Everything you need to know about effective pricing

pricing2
4 Shares 4 Flares ×

To the average person, pricing may seem fairly no-nonsense. Sellers determine a price based on production costs and rational buyers then decide whether or not they can afford it.

In fact, far more psychology lies behind the rules of effective pricing than most entrepreneurs realize.

Why?

Because price is central to positing the perceived value of both a product as well as an overall brand. In a world of varying products that do similar things with only slight differentiations, price often serves as a cue for rapidly assessing worth. This perceived value is what customers use to decide whether the benefits are worth the cost of purchase.

Luckily, researchers have discovered a number of pricing secrets that powerfully affect the likelihood of making a sale.

The Dollar Symbol

Did you know that price tags are better off without the dollar sign?

It may seem a little counter-intuitive at first, but think about this …

Our brains are wired to automatically think negatively about loss. And no where is this true than with pricing. Psychologists call this hard-wired response the “pain of paying.” People subconsciously anticipate having to pay for something and act more conservatively as a result. This results in either less spending less or no spending.

Interestingly, a number prefaced by a currency sign, like $42.00, is much more likely to set off the “pain of paying” than seeing it as a regular number, simply 42, or even written out: forty two.

So leave the dollar sign off the next price tags you create, online or off. This can apply to both B2C and B2B products, no matter the vertical.

Tiered Pricing

Tiered pricing is a very popular strategy with online businesses, and with good reason. When you give someone two or three choices, the most and least expensive options act as anchors to give the perception that the customer will get a better deal going with either the middle option or the higher priced option.

For example, let’s consider an experiment using beer presented in the book Priceless by William Poundstone. In the first experiment, when consumers were asked to choose between two beers, one priced at $1.80 and the other at $2.50, 80 percent of consumers went with the higher-priced option.

In the second experiment, customers were then presented with an even higher-priced, third option for $3.40. The majority of buyers still picked the middle option for $2.50. However, this time 10 percent chose the highest price. As you can see, the lower and upper prices made the middle price seem more attractive.

But what’s really interesting is that by offering a third option, they appealed to people who prefer the “best.”

Dynamic Pricing

Large e-commerce firms tend to be affected by pricing more than most.

Prices are not only determined by cost and profit margins, they must also be continuously monitored based on competitors.

Dynamic pricing takes the guesswork out of pricing by setting dynamic price ranges, which adjust automatically based on specified factors.

For instance, Amazon reportedly changes its prices every 10 minutes based on the data it collects in real time. Such a focus on active data can help feed a B2B company with demographic data on potential buyers, and can accurately reflect supply and demand for every offering.

As Econsultancy found, businesses who have flexible pricing were able to increase profits by an average of 25 percent.

Discount Pricing

In an effort to be transparent with pricing, back in 2007 Macy’s tried to cut back on coupons. The result? Their consumers stopped shopping.

What has your B2B firm done recently to offer discounts or flash sales?

While you might be on a mission to be as authentic and transparent as possible, there is no denying the psychological effect that discounts have on the mind of consumers.

The only question to ask is a tactical one. How do you present discounts: in percentage off or dollars off?

Here’s a little trick from branding creative director Ash Ambirge to help you decide:

If the price of a product is less than $100 prior to discounting, use the percentage-off tactic. If the product is over $100, use dollars. For example, if you were selling a $50 subscription fee to your social media management service, 20% off sounds a lot better than $10. But had you been selling your $500 software bundle, $100 off is going to sound more appealing than 20%.

Value-Added Pricing

Sometimes two products can provide the same core benefits. And yet, consumers are often willing to pay far more for one than the other.

The clothing industry is a perfect example.

Sure, higher priced clothing provide a certain utility and longevity, but only up to a point. In reality, most expensive clothing is bought simply because of the brand … and the value attached to it.

The value you add to products to attract a premium price can be implied, as with brands, or explicit, by adding tangible benefits such as bundled offers or additional services.

Customers are willing to go the extra mile and pay more for services they truly appreciate. For instance, customers will go to higher priced salons that offer them a glass of wine to drink while getting a pedicure simply because they want comfort. And others will go to more expensive clothing stores where everything in their size is in one place simply because they want convenience.

Neither of these added benefits costs much to implement, but they attract a higher price because of the perceived value of the offer.

And nowadays, value-added brands are not limited to the rich or elite. The average consumer will willingly trade down and be thrifty in their everyday purchases to afford the luxury items they really love.

The Power of “9”

We can’t talk about the power of pricing without discussing the power of 9.

For example, a study of a women’s clothing retailers conducted by a Rutger Business School professor found that items ending with .99 far outsold those ended with .00.

Another study of grocery stores by the University of Chicago found that a drop in price from 89 to 71 cents improved average sales by 65 percent. But when the price was dropped by a mere 2 additional pennies, from 71 to 69 cents, sales jumped by 222 percent!

The previous example may be more attributable to what is called the left-digit effect, which is the brain’s tendency to pay more attention to the leftmost digits. Since we read from left to right, these are the first digits we see. So $4.99 is more closely associated with $4 than $5.

If your ideal consumers are looking for a bargain, then using 9 in your price is the way to go.

Whole Numbers

But what if your ideal customers are looking for premium-quality goods instead of a thrifty deal?

In that case, you’ll want to stick to whole numbers. That’s because research shows that people tend to associate whole number prices with a higher quality than those ending in cents.

Look at how social listening tool BuzzSumo lists its pricing. All whole numbers, no decimal places. Knowing this tip, you’ll find yourself spotting many pricing models using whole numbers for more high-end services, compared to decimal-related fees for items that might not have such a high perceived value.

Price matters

As you can probably tell, there are powerful psychological principles behind choosing the right price. Though pricing can be complex, always remember to focus on your customers and the perceived value price creates.

4 Shares Twitter 0 Facebook 3 Google+ 0 LinkedIn 1 Email -- 4 Flares ×
The following two tabs change content below.
Dennis Mitzner

Dennis Mitzner

Dennis is a Tel Aviv-based journalist covering startups and tech trends, with a focus on Israel and Scandinavia. He also works with startups to devise content and marketing strategies. Follow him on Twitter: @DennisMitzner