceptable Pricing Page Discounts — Lincoln Murphy
- Data Shows SaaS Discounting Lowers Sales By Over 30 Percent — Patrick Campbell
- The Race You Can’t Win — Tim Peter
Tactic 25: Follow the “Rule of 100”
Earlier, you learned that people can perceive different magnitudes for the same price, depending on the context.
Discounts are no different.
When you offer discounts, you want to maximize the perceived size of them. That way, people feel like they’re getting a better deal.
Consider a $50 blender. Which discount seems like a better deal: 20% off vs. $10 off?
If you do the math, both discounts are the same monetary value. However, one discount has an advantage over the other.
How do you pick? Jonah Berger (2013) suggests following the “Rule of 100.”
- When your price is under $100, use a percentage discount (e.g., 25% off).
- When your price is over $100, use an absolute value (e.g., $25 off)
In both cases, you’ll be choosing the discount with the higher numeral (which will influence people’s perception of the magnitude).
Tactic 26: Provide a Reason for the Discount
To avoid the negative perception of discounts, you might want to avoid the term “discount.” At the very least, you should give a specific reason for the discount.
For example, every-day-low-pricing stores often refer to supplier price cuts:
“In advertising rollback prices, EDLP stores (e.g., Wal-Mart) often convey the message that additional cost savings they are able to obtain from suppliers are being passed on to customers… presumably to minimize the negative effects of promotions…” (Mazumdar, Raj, & Sinha, 2005, pp. 88)
By providing a reason behind your discount, you reinforce that the new price is unusual. Since the price is abnormal, people will be less likely to incorporate it into their internal reference price.
Tactic 27: Avoid Discounts With Precise Numbers
Earlier, I explained that you should use precise numbers for large prices. Since people associate precise numbers with small values, you can influence people to perceive large prices to be smaller in magnitude (Thomas, Simon, and Kadiyali, 2007).
With discounts, you want to maximize the perceived magnitude. Choosing discounts with precise numbers can actually hurt you. Those precise numbers will make your discount seem smaller.
Supporting that notion, Thomas and Morwitz (2006) found that people perceived the difference between 4.97 – 3.96 to be smaller than the difference between 5.00 – 4.00, even though the difference is roughly the same (1.01 vs. 1.00).
To maximize the perceived magnitude of your discount, use rounded values. Customers should be able to compute the general magnitude pretty easily.
Maximize Your Revenue
Your job doesn’t end when a customer purchases from you. Whether you want repeat purchases or a continuation of your subscription service, healthy businesses generate multiple streams of revenue from existing customers.
This section will teach you a few pricing strategies that play a role in your long-term revenue. You’ll learn (1) how to make price increases more undetectable and (2) which pricing strategies can damage your reputation.
- 4 Ways to Get Customers to Add More to Their Cart — Tim Ash
- How to Earn Repeat eCommerce Customers — Armando Roggio
- Getting Started With Customer Churn Analysis — Dan Andrews
- Maximizing Your Profits With Pricing — Andrew Youderian
- 3 Ways To Charge More for Your Products and Services — Joseph Putnam
Make Price Increases Undetectable
In a world with inflation, it’s inevitable. Your prices will increase at some point.
Since most people are familiar with inflation, they’ll be forgiving, right? Surely, they’ll understand.
Unfortunately, it’s not that easy. Despite inflation and other valid reasons, most consumers don’t see the justification for price increases.
Bolton et al. (2003) analyzed that perception. They found that consumers “underestimate the effects of inflation, overattribute price differences to profit, and fail to take into account the full range of vendor costs.” Welp, that’s unfortunate.
Although you won’t be able to eliminate all negative effects from price increases, you can make those price increases more undetectable (without being manipulative).
Tactic 28: Use More Frequent (Yet Smaller) Price Increases
The easiest way to control price perception is through the just noticeable difference (JND).
Just Noticeable Difference – The minimum amount of change that triggers detection (i.e., the difference that’s just noticeable)
If your price is $11.79, an increase to $14.99 will be more noticeable than a smaller increase to $12.99.
