Psychological Pricing

What is Psychological Pricing?

Psychological pricing is a pricing strategy that involves setting prices for products or services based on psychological effects and perceptions rather than logical or rational factors. The goal is to influence customers’ buying habits to increase the sales volume or dollar value.

Examples of psychological pricing include:

• A product priced at $9.99 instead of $10 to make it seem less expensive than it actually is
• A discounted price of $15.99 right next to the original price of $19.99 to emphasize the magnitude of the discount
• Selling an athlete-branded shoe for 50% more than the exact same shoe in regular colorways
• Pricing a product at a base-10 number like $1,000 or $5,000 to make it seem even more high-end and exclusive
• Displaying a price as $10 instead of $10.00 to make the number seem smaller
• Running a single-day sales event to create urgency

Companies use different psychological pricing techniques depending on whether they want customers to feel like they’re getting a good deal, the highest-quality item, or cost savings. It accounts for how people see prices and make buying decisions based on those perceptions.

Synonyms

• Psychological pricing strategy
• Psychological pricing theory

How Psychological Pricing Works

Psychological pricing takes advantage of human psychology and behavior to attract customers and increase sales. It plays on the idea that we aren’t rational decision-makers — emotions, perceptions, and social norms influence our buying decisions.

At the most basic level, customers want one of three things:

• The best price point
• The best value
• The best quality

The thing is, consumers rarely know what something should cost. Most of the time, they’re able to discern between a good deal and a bad one based on a sale price next to the normal listing price or by comparing multiple products in the same category.

That’s why consumer behavior is changeable. By triggering their emotions and perception towards your product or service, you’re “helping” them conclude whether your product is a good deal for them or not. When your prices lead them to that decision, they ultimately feel successful in their purchase.

12 Types of Psychological Pricing

1. Charm Pricing

Charm pricing is perhaps the most common psychological pricing method. It’s also known as “odd-number pricing” or “left-digit pricing.” The idea is to price a product just below a round number, such as $9.99 or $12.95.

Charm pricing leverages “left digit bias” — a phenomenon where people emphasize the leftmost digit of a number (in this case, a product’s price). and round down to the closest whole number. Because of this bias, people tend to overestimate the difference between $2.99 and $4.00 compared to $3.00 and $4.01.

In other words, people see $2.99 as closer to $2 than $3, which can make your product seem cheaper in the split second it takes someone to make a buying decision.

2. Prestige Pricing

Prestige pricing is the opposite of charm pricing — it involves setting higher prices compared to the competition to create a perception of exclusivity and high quality. As a result, customers associate your product with luxury and status.

This pricing strategy works particularly well for companies selling high-end, exclusive, or technologically advanced goods. For example, Nike might release a 1,000-pair limited edition Jordan colorway for $500, even though the materials and labor costs are the same as a mass-produced $200 pair.

They’ll place it next to the standard-priced colorways to emphasize its exclusivity. The higher price tag reminds buyers the product they’re looking at is more special than the ones around it, even though they serve the same functional purpose and have the same quality.

Luxury brands will often price their products using a base-10 number to emphasize the high-end perception further. For example, a Chanel bag would cost $5,000 instead of $4,999.

3. Bundle Pricing

Bundle pricing is when you sell multiple products together as a package for a discounted price. You’ll display the regular price for each product as well as the bundle price.

By offering a discount when people purchase multiple items, you’re incentivizing them to spend more than they initially would have, or you’re giving them a good deal on two complimentary products they were going to buy anyway.

Bundling serves two primary benefits:

• Increasing sales volume and average order value
• Taking sales from your competitors

Let’s say you own a mall kiosk selling smartphones. You also sell complimentary products like phone cases and chargers.

Millions of stores sell chargers and phone cases, but you obviously want people to buy those things from you rather than someone else. By advertising the price as a bundle, you’re making the smartphone seem like a better investment from your store and you’re preventing buyers from buying the exact same products from one of your competitors.

4. Price Lining

Price lining is a strategy where a vendor sells multiple versions of the same product at varying prices. It’s essentially tiered pricing, and it’s common in SaaS pricing.

The idea behind this pricing strategy is that not everyone will buy the cheapest product because they might associate it with being cheap, lacking in functionality, or unable to suit their needs. By offering two or three products at varying prices, you can address different customer segments and their willingness to pay for your product.

5. Reference Pricing

If you just display the markdown price, your customers don’t have the context they need to deduce if it’s a good deal or not. Reference pricing shows them your new price is actually lower than what the product was originally worth.

Let’s say you’re selling an info product worth $1,000 (though the same concept works for retail prices). You’ve decided to offer it to the first 500 buyers at half the price.

On your landing page, your target audience won’t know automatically that you’re selling it for $1,000 if they only see “$500” on the screen. They’ll think to themselves, “Why would I spend $500 on this if I don’t even know what it’s worth?”

