As a business, how do you set your prices? Probably high enough that you can pay your overheads, and low enough that you are competitive, right? What about setting your prices at the point that customers are willing to pay – which could be higher than the prices you have set right now. But how do you know? Are you potentially losing out on a significant amount of revenue?
The beauty of price setting is that it’s flexible. If you choose a price and your products don’t sell, try adjusting the price and see if it makes a difference. Testing different pricing strategies can give you more insights into what works and what doesn’t – but be careful with changing prices too much and too often, as it will confuse customers and can dilute your brand positioning.
There is a science to setting the right price and it takes human psychology into account. That’s right – there is a science to setting prices and it largely comes from perception of value. In this article we dive a little deeper into how tactics for setting the right prices according to human psychology, including how you can increase the perceived value of goods and services, generating greater demand and allowing for higher prices to be charged.
- Don’t price too low
There’s always a temptation to price yourself low so that you beat the competition. However, being priced too low and your product could be perceived ‘cheap’ and therefore sub-par and poor quality. With the internet in the palm of our hands when we shop, it’s easier than ever before to comparison shop, and see how that item compares to the same item elsewhere, or a similar item, By setting prices lower than comparable, or even identical items, it reduced the perceived value of that item. Consumers tend to convince themselves that a higher priced item must be better quality, therefore they are getting better value.
- Higher price can signify higher value and therefore higher happiness from the buyer
Does higher price mean more value? Not necessarily. A 2008 study by Goldstein and team asked people to try different wines and determine which they enjoyed the most. When the price of the wine was unknown, the less expensive wine came out as the most enjoyable. When the price of the wine was disclosed before the tasting, it was reversed, and the higher priced wine was seen as a more enjoyable experience. Price became a perception of value, and the perceived higher value increased the enjoyment of the product.
- Remember that price is always relative
If you make $100/hour, a $20 product is relatively inexpensive – you earn $20 in 12 minutes. However, a $20 product to someone making minimum wage is a significantly larger purchase, and might require more consideration. You won’t find much in the way of high-end, luxury goods at Walmart because its target audience is price-conscious shoppers. At the same time, Walmart is synonymous with value rather than “cheap” like a dollar store.
Does your product save people time? Saving half an hour of a busy person’s time might be well-worth it, but to someone with a lot of time on their hands, there is less value in forking out money for a product that saves time. Price is always relative.
Ultimately, it comes down to a greater understanding of your target market and what they are willing to pay. The more you learn about your audience, the more you can determine if they will be more or less sensitive to pricing. There’s no right answers when it comes to pricing based on the demographics of your target market – it all depends on what they are willing to spend, needing an innate understanding of their motivators.
- Present the value first, cost later
Promote the value-proposition first, before going in with the cost. The cost then becomes relative to the value portrayed. The danger of putting the cost first is that a) it might make people not even read the value benefit and b) if they do read the value benefit, they are reading it relative to the price. By taking price out of the equation initially it leaves only the value and the benefit to be of consideration. Price them becomes relative to that value.
- Set ‘Charm prices’
Charm prices are those that end in 9 or 99. We read numbers from left to right, so when we see a number of $5.99, our brain interprets it as $5, rather than $6 (which, now that the Canadian penny has been removed from circulation, it actually is!). Why does it work? Our brain reads the first number and makes a determination of value before we’ve even read the rest of the number.
But it doesn’t only apply to 0.99c numbers. William Poundstone wrote a book that talked about a study comparing women’s clothing priced at $35 versus $39 – it found that the prices ending in nine outperformed the lower prices by an average of 24%.
- Use rounded numbers to convey prestige
There’s a time and place for rounded numbers however. ‘Prestige pricing’ as it’s sometimes referred to involves making all numerical values into rounded figures, i.e., $100 instead of $99.99. According to the science, rounded numbers are more fluently processed and encourage reliance on consumers’ feelings (the sense that this is a prestigious, valuable item), compared to non-rounded numbers which are less fluently processed, and encourage reliance on cognition (how we interpret and recognize numbers).
- Use ‘Price Anchoring’
Price anchoring refers to the tendency to heavily rely on the first piece of information offered when making decisions. You’ll see this type of pricing structure, from Wix, used all over the web:
Wix makes the $14/month plan seem like a bargain next to the other monthly subscriptions. In addition, it’s highlighted so it stands out among the other plans. This is the plan they want you to buy, and it’s priced in a way that makes it look attractive.
Other variations of price anchoring seemingly throw in something extra for nothing, such as:
- One shirt for $10
- Three Shirts for $20
If one is $10 then three for $20 is a much better deal. In reality, last week, the $10 shirt might have only been $7, but the perception now is the the 3 for $20 is better. Buying 2 shirts would be senseless so it makes people buy 3, when they may have only wanted one. There’s a sense of value associated with the purchase. However, the first shirt price of $10 is needed to anchor a price in the customers mind. If the offer was simply 3 shirts for $20, where is the value? By seeing $10 for 1, $20 for 3 seems like an exceptional deal.
- Reduced Analysis Paralysis
It’s been proven that too much choice when making decisions can lead to analysis paralysis where in the end, no choice is made at all. It’s good to provide customers with a choice, but keep it to a minimum (see example above about price anchoring – in most cases, there are usually only a handful of plans to choose from, making the ‘right’ choice easier to make).
- Remove dollar signs
Have you ever been to a fancy restaurant and seen food and drinks written without $ symbols? A study found that diners spend significantly less when the dollar sign was included or was written out as ‘dollars’. Apparently writing $39 as 39 takes focus away from the price, and stops the brain thinking about it in terms of money spent.
- Describe your product in a way that emphasizes value
When it comes to labeling products, referencing services, think about what elements you can focus on that makes it sounds more valuable. For example, you’ll see signs for “gluten-free” “100% organic”, “locally made” all over the place. Why? Because people place a higher value on these types of items and would not be surprised if the item was therefore slightly more expensive.
Pricing Psychology in Action!
Papa John’s, the #1 pizza brand in the USA, opened their first Canadian store in Calgary in 2000. Papa John’s partnered with GetintheLoop to bring 17 locations in British Columbia on board to sell more pizza particularly during off peak times. Papa John’s started with attractive offers including two large four topping pizzas for $26.
While this was a great offer, the team quickly learned through testing that 40% off, the same value as the original deal, drove more orders. Customers were more receptive to a great deal on any pizza order with a percentage off rather than the same great deal on a set order. The rule of thumb is give % discounts when the original value is under $100 and give absolute numbers when the original number of over $100. For example, when an item is $50, 20% off is better than $10 off. However, for a $150 item, $15 off works better than 10%. The reason? You’ll always be choosing the number that’s higher (e.g. $15 rather than 10%, but 20% rather than $10), and this makes the perceived value higher.
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