In theory, that concept is really intuitive. Obviously people will notice larger price increases.
In practice, however, that principle is very counter-intuitive. Since businesses are afraid of increasing their prices, they often save that tactic as a last resort. They wait until it’s absolutely necessary to do it.
However, if you reach that point, then you’ll usually be desperate for revenue. You won’t be able to increase your price by a tiny amount. You’ll need to increase it by a noticeable amount.
What should you do?
If you know that you’ll need to increase your price eventually, you should use more frequent (yet smaller) changes. Avoid waiting until the moment of desperation.
With more frequent price increases, you also avoid reinforcing a concrete reference price. If your price stays the same for years, then people will become accustomed to your price at that specific level. Once you change your price, people will be more likely to notice.
Tactic 29: Downsize a Feature Besides Price
You can also use the just noticeable difference for other aspects of your product.
Food marketers know that consumers are pretty familiar with prices, so they often avoid price increases by reducing the physical size of their products (e.g., potato chip bags, candy bars, etc.).
By reducing physical size by a small amount, food marketers lower their costs and increase their margin. More importantly, they increase their revenue without increasing their price (or alerting people to any negative changes).
If you decide to downsize your product, you should reduce the size of all three dimensions — height, width, and length — by an equal amount. Consumers are less likely to notice a change in all three dimensions (Chandon & Ordabayeva, 2009).
Downsizing a feature in your product can be risky. If consumers detect a mischievous intent, you can lose trust and lower sales.
To maximize your revenue, you need to maintain and cultivate customer loyalty. The next strategy will describe certain pricing strategies that could damage your reputation.
Avoid Harmful Pricing Strategies
Certain pricing strategies can leave a bad taste. This section will teach you which ones to avoid.
Tactic 30: Don’t Use Bait-and-Switch Pricing
When I was searching for apartments, I noticed an incredibly good deal on Craigslist. I visited the complex the following day, and I was blown away by the luxuriousness.
Unfortunately, my starry-eyed naiveté didn’t last long. The deal was too good to be true. The price from the listing was a blatant lie — the cheapest apartment in the entire complex was an additional $250/month. Yep, I was a victim of bait-and-switch pricing.
Bait-and-Switch Pricing – Marketers promote an extremely low priced product to pull people into a store. When people arrive at the store, the product is unavailable (e.g., sold out, nonexistent). Marketers then try to upsell those customers to a more expensive product.
Bait-and-switch pricing is not only unethical, it can also be illegal in some cases.
Even if it were legal, that deception triggers a negative response, which can often lead to lower sales (Ellison & Ellison, 2009).
Tactic 31: Be Cautious With Dynamic Pricing
Over the past decade, more businesses have been dynamically adjusting their prices for different customers. Based on a variety of factors, their algorithm spews out a price that should lead to the highest amount of revenue.
That trend is known as dynamic pricing. Even though it seems appealing, you should usually avoid it. While it can boost sales in the short-term, Dai (2010) found that it can lower sales in the long-term:
“Although dynamic pricing is attractive because it has the potential to maximize a seller’s profit, the results of this study indicate that charging different prices for the same product can trigger negative price fairness judgments which lead to negative behavioral intentions.” (pg. 86)
Is dynamic pricing always bad? Not necessarily. Dynamic pricing can be effective when adjustments are based on supply and demand (e.g., stadiums trying to fill remaining seats).
Dynamic pricing becomes harmful when adjustments are based on a customer’s willingness to pay. You should avoid charging different prices based on past behavior, demographics, or any other factor besides natural supply and demand.
- Five Dynamic Pricing Issues Retailers Should Consider — Patricio Robles
Update: New Tactics
Whenever I encounter a new pricing tactic, I add it to this section.
This list was last updated on December 14, 2015.
Tactic 32: Sort Prices From High to Low
You can influence customers to choose a more expensive option if you sort products by descending price (i.e., from high to low).
