Businesses often debate whether or not using psychological pricing strategies results in increased sales. What exactly is this, and does it work? Businesses use psychological pricing to make their wares seem more affordable than they actually are.
Some products are priced at $99 instead of $10, or the words “sale” or “discount” are used in the description. However, there is some evidence that suggests that using psychological pricing can make customers feel like they are getting a good deal, which could lead to increased sales.
A closer look at psychological pricing is in order, so let’s do that now.
Definition of Psychological Pricing
You see the words “BOGO 50%!” in the window of your favourite store as you walk by. It’s only today! Did you then visit our store to purchase an item you didn’t require? If you answered yes, then you’re one of the millions of people who have fallen prey to psychological pricing. To be sure, that’s fine. Psychological pricing is used in a variety of contexts, including by retailers, restaurants, and businesses. Is this also helpful for SaaS businesses, or is it just a good way to get customers to make a quick purchase? Here we’ll discuss what psychological pricing is, its advantages and disadvantages, some possible approaches, and whether or not you should use it in your B2B company.
It’s a method of pricing goods and services that appeals to consumers’ irrational or unconscious desires in an effort to increase sales. For businesses, this means working together across departments (such as sales, marketing, and customer success) to take advantage of shifting market conditions and provide customers with more valuable services.
Psychological pricing is also known as “setting the price lower,” though this is not the case. Customers are less likely to negotiate down from $100 to $99 because they perceive a psychological discount of $1, and this is where you make your profit. Retailers can also employ the psychological pricing strategy of offering discounts to stimulate product sales.
Do you find this intriguing? There is, however, a downside to every advantage. Let’s examine the benefits and drawbacks of psychological pricing:
There are benefits and drawbacks to using psychological pricing.
Similar to any other aspect of life, psychological pricing has both advantages and disadvantages. While useful in many contexts, there are those where it could do more harm than good. Now I will briefly discuss some benefits and drawbacks that you should think about when evaluating your psychological pricing strategies. Okay, let’s get the good ones out of the way first.
- First, any large advertisement will increase consumer interest in your product by increasing product recognition. An eye-catching red sign describing a sale will draw customers’ attention in a brick-and-mortar store. Even if no one buys, at least your product will be noticed.
- For one-time sales—especially during peak seasons, also known as Festive seasons or holidays—psychological discounts can provide a high return on investment. High returns are a possible outcome of the kind of behaviour that draws a large crowd.
- Third, most psychological pricing strategies make choice relatively easy for the customer. When consumers are offered sales and promotions, they tend to think less about making a long-term financial commitment. This is beneficial for shops that make money off of individual transactions.
- Depending on the approach taken, psychological pricing can instill a sense of urgency. Clients need information so they don’t miss out on a bargain. Adding this will also hasten the rise of your already impressive ROI (RoI).
- First, some customers may recognise that they are being used when businesses employ psychological pricing strategies. Though some may be able to spot a tactic and accept it as necessary, others may view it as beneath the dignity of doing business itself.
- The use of psychological pricing strategies is not a sustainable pricing model. It’s easy to change over, but B2B businesses should instead plan more carefully and strategically for the future. Companies that provide software as a service (SaaS) rely heavily on recurring revenue, which in turn generates a great deal of trust from their clientele. The use of deceptive pricing practises can damage their reputation.
- There is always the chance of misinterpreting value when using psychological pricing strategies. Customers receive additional value from you at the price you charge. The way your customers interpret your prices will determine the tone of this type of communication. Keeping prices low to stimulate rapid trade may lead to complacency on the part of buyers who do not give much thought to the quality of the goods they purchase and who come to expect the same low prices on a consistent basis.
Strategy/Plan Popular in the Market That Uses Psychology to Set Prices
Every sale, ad, and purchase follows a tried-and-true formula. Here are the top four choices:
Price Inflating Extravaganza
All retail prices with a 9 at the end are referred to by this fancier, more formal moniker. Price points that end in “9” have been shown to increase sales by teams at both the Massachusetts Institute of Technology and the University of Chicago. This is based on the scientific observation that most readers process text from left to right. As a result, the first thing you’ll notice about a price of $1.99 is that it’s relatively close to $1.
The opposite effect from using charm pricing is possible as well. Prices that end in “9” are considered to be a steal. That’s why I say it’s a fantastic bargain. However, prices that end in “0” are sometimes indicative of higher quality or prestigious awards. If you want people to think highly of your product, offering it at a discount is a bad strategy.
Temporal Constraints Inflicted Artificially
It read, “BOGO! ONE DAY ONLY!” Everyone here has seen this commercial set to at least a few songs. In order to make customers feel as though they need to act quickly, stores will put a fictitious deadline on sales. Time limits are implemented in stores because they encourage customers to make purchases. Customers are made anxious by the mental strategy. They risk missing out if they do not act immediately. However, the truth is that there will always be another sale.
