As an entrepreneur, you’re busy.
There are plenty of aspects of running a business constantly tugging away at your time and focus. It’s easy to overlook something as seemingly simple as pricing strategy.
But career marketers know… price and pricing strategy can have a huge effect on sales. Luckily, there’s a wide variety of pricing strategies available for small businesses to optimize the revenue coming in.
One of the most effective is psychological pricing. This looks at how businesses can tap into key findings in psychology to help persuade potential customers to buy goods… or dissuade them from walking away.
These are proven to be effective not only by science but also by real-world examples. Today we’ll look at five of the most effective pricing strategies, and discuss how you can use them in your business.
List Higher Prices First
It may seem illogical, but it’s actually been shown that consumers are more willing to purchase higher-priced options if the prices are listed in descending order.
In a 2012 paper by Suk, Lee, and Lichtenstein, the authors alternated the sequence of beer prices in a bar over an 8-week period. They found that they could maximize revenue when they sorted the prices going from high to low.
With prices ranging from $4 - $10, they found that when the beers were listed from low to high, the average sale came in at $5.78. However, when they adjusted the menu from high to low, the average sale went up to $6.02.
CrazyEgg uses this strategy effectively by listing their higher prices first:
For your business, you can adjust the presentation of your prices to see how this will impact your sales. If you’re selling online segment your visitors and experiment with different prices.
Differentiate Similar Products with Small Price Changes
There are a few popular strategies revolving around the effect of choice on consumers. One popular one is the ‘paradox of choice’ (more options make consumers less willing to buy) and the opposite effect where similar products increase people’s willingness to buy.
However, a newer pricing strategy revolves around differentiating two products by a small price discrepancy so that users are more likely to purchase one of them.
One study discovered that consumers were more likely to purchase an item (in this case, a pack of gum) if they had small price differences between the different versions (62 cents compared to 64 cents). They were less likely to purchase the gum if the two versions had the same price — 63 cents.
According to the study, only 46% of the people chose a pack of gum when both offerings were 63 cents. However, when the gum had different prices, 77% made a purchase.
The reasoning behind this is that people need differences in order to comfortably evaluate two options. If the products have the same price, consumers differentiate by their qualities.
However, when the prices are tweaked slightly, consumers are more focused on the similarities of the offerings. This similarity between the options makes people more likely to purchase one of the products.
Use a Decoy Offering
People generally have a hard time determining the value of a product in isolation. We need something to reference to help us decide how good an offering is.
You can create that reference by adding a decoy offering to help boost the appeal of your product.
Imagine you have two versions of the same product, A and B, with A being lower and B higher priced. A majority of people will simply choose version A.
You then introduce a decoy by adding option C, which is a worse offering than B because of its features and price. Option B now looks much more attractive in comparison to C, and sales of B will increase.
This is what Dan Ariely discovered in his book Predictably Irrational. He noticed that the Economist had three offerings for its magazine:
a web only version for $59
a print only version for $125
a web and print version for $125
Obviously, the print only option is a horrible choice, as you can get the web and print for the same price. Who would choose it?
However, Ariely noticed that its inclusion had a purpose: to cause people to view the web and print option much more favorably in comparison.
The Economist’s introduction of the decoy offering paid off. While no one chose the print only offering, 16% chose the web only (down from 68%) and an astonishing 84% chose web and print (up from 32%).
In your business offerings, especially for services or digital goods, you can introduce a decoy offering to help provide a reference point. This can encourage consumers to view your higher price offering more favorably in comparison and help to increase your sales.
Make Your Bundled Products Fun, Not Utilitarian
One of the popular pricing strategies used in many different businesses is to bundle products together. This works because it stops people from being able to assign a specific value to any item within the bundle, making it seem like the savings are bigger.
While this is effective, we can take it a step further.
When you bundle your products, don’t focus on practical, utilitarian functions. Instead, highlight the more hedonic features those based on pleasure and fun.
According to Khan and Dhar’s [2010 research](https://archive.ama.org/archive/AboutAMA/Pages/AMA Publications/AMA Journals/Journal of Marketing Research/TOCs/SUM_2010.6/price_framing_effects.aspx), when you present a bundle as providing discounts on hedonic functions, it can be a greater incentive for the customer to buy than when you present it for utilitarian needs.
The authors believe that by presenting the offer as a discount on a hedonic item, there is a justification for the customer to reduce the guilt normally associated with buying things for pleasure. This makes the customer more likely to buy the product.
For utilitarian items, there is no guilt associated with the purchase and it doesn’t increase sales to emphasize the utilitarian features.
In one experiment, the authors presented consumers with a bundled lamp and blender and presented hedonic and utilitarian options separately.
They found that the consumers were more likely to purchase the bundle when the blender was described for hedonic purposes (making exotic cocktails) than for utilitarian purposes (such as for making healthy shakes).
This can be done creatively with many bundled products. For example, if you sell lipstick along with a makeup kit, you can present it as helping you to have a fun night out, rather than something more utilitarian like getting ready for work.
Retailers can sell gift cards in a hedonic way: “Buy a $50 gift card for someone special and get a $25 gift card for yourself at half price.” Here, buying a gift for someone else doesn’t require justification and isn’t hedonic, while indulging yourself is.
Use Rounded Prices for Luxury Goods
This psychological pricing strategy is based on how fluently your potential customers are viewing your prices. The more fluent a price seems, the easier it is for people to process the information.
When it comes to prices, rounded prices, such as $30, are processed fluently, meaning customers are able to process the prices more quickly and focus on the quality of the product. This leads them to view it more subjectively and evaluate it emotionally.
Non-rounded prices on the other hand, such as $28.79, are processed disjointedly. The consumer takes longer to process the information and therefore analyzes the price more closely. With this closer scrutiny, the product is evaluated on a more practical or rational level.
According to Wadhwa and Zhang’s 2015 study, when consumers view rounded prices, they are encouraged to make purchases based on their perception that the price “just feels right.” This seems to fit with luxury goods which are based more on a gut feeling.
For rational purchases, non-rounded figures are most suitable.
Overall, luxury goods tend to be emotional while utilitarian goods are more rational. In the study, the authors presented consumers with similar champagnes priced at $40 and $39.71.
They discovered that people were more willing to buy the rounded-figure champagne at $40 rather than the one priced at $39.71.
This psychological pricing strategy can be used effectively by businesses selling luxury or premium goods. This includes if you sell handmade jewelry, create fine leather goods, provide premium dating services, or do anything with higher quality and higher prices.
The Best Psychological Pricing Strategies for Your Business
If there’s one caveat to these pricing strategies, it’s this: Every business is different. The perfect pricing strategy will require you to test, measure, and adjust until both you and your customers are happy with the value you’re offering.
All of the strategies are relatively easy to apply they require only small price tweaks or adjustments to descriptions. And by finding one that works, you’ll be able to help boost your sales and increase your business’s growth.