Suk, Lee, and Lichtenstein (2012) tested that claim in a bar. Over an 8-week span (and 1,195 beers), the researchers alternated the sequence of beer prices. And they were able to maximize revenue when they sorted beer prices from high to low.
Thanks to a simple change in sequencing, the bar owners now make an extra $0.24 (on average) for every beer sold.
But why does that happen? The researchers proposed two reasons.
Reason 1: Anchoring / Reference Prices
When consumers evaluate a list of products, they use the initial prices to generate their reference price.
If the initial prices are high, consumers will generate a higher reference price. When consumers use that reference price to evaluate the options later in the list, the new options will seem like a better deal (because those prices will be lower than the inflated reference price).
In addition, that higher reference price becomes a numerical anchor that pulls the eventual choice upward.
Reason 2: Loss Aversion
As humans, we focus on losses. Whenever we choose an option, we lose benefits from the options that we didn’t choose. And that hurts.
Depending on your pricing order (i.e., low to high vs. high to low), customers perceive different losses when they scan down the list of products.
When you sort products by ascending price (i.e., low to high), customers view each new product as a loss in price. With each new option, they’re gradually losing the ability to pay a lower price. Thus, they feel motivated to minimize that loss by choosing a lower priced product.
But here’s the flipside. When you sort products by descending price (i.e., high to low), customers view each new product as a loss in quality. Thus, they feel motivated to retain a higher quality (thus more expensive) product.
But here’s a caveat: those customers need to associate price with quality. Without that association, this effect diminishes.
Suk, Lee, and Lichtenstein (2012) also conducted some follow up studies (including a lab study with pens), and they found similar results. So the findings should generalize to other contexts (e.g., ecommerce products).
For example, based on results from numerous A/B tests, you might be able to increase revenue by arranging subscription or SaaS products from most expensive to least expensive.
Tactic 33: Expose Customers to Two Multiples of Your Price
This tactic is pretty neat. King and Janiszewski (2011) showed participants the following pizza advertisements:
The first two advertisements offered unlimited toppings — an economically better deal than the other two ads. However, people evaluated the other two ads more favorably.
Why did that happen? Because those ads incorporated multiples of the price:
At first glance, it seems absurd. Rest assured, there is a psychological reason behind that effect.
In our brain’s associative network, we store common arithmetical operations:
“Over time, children are drilled on simple problems so that an association develops between operands (e.g., 2 x 6) and results (e.g., 12). These stored associations are called “number facts” (Baroody 1985). Stored number facts enable a child, and later an adult, to respond effortlessly to simple arithmetic problems.” (King & Janiszewski 2011, pp. 328)
Because of those associations, exposure to two numbers (e.g., 2 and 6) increases processing fluency for the sum (e.g., 8) and product (e.g., 12).
When the pizza ads contained multiples of $24 (e.g., 3 and 8), participants could process the price of $24 more easily. The price simply felt right. They misattributed that ease and pleasantness with the attractiveness of the offer.
Use that insight for your own product. Wherever you display your price, incorporate multiples of that price:
- $15: 3-Day Sale for $5 Off
- $120: Get 4 Weekly 30-Minute Coaching Calls
- $500: Get 5 Bonus PDFs for Free ($100 Value)
One final caveat: include two — and only two — multiples. If your price is $12, a wide assortment of multiples (e.g., 2, 3, 4, and 6) will reduce fluency. To increase fluency of $12, use two multiples that result in the sum (e.g., 6 + 6) or product (e.g., 4 x 3).
Tactic 34: Offer Free Trials Toward the Start of the Month
Soster, Gershoff, and Bearden (2014) found evidence for a bottom dollar effect.
Bottom Dollar Effect – We feel the pain of paying in accordance with the depletion of our budget. We feel more pain when we have fewer funds available in our budget.
Suppose you have a monthly budget of $300. If you spend $10 on a movie ticket, you will generally feel more pain toward the end of the month — when your budget is nearing depletion.
The researchers conducted multiple studies and found that this effect influences willingness to pay and purchase satisfaction (Soster, Gershoff, & Bearden, 2014). You’re more likely to buy a product (and be satisfied with it) when you have more money left in your budget.
