Which price is better:
So WHAT factors do you need to consider? Which prices should you use in certain scenarios? This video explains the answer.
When you’re choosing your price, you need to choose the ideal TYPE of price. One common distinction is whether it should be rounded, such as $38, or precise, such as $38.26.
And even WITHIN those categories, there are more distinctions. If you choose a rounded price, should you add zeroes after the decimal — like $38.00? And what about charm prices —like $38.99 or $38.95? What type of pricing should you use?
That’s what I’ll be explaining in this video. You’ll learn the various types of prices to choose from, WHEN you should use them, and WHY that’s the case.
What are the Four Types of Prices?
So let’s first look at TYPES of prices. I categorized prices into four distinct types: ROUNDED, a price with no units after the decimal, ZEROES, a price with zeroes after the decimal, PRECISE, a price with very specific values after the decimal, and CHARM, a price with .99 or .95 after the decimal. So which of those prices should you use and why?
Well, let’s first simplify things. I couldn’t find any good reason why you’d ever want to use a price with zeroes after it. The only valid reason I can think of is if you’re displaying prices in a column and those other prices include units after the decimal. In that case, you might want to add zeroes for design purposes, so that you adhere to a vertical alignment. But even then, it’s really not a STRONG reason. So let’s get rid of this ZEROES category. If your price doesn’t have any values after the decimal, then use a ROUNDED price.
But that leads to another question. Should you keep your price rounded or should you ADD values after the decimal — whether the values are precise or whether they constitute a charm price, like .99 or .95?
Well, the key factor that you need to consider is the desired amount of mental processing. Rounded prices can be processed quickly, whereas precise prices take more effort and cognitive resources. And charm prices fall somewhere in the middle.
Now, for some products — like emotional purchases — you DON’T want to extract mental processing. Because emotional purchases are harder to rationalize, you want to prevent customers from using logic and rationale in their purchase decision. If they exert more cognitive effort, that’s incongruent with the motivation behind that purchase. So they might start to question it. And that’s why rounded prices work better for emotional purchases. Those prices will just “feel right”.
And the reverse is also true. With RATIONAL purchases, cognitive effort is a GOOD thing. So precise prices usually work better. When people are entering the purchase decision for a rational product, they know that they need to spend time contemplating that purchase. So when you extract cognitive effort through a precise price, people misattribute that mental effort to the amount of time that they spent thinking about the purchase. Even though that cognitive effort is irrelevant to the inherent value of the product, it doesn’t matter. People will be more likely to feel that they’ve done their homework and that they carefully thought about the purchase. So they’ll feel more justified in moving forward with the purchase.
How to Choose the Right Type of Price
So now that you know the main factor that you should consider, how do you know which type of price to use? Well I put together this chart to help guide your decision.
If your price is under ten dollars, you can use charm pricing for any product — whether it’s rational or emotional. Even though charm prices might be a little more cognitively demanding for an emotional purchase, the benefits outweigh that drawback in this price range. This is a price range where a one-dollar difference in price can be extremely influential.
And notice that I said one dollar difference. If you go from seven dollars to $6.99, wouldn’t that be a one cent different? Technically, yes. But that’s not how customers perceive it. When they read a price from left to right, their brain starts encoding the value of that price before they reach the end of it. In this case, that six will become an anchor. And their brain will encode a magnitude that’s near the value of six. So thanks to numerical cognition, the perceived difference is actually closer to one dollar than it is to one cent. So that’s why it’s okay to use charm pricing within the ten dollar range, even if your product is emotional…because it’s so impactful. And realistically, it should also extend a little above that price range too.
Now, I don’t think there’s a clear definition of charm pricing. So when I refer to charm pricing, I’m referring to a price where the units after the decimal are 99 or 95. I wouldn’t consider a price like $49 to be a charm price, even though that price will still produce the same benefit. In fact, the higher the price, the higher the perceived difference. With seven and $6.99, the perceived difference is about one dollar. However, with $49 and fifty, the perceived difference is about ten dollars — thanks to the same underlying mechanism. Here, people encode a value near the forty dollar range, instead of the fifty dollar range. So getting back to my original point, even though forty nine would be taking a charm pricing approach, I’m still classifying that price as a rounded price — because there are no units after the decimal.
Now…going back to the original chart, charm prices can be effective for emotional purchases. However, the higher your price gets, the more and more it’ll be in your favor to use a rounded price for emotional purchases.
For rational purchases, since cognitive effort is a good thing, and since charm prices are more precise and require a little more cognitive resources, I extended charm pricing up to the one hundred dollar range. However, once your price surpasses one hundred dollars, charm pricing becomes counterproductive — for two reasons.
First, charm pricing often has an inexpensive connotation. So if you’re using it for a more expensive product, it can sometimes convey a “cheap” connotation.
But second, and more importantly, there are now three digits in the base price, so you need to pay extra attention to the overall unit length. In my article and in another video, I explain the relationship between visual size and numerical magnitude. People perceive prices to be larger when those prices are displayed in a larger font size.
Based on that underlying research and the mechanism behind it, I’d also venture a guess that a similar effect occurs for unit length. There’s a good chance that people equate numerical magnitude with unit length. So the more units that appear in your price, the higher the magnitude it appears to be. So even if you’re adding cents to the end, it doesn’t matter. That mere length will artificially inflate the perceived magnitude of that price. So you should only increase that unit length if you have a strong reason to do so. Charm pricing is a strong reason when the price is low. But the higher your price, the more it’ll be in your favor to use a rounded price. You can still follow a charm pricing approach — like the forty nine dollar price that we just saw. But your price should be rounded so that you remove the units after the decimal.
Now that’s for emotional purchases. If your product is rational, and your price is over one hundred dollars, then you should add very precise units after the decimal — because you do have a strong reason to add them. You want people to exert more cognitive effort — because that’s congruent with their motivation. So people will feel intuitively better about purchasing the product.
On top of that, a precise price will also seem more fair. Now, you should always base your price around the value that your product provides, instead of your costs. That said, customers usually perceive cost-based pricing to be more justifiable. So that’s a benefit of precise pricing. Although you can still base your price around value, that precision subtly implies that your price wasn’t plucked from thin air — and that it was a very careful and deliberate choice, based around costs.
And it’s similar for emotional purchases. Although you still want a rounded price, you also want to avoid pricing at definitive THRESHOLDS — like $50, $100, $5,000, etc. It’s much better to take a charm pricing approach and price at $9, $49, $99, etc.
So whenever you’re debating whether your price should be rounded or precise, just refer to this chart to help guide your decision. And if you want a deeper look at the research behind these principles— or if you want to lean more pricing techniques— you can click below to download my full PDF on the psychology of pricing.