It’s so much more than a simple calculation—pricing, especially the practice of psychological pricing, can have a real impact on the purchasing decisions of your customers.
written by Alexa Collins at Shopify
Pricing can be used as a marketing strategy or as a way to increase perceptions of quality. Sometimes it’s baked directly into a brand’s ethos. It’s so much more than a simple calculation—pricing, especially the practice of psychological pricing, can have a real impact on the purchasing decisions of your customers.
We’ll explore what psychological pricing is, how it functions as a marketing strategy and ways you can implement pricing strategies into your business.
What is psychological pricing?
Psychological pricing is a strategy that uses pricing to influence a customer’s spending or shopping habits to make more or higher value sales.
The goal is to meet a customer’s psychological need for something, whether that’s saving money, investing in the highest quality item, or getting a “good deal.”
Why psychological pricing is effective
Psychological pricing plays on the fact that consumers rarely know what something should cost. Most often the way we’re able to determine if something is a good deal is by getting it for a lower price than normally listed or by comparing it to similar products in the same category.
Marketers and salespeople knew too well that what a customer was willing to pay was changeable and that there was money to be made from that fact
In his book Priceless: The Myth of Fair Value, William Poundstone writes, “Marketers had long been doing experiments in the psychology of prices. In the heyday of mail order, it was common to print up multiple versions of a catalog or flyer in order to test the effect of pricing strategies. These findings must have dispelled any illusions about the fixity of prices. Marketers and salespeople knew too well that what a customer was willing to pay was changeable and that there was money to be made from that fact.”
Psychological pricing also relies on simple changes that trick the brain. One of the most well known strategies is called charm pricing, where businesses knock a rounded dollar figure down by one cent. The brain reads $12.99 as $12, not $13.
Consumers want to know that they’re getting the best of something, whether it’s the best price point, the best quality, or the best value. Psychological pricing leans into that idea, using price as a way to send the right signals to make customers feel successful.
6 types of psychological pricing
If using a .99 in the list price of the items in your store doesn’t feel like the right move for your brand, there are several other strategies you can use. The different types of psychological pricing include:
- Charm pricing and odd-even pricing
- Slashing the MSRP
- Artificial time constraints
- Price appearance
- Flat-rate bias
1. Charm pricing and odd-even pricing💰
Charm pricing, the most heavily taught method of psychological pricing, removes one cent from the rounded dollar price of an item to trick the brain into thinking it costs less. So $4 becomes $3.99, and the customer sees and remembers the 3, not the 4. Furniture company Belleze uses this tactic for the product listings across its website: all items end in .99.
A similar practice is odd-even pricing. Studies have shown that customers purchase items that end in an odd number more often than they purchase items with an even number. Interestingly, a study on psychological pricing in online food retail found that 70% of the prices on Amazon Fresh end in the number 9. And treats or special buys were more likely to be priced ending in 9 than necessary grocery staples like fruits or veggies.
The trend holds in other areas of ecommerce too. For example, Tahoe Kitchen Co. ends prices for its cookware in 9 and prices for its Wolfe knife collection in 5.
2. Slashing the MSRP 💸
Manufacturers usually set a manufacturer’s suggested retail price, or MSRP, for items that will be sold across many different ecommerce or retail stores. This is the price you’ll often see on a standard price tag for a book or car. Some businesses may choose to sell right at the MSRP, but others show the MSRP next to the lower price they’re selling the item for. This is a tactic commonly used in outlet stores. A shop might run a 40%-off the MSRP sale and offer an extra 30% off certain items, so a purse listed at $298 MSRP ends up costing $54 instead.
The business uses the MSRP as an anchor to make customers feel like they’ve actually saved money on an item. For ecommerce shops, the MSRP might be crossed out with the new price next to it, a similar signal of savings.
Learn more: Competitive Pricing 101: Avoid Price Wars, Save Profit Margins
3. Artificial time constraints⌚️
One day only! Only a few hours left! Early bird sale! Businesses use artificial time constraints to create a sense of urgency. Single day events or sales that end within a few hours encourage customers to make purchases quickly—before the sale ends or before their favorites sell out.
While the messaging on a business’ website might say that the sale is ending, the truth is that it’ll reset in a few hours and keep running. The trick is to make customers believe the ending is impending so they make a purchase.
4. Innumeracy 🔢
If you know the old saying, “six of one, half a dozen of the other,” innumeracy is similar. Innumeracy strategies take simple math and choose the option that’s more appealing to a customer. For example, a box of penne pasta might be on sale for 50% off if you buy two. Next to it, a different brand’s box of penne is buy one, get one free.
The buy one, get one free option actually sells better, even though the math is exactly the same. Customers feel like it’s a better deal.
5. Price appearance 🏷
Did you know that the way a price appears can influence the way your customers feel about it? Ditching the cents makes people feel like they’re spending less money. Indeed, $12 feels cheaper than $12.00 because the number itself isn’t as long.