Consider that insight when planning the timing of promotions. Specifically, you could offer free trials toward the beginning of the month — when monthly budgets are higher:
“…if a marketer’s goal is to attract new customers or generate word of mouth, initial satisfaction with trial is important. So, promotions of these types might be better timed at the beginning of the month, or immediately after consumers receive tax refunds, in order to ensure that budgets are not approaching exhaustion at the time of purchase.” (Soster, Gershoff, & Bearden, 2014, pp. 672-673)
And that leads to the next tactic…
Tactic 35: Offer Discounts Toward the End of Month
Likewise, discounts and price promotions will be more effective toward the end of the month — when budgets are nearing exhaustion.
However, the previous two tactics assume that your customers are using monthly budgets. The researchers explain that you should always consider your target customers (and the types of budgets that they follow):
“…consumers may construct their mental budgets differently on the basis of individual circumstances (e.g., college administrators may budget for the academic year, assistant professors may budget for the semester, college students may budget for the week).” (Soster, Gershoff, & Bearden, 2014, pp. 673)
How do your customers budget their expenses? Plan your promotions accordingly.
Tactic 36: Tailor Prices Toward Names and Birthdays
This tactic might sound bizarre. But a surprising amount of research supports it.
Coulter and Grewal (2014) found that customers prefer prices that contain the same letters in their name or birthday:
“…consumers like prices (e.g., “fifty-five dollars”) that contain digits beginning with the same first letter (e.g., “F”) as their own name (e.g., “Fred,” “Mr. Frank”) more than prices that do not. Similarly, prices that contain cents digits (e.g., $49.15) that correspond to a consumer’s date of birth (e.g., April 15) also enhance pricing liking and purchase intentions.” (pp. 102)
The underlying principle involves implicit egotism (Pelham, Carvallo, & Jones, 2005). We all possess an innate sense of self-centeredness. We subconsciously gravitate toward things that resemble ourselves — including the letters in our name or the numbers in our birthday.
Some researchers suggest that we make important life decisions based on that principle. For example, people named Dennis are more likely to become dentists, and people named Louis are more likely to live in St. Louis (Pelham, Mirenberg, & Jones, 2002).
If you need to give someone a custom price quote, it might not hurt to slightly adjust the price to complement that customer’s name or birthday (perhaps after a quick glance at their Facebook page).
Tactic 37: Position Sale Prices to the Right of Original Prices
Oftentimes you’ll want to display a sale price next to an original price. If so, which placement is more effective:
- $25 $19
- $19 $25
The answer? The first placement: $25 $19
Biswas et al., (2013) conducted multiple studies and found that customers perceive a larger discount when the sale price is positioned to the right of the original price.
Why does that happen? Based on numerical cognition, we can subtract two numbers more easily when the smaller number is positioned on the right:
The researchers dubbed it the subtraction principle.
More importantly, they found that it alters the perception of discounts. When a sale price appears to the right of the original price, customers can calculate the discount more easily — enlarging its perceived magnitude.
But one caveat: the discount should be moderate in size. If your discount is either very low or very high, you might want to place the sale price on the left:
“…at both very low discount depths and exaggerated discount depths, retailers should use sale price display locations that hinder initiation of the subtraction task. This is because when consumers calculate these discount depths, they may either suspect the retailer of opportunistic motives (in the case of very low discounts) or question product quality (in the case of exaggerated discounts).” (Biswas et al., 2013, pp. 63)
Tactic 38: Position Prices to the Right of Large Quantities
Suppose that you’re selling a product bundle. Which order is better:
- $29 for 70 items
- 70 items for $29
Give up? Research shows that the second presentation is more effective (Bagchi & Davis, 2012).
However, there are two conditions.
1. The unit price calculation must be difficult
With a difficult calculation, customers use heuristics to make their purchase decision. Specifically, they use the first piece of information to guide their purchase decision:
- If the sequence begins with price, customers focus on cost.
- If the sequence begins with quantity, customers focus on benefits.