But by putting down the previous price, you’re giving them context. People will see, “Oh wow, they’re selling something for only half its original value.” When your customers feel like they are getting a deal or saving money, they’ll be more likely to make a purchase.

6. Multiple Unit Pricing

Multiple unit pricing — also known as a “volume discount” or “price break” — is when you offer more value to your customers by selling them multiple units of the same product at a lower price.

It’s similar to bundle pricing, but instead of offering different products as a package, you’re selling multiples of the same product together at a discounted markdown. Usually, the volume discount is also displayed as a per-unit price comparison or a percentage savings to give your customers more context.

Multiple unit pricing works best on items that are frequently repurchased, like household supplies, toiletries, or groceries. By giving customers a small incentive to buy more than they immediately need, you’re increasing the chances that they’ll be loyal to your brand in the long run.

7. Pay What You Want (PWYW) Pricing

The “pay what you want” strategy is one of the most interesting examples of consumer psychology because it’s a purely value-based pricing model. With PWYW, customers can choose to pay as much or as little for your product as they want, or nothing at all.

The concept is that people will feel guilty (or immoral) if they don’t give something in exchange for the value received. Or, they’ll love the product so much that they want to support it.

There are a few reasons PWYW can work:

• It goes against the grain, so it’s memorable.
• It gives customers a feeling of control.
• You don’t isolate any of your potential customers based on willingness or ability to pay.
• Your buyers aren’t worried about whether your product is worth it or not (e.g., “buyer’s remorse”).
• You’ll get more people to try your product.
• Buyers might unknowingly overvalue your product.

This pricing strategy is popular in creative and content-based industries like music and publishing. Wikipedia, for example, is completely reader-supported, as are many independent musicians, authors, and news publishers who request optional payments in exchange for their work.

Radiohead famously made over $6 million with a PWYW pricing model when they released their album “In Rainbows” and let fans choose how much they wanted to pay for it. Some ecommerce brands have also had success with this by using it as penetration pricing.

8. Decoy Pricing

Decoy pricing, also known as the “asymmetric dominance effect” or the “decoy effect,” is a sneaky (but effective) tactic to influence consumer behavior through pricing.

The concept of decoy pricing is simple: add another product to your offering that is slightly less appealing than your target product but priced slightly higher or lower. This makes your target product seem more attractive and valuable in comparison.

Movie theater popcorn is the perfect example. Let’s say you’re looking at two prices:

• Small: $5
• Large: $10

Most people will look at these and think, “Well, I’m not going to get the small because it’s too small. But I don’t want to spend much more for the large.”

But what if there was a third option?

• Small: $5
• Medium: $9
• Large: $10

Before looking at prices, you might think, “I only want a medium-sized popcorn, so I’ll go ahead and get that one.”

But the medium isn’t really a better deal than the large. And if you compare it to the small, it’s not much more expensive for a lot more popcorn. So why wouldn’t someone just pay for the large?

The medium-sized popcorn is the “decoy” product. The large size is asymmetrically more attractive because of the small price difference compared to the huge value-add.

The secret: The theater never wanted to sell you the medium, they just needed a way to get you to buy the large.

9. Price Anchoring

Price anchoring is a form of decoy pricing, but the goal is to draw attention to the lower-cost option. It’s common with B2B SaaS companies, which often highlight their “Pro” subscription tier in the middle even though they know many buyers can get by without all its features.

By drawing attention to the higher-cost item first, they allow buyers to disqualify themselves from the more expensive option and settle on a package that still offers most of the value they’re looking for.

10. Subscription or Membership Pricing

In the subscription economy, consumers want to have a relationship with your brand, rather than just buying individual products or services. And they don’t want to maintain the product themselves. They only want uninterrupted access.

The psychology behind subscription-based pricing is that it taps into a consumer’s desire for convenience and consistency. By offering a service on a recurring basis, you are providing them with one less thing to worry about.

Examples of subscription pricing include:

• SaaS
• Streaming platforms
• Product boxes
• Meal delivery services

The “set it and forget it” nature of subscriptions makes it easier for consumers to justify the cost. Instead of paying a large sum upfront, they can spread out the cost over time.

Subscription and membership pricing can also create a sense of exclusivity for your brand, as only paying members have access to certain products or benefits. This can increase customer loyalty and retention.

11. Buy One Get One Free (BOGO) Pricing

“Buy One Get One Free” — or BOGO — pricing is a popular tactic retailers use to increase their AOV and drive customer demand. The psychology behind it is simple: customers feel like they are getting a good deal when they get something for free. In fact, people would rather get something for free than purchase two items for 50% off.

Some reasons BOGO pricing can be effective include:

• Encourages impulse buying
• Creates urgency (limited time offer)
• Can increase the perceived value of the product

There are variations of this pricing strategy, such as “buy one get one X% off” or “buy one, get another item for free.” All of them work on the principle that customers prefer to have more products for less money.