Additionally, according to an article in The New York Times, even dollar signs can trigger purchasers into feeling the “pain of paying.” The best route? Remove the dollar sign and cents all together.
6. Flat rate bias ✉️
Flat rates make things easier, it’s true. You might consider going on vacation and look at staying at an all-inclusive resort versus one that doesn’t offer a package. Piecing together the vacation may be cheaper in the long run, but the flat rate is easier to predict and feels more stable than an a la carte option, even if it’s more expensive. Studies cited in William Poundstone’s Priceless found this to be true: “Consumers like flat rates, even when they cost more.”
Psychological pricing and marketing
While psychological pricing can be a lucrative way to determine how much the items you sell should cost, it can also be part of your brand’s wider marketing strategy.
For example, Belleze advertises itself as an “affordable modern furniture” business. Its mission centers around providing stylish, high-quality items that don’t come with an outrageous price tag. Pricing is a core part of the Belleze brand, and its messaging signals to customers that they’re getting well made furniture for a good deal. If you’re considering starting a business centered around providing affordable items, consider making that part of your branding strategy.
Next, we’ll explore three psychological pricing methods that act more as marketing strategies: how high price points suggest high quality, pricing transparency, and pay-over-time options.
Higher price points act as quality signals
The way a business prices its products can significantly impact a customer’s perception of quality.
Higher prices give the impression that an item is worth more, even if it’s made by the same manufacturer or the same materials. In an episode of the early 2000s Disney Channel television show Kim Possible, Kim falls for a pair of boots significantly more expensive than the same pair at another shop. Club Banana, owned by the same proprietor as Smarty Mart, marked up and renamed Smarty Mart’s black pair as onyx to better fit in with other designer items at a similar price point.
This is a popular pricing strategy that businesses use to signal that its items are luxury or designer pieces. Customers see an expensive price tag and assume the items are of the highest quality possible. Even if that is true, it doesn’t mean that the cost reflects what the items are actually worth.
For example, CO Collections offers beautiful clothes and accessories at luxury prices. Featuring cashmere coats and sweaters, bags made of Italian lambskin leather, and linen jumpsuits, the brand’s main line is “an exploration of dramatic proportion and rich textures with a focus on emotion and seasonality.” While the $1,095 price of a cable knit cashmere sweater might discourage some buyers, CO uses price as a strategy to attract those looking for clothes focused on luxury and great design.
Conversely, cheaper items signal that they’re lower in quality—even if they’re not. In Priceless, Poundstone mentions that the Hollywood Bowl concert venue in Los Angeles sells tickets to its summer concerts for a dollar. Even though the seats come with a better view of the city, prime sunset viewing, and acoustics the same as more expensive seats below, they’re often empty because the low price tag makes people believe the seats are terrible.
💡 Tip: Whether you opt for higher prices or want to go the affordable route, it’s important to remember that your prices impact the way your customers perceive the quality of your products, even if you mark them up with a traditional pricing formula.
Pricing transparency improves customer trust
Another available route is the pricing transparency option, where you list out exactly what each element of your product costs (raw materials, labor, shipping) and how much you mark up those products and why. This is a great approach if your marketing strategy is to sell designer quality items for more affordable prices.
Pay over time options help ease sticker shock
Giving customers the opportunity to pay for their purchase over time via companies like Affirm, Klarna, and Shop Pay makes it easier for them to afford—and rationalize—larger purchases. Advertising that you partner with a service that allows customers to finance their purchases for free can help remove the barrier to buy. Suddenly, a $1,000 item becomes $250 every two weeks, which is a lot more palatable.
Testing and iterating psychological pricing strategies
The amount that customers are willing to pay for different products is never set in stone. And your prices can’t be either. That’s why iterating and testing different prices over time is incredibly important. You might find that seasonality impacts your store in a real way, or that customers are more likely to spend more in the summer months versus the fall.
Running pricing tests, getting customer feedback, examining abandoned cart data, and looking at the overall numbers for your store can help you better understand what prices are most successful.
Psychological Pricing FAQ
What is psychological pricing and give example?
Psychological pricing is a pricing strategy that takes advantage of the way people perceive prices. This strategy involves setting prices just below a price point that contains a “9,” such as $9.99 or $19.99, in order to make a product appear cheaper and more attractive to buyers. For example, a company may price a product at $29.99 instead of $30 to make it appear more affordable and thus more appealing to buyers.
Where is psychological pricing used?
Psychological pricing is used in a wide variety of industries, including retail, restaurants, travel, and entertainment. It is used to influence consumer behavior by creating perceived value or discounts. For example, a company may price a product at $9.99 instead of $10 in order to make it appear cheaper. Similarly, restaurants may offer a “two for one” deal to encourage customers to purchase more than one item.
Why is psychological pricing good?
Psychological pricing is a good strategy because it can help increase sales by appealing to customers’ emotions and making them more likely to purchase a product. It can also help to create a perception of value, as customers are more likely to view a product as a better deal when it has a lower price. Finally, it can help to increase profits by allowing a business to charge more than the actual price of the product or service.
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