2. The item quantity must be larger than price
When the quantity is larger, an anchoring effect occurs. Customers anchor on the high quantity (e.g., 70), and they adjust insufficiently for price. Because the numerical price is lower than the numerical quantity, consumers falsely infer that the price is an attractive deal.
Obviously you should only use this pricing tactic if it makes sense for your product. As the researchers warn:
“…offering larger packages without understanding consumers’ perceptions can be a dangerous proposition, and bigger isn’t always better.” (Bagchi & Davis, 2012, pp. 71)
Tactic 39: Only Give Discounts on Low-Priced Products
Discounts can be harmful. When you stop offering a discount, you might cause people to (a) choose a competitor’s product or (b) wait for the next discount.
But when and why do those harmful effects occur? The answer lies in the positioning of your brand — whether it’s high quality or low quality (Wathieu, Muthukrishnan, & Bronnenberg, 2004).
In any marketplace, when retailers end discounts on premium products, demand shifts toward lower priced products. However, when retailers end discounts on lower priced products, the distribution of demand remains the same:
“…higher quality, higher regular price brands are less likely to be chosen after posting and retracting a price discount, whereas lower quality, lower regular price brands will continue to divert buyers away from higher quality brands after the discount is retracted with no detrimental impact on their own initial customer base.” (Wathieu, Muthukrishnan, & Bronnenberg, 2004, 4, pp. 652)
That effect occurs because of price saliency…
“A price discount posted by a brand not typically assumed by consumers to compete on the basis of price (i.e., a discounted higher quality, higher price brand) is particularly likely to be perceived as unusual and should cause price salience…causing an immediate increase in the amount of attention paid to price information and, ultimately, an increase in the weight accorded to the price attribute in subsequent choices.” (Wathieu, Muthukrishnan, & Bronnenberg, 2004, pp. 657)
In other words, when premium brands retract their discounts, customers will still be focusing on price. Thus, they’ll consider price more heavily in their purchase decision. Since the product is already priced high, the perceived cost will seem even larger (compared to a situation in which a discount wasn’t offered).
The takeaway? If you’re competing on price, feel free to offer discounts. However, if you’re competing on quality, you should avoid discounting so that you deemphasize price. Instead, remain focused on the attributes and quality of your product.
Tactic 40: End Discounts By Phasing Them Out Gradually
Marketers generally use two types of pricing strategies: hi-lo pricing and everyday low pricing (EDLP).
“…managers might regularly charge $999 for a television, put it on sale for $799 for a week, and then raise the price back to $999 after a week. Alternatively, some retail managers choose to employ an EDLP tactic and price the television at $919 every week.” (Tsiros & Hardesty, 2010, pp. 60)
Tsiros and Hardesty (2010) found benefits for a new strategy: steadily decreasing discounts (SDD). Instead of retracting a discount entirely, gradually return the price to the same base level:
“Our research supports the use of an SDD tactic, in which the television described is discounted to $799, and then instead of returning it to its original price all at once, the retailer offers at least one additional sale, such as $899.” (Tsiros & Hardesty, 2010, pp. 60)
The researchers conducted a few studies and found positive outcomes on multiple metrics. An SDD strategy led to…
- Higher revenue (Study 1)
- Higher willingness-to-pay (Study 2)
- Greater likelihood of visiting a store (Study 2)
The researchers even conducted a field study. Over a 30-week span, they alternated between three strategies for a $24.95 wine bottle stopper at a kitchen appliance store.
In the experiments, SDD was effective because consumers developed an expectation of higher future prices, which increased their anticipated regret:
“…the “steadily decreasing” part of the discount is fundamental in providing consumers with a signal for higher future prices, which encourages them to buy now.” (Tsiros & Hardesty, 2010, pp. 59)
The researchers found no detrimental effects on store or brand image.
Tactic 41: Offer Discounts With Low Right Digits
If your regular price and sale price share the same left digit, your discount will seem larger if the right digits are small (less than 5).