Myriad is missing
The majority of customers will opt for the “buy one, get one half off” promotion rather than the “buy two, get two half off” promotion, even if the latter offers a lower total cost. This situation is indicative of the many occurrences where the client lacks an understanding of elementary mathematical concepts.
Consumers are holding out for a better deal, according to research by Akshay Rao of the University of Minnesota’s Carlson School of Management. We don’t understand math, so we’d rather save money by buying more stuff.
Double discounts are another hidden psychological tactic used by many. First, a percentage-off discount is applied. As an illustration, you could advertise a 25% price cut on a product. Thereafter, the business will provide a further 20% off. Customers may interpret this as a 45% discount when in fact it is only 20% off the already reduced price.
The human mind is affected by the way a rate appears to the naked eye. The perception of cost is skewed such that longer fees appear more expensive than shorter fees of the same total amount. Longer fees require more time to analyse, which leads people to inadvertently link time and money.
You’ve probably noticed that many restaurant menus use a compact form of pricing that omits the digit 0 and the dollar sign ($). Omitting the “$” sign will result in a shorter price being displayed that has no direct correlation to the money you have on hand.
A Few Cases of Psychologically-Driven Pricing
You’ve probably already been exposed to psychological pricing strategies, whether you know it or not. Here are some real-world applications of some of the strategies we just discussed.
Discounts Following the Holidays
The after-Christmas and Diwali sales are awesome because you can buy whatever you want at a ridiculously low price (you attracted because of Mental or you say psychological pricing).
Many businesses these days use a wide variety of strategies. Recent advertisements feature an abundance of mathematical notation and formulas. The point I’m making is that I can’t afford to waste time mulling things over. The company believes that by bombarding customers with so many figures, they will stop thinking about how realistic those percentages actually are.
Sales at the End of the Year (EotY)
In recent times, many psychological prizes have also been featured in End-of-the-Year (EotY) sales advertisements. For instance, “$ 89” is the one number in this ad that really stands out to me. This is an excellent example of a competitive price. If the advertisement simply says “90,” consumers will perceive a savings of nearly $10, as “90” is close to $100.
The Best Deals Available Only Here
There are also ads like this “exclusive transaction” that take advantage of the limited time frame. The amount of time left to complete the advertised transaction is typically displayed in a banner at the top of the page in the form of a stopwatch. There’s a countdown clock with the words “The offer ends in specific Hours: Mins: Secs.” Customers may become anxious if their watches start to run. They can feel that time is running out and urge you to make a purchase right away.
Food and Drink: The Menus
The “Menu” case study is an ideal illustration of the usefulness of price signage. The menus at most modern HoReCas (Hotels, Restaurants, and Cafes) are minimalistic and straightforward. Every menu item has a price tag next to its name. There are no zeros or dollars signs in italics, but the price is not cheap. A dish may cost $14.00, but the menu may only list $14 as the price. As a bonus, the shorter length makes the number 14 appear more affordable than the equivalent dollar amount.
Do You Think Psychological Pricing Methods Work?
Should you use what I call “psychological pricing?” You will find my “Personal Opinion” below. But in my opinion, the pricing strategies employed by B2B SaaS providers are far more successful. The customer-business partnership is at the heart of the recurring revenue model. Value-based pricing is the best way to keep customers happy and retain revenue.
Businesses with a short-term focus would do better with psychological pricing. Some stores rely heavily on one-time sales, doing whatever it takes to make a quick sale and employ psychological pricing strategies that consistently yield positive results.
In the case of business-to-business transactions, however, I believe that value addition is preferable to discounting. If you can’t afford to reduce prices, maybe you could increase your distribution. In doing so, you can boost your brand’s worth and reputation without risking its already stellar reputation.
A Pricing Structure Based on Psychological Factors
Most people who consider setting a price take into account both the product’s or service’s direct costs and the desired profit margin. Yet, psychological pricing is an additional consideration that is frequently disregarded. Psychological pricing refers to the practise of charging premium prices based not on the actual cost of goods or services but on more subjective factors.
According to the psychological pricing theory, prices have an impact on consumers’ perceptions of a product’s worth. Profits and sales can be increased with the help of this pricing strategy by altering customers’ perceptions of the value of a product. Although the success of using psychological pricing is contested, many companies employ this strategy anyway.
In conclusion, consumers are affected by psychological pricing. It’s worth noting that not all customers are impacted in the same way, and that not all products can benefit from this pricing strategy. Prior to implementing a psychological pricing strategy, marketers should give serious thought to the demographics of their target market. Using this method, you can sway consumer decisions. However, there is scant evidence to support the claim that this strategy actually increases sales, despite the fact that many marketers believe it does. To gauge the success of psychological pricing, more study is required.
The researchers believe their findings have practical significance for companies employing psychological pricing strategies. Dr. Vanessa Patrick, a co-author on the study, said in a statement, “Our findings suggest that marketers should be cautious in selecting the special offers they use and how these are framed to consumers.” Retailers should exercise caution before implementing strategies like buy-one-get-one-free discounts because they may result in a net loss of revenue.