12. Artificial Time Constraints

Artificial time constraints are a scarcity marketing tactic where sellers create urgency by limiting the availability of a product or service.

The psychology behind this tactic is rooted in FOMO (fear of missing out). By setting an artificial deadline, customers feel compelled to make a purchase before they miss out on the opportunity.

Examples of artificial time constraints in pricing include:

• Limited time sales
• Flash deals
• Countdown timers on product pages

This strategy can also increase the perceived value of a product, as customers may think that it must be in high demand if there is a limited time to purchase it.

Another benefit of this tactic is that it can help move inventory quickly and bring in more revenue for the seller.

Advantages and Disadvantages of Psychological Pricing

Pros of Psychological Pricing

• All eyes on you. Any time you promote your product at a favorable price to customers, it’ll turn a lot of heads. Even if you don’t convert many buyers, at least you got their attention on what you’re selling.
• Faster decision-making process. Most buyers have a hard time making purchase decisions. By using psychological pricing, you help them decide faster.
• Higher return on sales. When you can sell high volumes of your product in a short time frame, you’re making more money with less overhead. Especially during peak volume times, this is a way to maximize revenue and profitability.
• Reduced inventory cost. At some point, holding onto product for too long gets expensive. By reducing your sellout time, you’re saving yourself from massive costs later on.

Cons of Psychological Pricing

• Deceptive. As mentioned before, some customers may feel tricked by psychological pricing tactics. This can lead to a loss of trust and damage your brand’s reputation.
• Can devalue your product. Constantly promoting something or reducing the price will call into question whether it was worth the higher value in the first place.
• Doesn’t not work for all products. Recurring revenue businesses struggle to retain customers for a long time on the same product. This can be problematic when offering subscriptions or memberships at a discounted price.
• Difficult to implement. Psychological pricing requires in-depth knowledge of consumer psychology, pricing strategies, and market trends.

How to Determine the Right Pricing Strategies for Your Business Model

1. Determine price range based on product positioning.

Pricing and product differentiation go hand-in-hand. Before you can think about pricing psychology, you need to set a price that reflects your product’s value and your target market’s willingness to buy. Ideally, your product price should drive away buyers who wouldn’t be a good fit and draw in those who would.

For example, Gucci doesn’t care if some people think a $500 cotton t-shirt is a waste of money. The brand only cares about those who would buy it because it’s $500. They’ve positioned themselves as a luxury brand, so they only want to attract luxury buyers.

Prices should also reflect the quality and value of your product or service. Part of why Gucci prices its clothing so high is because of the materials and craftsmanship that goes into them.

It’s worth mentioning you should have your product-market fit down before considering psychological pricing tactics. Selling a high-cost good to customers who value quality over cheap sale prices might get you sales from those buyers right away, but you’ll only retain them if you can deliver on the things they actually expect from your product (in this case, quality).

Otherwise, you’re just being deceptive. And that won’t fare well for you long-term.

2. Consider price sensitivity.

You’ll never sell a $135.00 product for $134.99 if your customers’ maximum is $60.

It’s true that customers often don’t know what something should cost, but price sensitivity and price elasticity determine whether or not they will actually buy it.

According to both concepts, the price your customers are willing to pay is changeable, but only up to a certain amount. Psychological pricing is first about working within that threshold, then using simple tricks to make sure they’re either motivated to buy or scared they’ll miss out if they don’t.

3. Weigh all the other factors.

Besides sensitivity, consider the following:

• Branding
• Cost structure
• Consumer demand
• Competition
• Perceived value
• Profitability goals

4. Communicate your price clearly.

Whatever pricing strategy you choose for your business, it’s important to communicate it clearly and consistently. Confusing or constantly changing prices can lead to customer frustration and mistrust.

This is especially true when using psychological pricing tactics, as they can be seen as deceptive if not executed transparently.

Pricing Technology Trends

Configure, Price, Quote (CPQ)

CPQ software software uses advanced algorithms to calculate product pricing based on specific needs, preferences, and budget. Businesses use it to implement their pricing strategy and adapt it in response to market conditions or customer demands in real-time.

Pricing Engines

A pricing engine is a software tool that automates price calculations based on predefined rules and algorithms. It uses AI to come up with optimized prices based on demand elasticity and company profit margins.

Dynamic Pricing

Dynamic pricing is a strategy of setting flexible prices for products or services based on real-time market conditions. It relies on data and algorithms to determine the optimal price for each customer, taking into account factors such as demand, time of day, seasonality, and more.

Subscription Billing

As consumers move away from traditional one-time purchases and towards subscription-based services, businesses are leveraging subscription billing software to manage and automate recurring payments. This not only simplifies the billing process for both parties, but also allows for strategic pricing models such as tiered subscriptions or usage-based pricing.

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