Based on numerical cognition, we compare numbers in relative terms. All else being equal, a $10 discount will be more appealing for a $50 item (compared to a $500 item) even though the absolute discount is the same (Tversky & Kahneman, 1981).
A similar process occurs when you compare small numbers (e.g., 0-4) with larger numbers (e.g., 6-10):
“The Weber-Fechner Law is based on people’s tendency to compare disparate digits (and, hence, price reductions) in relative terms. For example, because 3 is 50% greater than 2, and 8 is 14% greater than 7, the absolute difference between 2 and 3 is perceived to be greater than that between 7 and 8, even though their absolute differences are identical.” (Coulter & Coulter, 2007, pp. 163)
Those relative judgments are the answer.
In the section on charm pricing, you learned that people evaluate prices by encoding the digits from left to right. If a sale price shares the same left digit with the regular price, then people compare the remaining digits using relative comparisons.
Thus, the perceived magnitude will seem larger for small numbers, compared to larger numbers.
Coulter and Coulter (2007) conducted a few experiments, and they found support for that claim. Even when the absolute discounts were larger, people still perceived them to be smaller in magnitude. Here’s what they found.
Assuming that the left digit remains the same in the original and sale price, a discount will seem larger when the right digits are smaller.
Tactic 42: Show Product Then Price (for Luxury Items)
What should you display first: your product or your price?
To answer that question, Karmarkar, Shiv, and Knutson (2015) gave participants $40 in shopping money. Then, the researchers used fMRI to analyze their brains while they shopped for online products.
Turns out, the first exposure — price vs. product — influenced the criteria that people used when deciding whether to buy.
When products were displayed first, participants based their purchase decision on the product qualities.
When prices were displayed first, participants based their purchase decision on the economic value.
If you sell luxury products, you want people to base their decision on your product qualities. You don’t want them to consider the economic value. Thus, for luxury products, show the product first. THEN show the price.
Roger Dooley gave the example of Tiffany’s jewelry. On Tiffany’s website, they emphasize the jewelry before revealing the price.
Even when they reveal the price, they visually deemphasize it — as if it’s unimportant and negligible.
The opposite is true for utilitarian products…
Tactic 43: Show Price Then Product (for Utilitarian Items)
The researchers from the previous study conducted a follow-up study.
They showed participants discounted utilitarian products (e.g., a pack of AA batteries, USB drive, flashlight). Consistent with the original finding, participants were more likely to buy those products if they encountered the price first. With that initial exposure, people were more likely to appreciate the economic value of the purchase.
Tactic 44: Display Red Prices to Men
Puccinelli et al. (2013) found that men are more likely to buy products when the prices are displayed in red.
“Men seem to process the ads less in-depth and use price color as a visual heuristic to judge perceived savings offered by the store.” (Puccinelli et al., 2013, pp. 121)
Because men use heuristic processing to evaluate ads, when they encounter a red price, they’re more likely to base their decision around the red price — and the red price alone:
“…multiple stimuli present at the same time in the visual field compete for neural representation and when people give attention to any one target it leaves less available for others…when price information in retail ads is emphasized (e.g., by making it red), compared to other product attributes, the ability for people to process the other attributes of the ad (e.g., photo quality of products) is diminished.” (Puccinelli et al., 2013, pp. 121)
That red price became a focal point of attention – and thus the only information that men used to evaluate their purchase decision. More importantly, because men associate red prices with perceived savings, they relied more heavily on that belief.
Those findings also align with my research on color. In my color article, I explain how red increases arousal (which then increases our reliance on heuristic processing).
Tactic 45: Emphasize the Inherent Costs of Your Product
Customers care about the perceived magnitude of your price (i.e., whether it’s high or low). But they also care about the perceived fairness of your price.
Even if your price is low, customers could still perceive it to be unfair. Likewise, customers could still perceive high prices to be fair — depending on a few factors.
One important factor is your pricing method. Consider two types of pricing:
- Cost-Based Pricing: Prices based on cost factors (e.g., costs of materials)
- Market-Based Pricing: Prices based on supply and demand factors (e.g., competition)
Customers perceive cost-based pricing to be fairer than market-based pricing (Xia, Monroe, & Cox, 2004). That’s why you can increase the perceived fairness of your price by emphasizing the inherent costs of your product:
“…consumers have little knowledge of a seller’s actual costs and profit margins…Therefore, sellers’ making the relevant cost and quality information transparent helps.” (Xia, Monroe, & Cox, 2004, pp. 9).
In your product descriptions, emphasize your product’s “top-of-the-line raw material” or any other cost-based input. That cost-related information will trigger a more empathetic perception of your price.
Tactic 46: Add Slight Price Differences to Similar Products
You might be familiar with the paradox of choice. When more options are present, people are often less likely to choose an option.
Once people choose an option, they lose the benefits offered in the other options. Because of loss aversion, they postpone their decision — especially when more options are present (because they’d be losing more benefits).
That insight led to a similar finding: people are more likely to choose an option if the potential options are similar (Sagi & Friedland, 2007). If options are similar, then people will receive similar benefits with any option. So loss aversion is lower.
But let’s question that insight.
In one study, Kim, Novemskey, and Dhar (2012) asked two groups of participants if they wanted to purchase a pack of gum. Each group had two options:
- Group 1: Exposed to the same price (e.g., 63 cents)
- Group 2: Exposed to a price difference (62 cents vs. 64 cents)
Despite a trivial difference, the results were extremely different. People were much more likely to choose a pack of gum when a price difference existed.
So why did that happen? Shouldn’t the first group be more likely to choose an option — since the gum was priced similarly?
When the packs of gum shared the same price, customers perceived the gum to be less similar. Paradoxically, adding a small price difference increased the perceived similarity.
Weird, right? I’ll explain.
When two products share the same price, people can’t immediately distinguish those products. As a result, they seek out differentiating characteristics. Thus, the product differences become more salient.
However, when you add a slight price difference, you reduce that need to search for differences. Customers can differentiate the products based on price. Because customers focus less attention on product differences, the two products maintain a higher degree of similarity. And that similarity makes people more likely to choose a product.
Did you skip immediately to this conclusion? No worries. I’m guessing you want the main takeaways without trudging through the entire article. If so, then you’d love the 15 min video summary. You can watch it here for free.
Did you trudge through the entire article? Then you’re a brave soul, my friend. And you deserve a huge pat on the back. I spent a ton of time researching and writing, so I hope you found the insights helpful.
Before parting ways, let’s look at a few final topics.
Should You A/B Test Your Prices?
My recommendations are often bizarre. I get that. That’s why I always include academic citations.
That’s also why I recommend A/B testing my suggestions. Theory is great. However, theory and practice don’t always align. If you were to A/B test images from my article on stock photos, not every test would be successful.
That means you should test pricing, right? Well…here’s the thing. Pricing is a different animal. If customers see two different images, no problem. If customers see two different prices, uh-oh. You’ve got a problem.
It’ll always depend on the situation. But here’s my usual recommendation: you shouldn’t A/B test your prices.
You could test different features of the price (e.g., color, size, location). However, you should avoid running A/B or multivariate tests on the actual price itself.
If you’re gung-ho about testing your price, then you should run a more controlled experiment. Send customers a survey (ideally, with a conjoint analysis segment). That way, you’re not altering the price for real customers in real-time.
- Should You Test Prices Online? — Linda Bustos
One Final Pricing Tactic
Instead of reiterating all of the pricing strategies, I want to end with one final tactic — the most important tactic in this list.
If you still have trouble justifying your price to customers — even after implementing the strategies in this article — then you might not have a pricing problem. You might have a problem communicating the value of your product.
Instead of focusing on a new price, try adjusting your value proposition to better convey the value of your product or service.
- What makes your product special?
- How is it better than other products?
- Why would customers enjoy it?
Oftentimes, you can solve your pricing problem by communicating the value more effectively.
With that tactic — and all of the other psychological pricing strategies in this article — you should be able to justify your price much more easily.