pricing strategies header

Have you ever been in a store and decided not to buy something you thought was too expensive, only to end up spending money on a similar item located nearby that cost just a little less? Hey, you tell yourself, it looks like a bargain compared to that expensive item.

The reason we purchase something doesn’t always depend on whether the price is actually reasonable. Instead, it’s perception, location, perceived value and a host of other things that play into the decision.

All of us make these decisions. All of us have cognitive bias.

Our cognitive bias can be manipulated rather easily.            Tweet this

Marketers quickly learn how to incorporate consumer cognitive bias into pricing strategies. This is essentially creating an “ideal reality” in consumers’ minds. Below are eight psychological pricing strategies, along with real-world examples to help you get an idea of how to use them in your own marketing efforts. By using and testing different pricing psychology strategies you’ll quickly see higher returns; especially for stagnant products.

1. Anchor Pricing

What it means: We create focal points, such as an initial price for an item. The initial price functions as the primary reference point when new information is introduced, such as a lower or higher price.

There are many ways to do this. You might simply price one at $100 and the other at $79. You can also use a more sophisticated strategy by purposefully inflating the price of a similar item in order to get the other one to move off the shelves.

Real-world example: Williams Sonoma did a great job of exploiting the anchor price principle when it rolled out its very first bread machines two decades ago. The initial model sold very sluggishly at a cost of $275. So the company introduced a second, “deluxe” model – with double the price tag – placed it next to the first, and declared the original to be “50 percent off.” Suddenly sales turned brisk; the stores couldn’t stock enough bread machines.

Online, anchor pricing is an extremely versatile strategy.
We can change prices at any point. We can shower visitors in benefits and features for our anchor price, creating a reality where this price is very ideal. But let’s say our visitors start navigating away from the page…

BOOM!

A pop-up box appears, introducing an even cheaper price for the same product deal. This is, of course, a “limited time” offer so we must act quickly. The famous ShamWOW does this precise anchor tactic on their website. First we see the anchor:

anchor 1

Then we try to leave the page and POW!

anchor 2

These offers look like they were designed in 1995 but they’re making killer conversions. Our reality has been shattered by this newly introduced offer. Our decision to purchase is heavily influenced by referencing the more expensive, initial price.

2. Fragmented Pricing

What it means: You’ve undoubtedly seen commercials for products that scream about the retail price being “only” five payments of $19.99. Why break it down like that, rather than saying the actual price of the item, which would be $99.95? Again, we’re creating “ideal realities” in the consumers’ mind. We’re playing with heuristics.

We’re aware the actual retail price is not $19.99, but seeing small payments – fragments – instills a thought where the total price is more palatable. We can imagine shelling out less than $20 per month much easier than paying an  entire $100 in one lump sum.

Real-world example: P90X, an intense workout DVD training program, is perhaps the best-known product right now selling on an installment basis. Though it’s available in any Walmart, much of its business comes through infomercials, where the incredibly fit trainer and host Tony Horton promises to get you buff by buying the DVD in “low monthly installments.”

fragment pricing

We have to perform math – albeit basic math – to figure out the total cost ($140 including shipping). Instead, our heuristics are trained on $39.95 and nothing more.

Fragmented pricing is available for most big purchases and is often necessary, such as monthly payments:

fragment pricing mustang

We’re also using the anchor – the net price – as a way to create a super ideal reality. Fragmented pricing makes this possible. Going from $33,000 to $400 is literally the difference between “no, I cannot afford this” and “yes, I can afford this if it’s monthly.”

3. Reference Pricing

What it means: Companies are constantly selling against the competition. When you can claim that your price is cheaper than someone else’s, consumers immediately associate your option preferable. You’re on top. Because of this, many stores have taken to comparing pricing between themselves and their main competitor in the aisles. Reference pricing is a child of anchor pricing that uses competitors as an unattractive option.

This is also why many big box stores will price match their competitors if the same product is being offered at a cheaper price.

 The emotion of discovering something valuable and sweet is what makes reference pricing effective. 
Reference pricing is especially effective at discount stores, where shoppers are already on the lookout for bargains. When a dress price tag says it would have cost $170 at a top retailer but is available for only $85 at TJ Maxx, the effect is to make the shopper think they’ve discovered a tremendous bargain – even if that’s not actually the case.

Real-world example: Nordstrom Rack, the discount arm of the department store, uses reference pricing very efficiently.

shoe reference price

Every piece of clothing has a reference price attached, saying how much the merchandise was originally priced. This may not even be true, but nonetheless buyers feel they’ve stumbled onto a great deal.

4. Higher Perception Value Pricing

What it means: When prices are planned for products at scale – such as 5,000 – development costs generally set the base price. It might cost 85 cents per pair of socks for creating and packaging. 85 cents would be our base price – not the final price, which is determined by value-adding. The way value is measured is different for many companies. We often look at perceived value; what consumers think something is worth.

 Price and quality generally scale together
We usually have a “price we’re willing to pay” as soon as we enter a store or a website. It’s a marketers job to identify this price through user-testing, focus groups, and surveys.

More expensive prices create an aspirational quality many customers seek. Bargain prices target bargain shoppers who are blind to prices beyond a certain level. This isn’t a natural blindness; it’s simply a selective blindness based on majority economic statuses.

Some shoppers will only settle for the highest tier – the most expensive – because they’ve been conditioned to associate price with quality. We can spend $30 on a B&D toaster that’ll satisfy most basic toasting needs and last many years, or we can spend $200 on a multi-functional toaster oven that compliments our kitchen counter. These are two extremely different consumer mindsets – yet both present heuristics we use for pricing.

pricey banana republic

 

Real-world example: The Zieglers, the couple who started The Banana Republic stores, initially had trouble selling their inventory. When they made a few tiny changes to the items and raised, instead of lowered, the prices on their first round of clothing, they found that demand suddenly spiked and they sold all their inventory immediately.

5. Conditional Pricing (Power of 9)

What it means: You’ve undoubtedly noticed that a huge number of prices end in a 9, or in some way,  shape or form, have a 9 as part of the price. Whether it’s a deal for 99 cents or $9.95 or $5,199, the average global consumer is conditioned to expect prices to end in nines or the nineties (such as 4.97). It’s a pricing strategy that developed as a way to create the reality of a discount.

Many studies have been published – both for the physical application and the digital – veriyfying just how often and effective the 9 really is.

Here’s a study on usage:

pricing study 1

And here’s a study from Gumroad on the conversion value:

gumroad pricing study

Real-world example: A study once found that when people were offered the exact same item at price points of $34, $39 and $44, the $39 level sold the most, even though it wasn’t the cheapest. That suggests that we’re conditioned to look to the nine as the best value, even when it’s not!

6. Removing the Dollar Sign

What it means: A simple and subtle hack, this pricing strategy has increasingly become popular throughout the fine dining industry. Restaurants have also experimented with simply writing out prices instead of putting them numerically on menus.

A dish may cost “twelve” or “12” rather than “$11.99.” Without the reminder that you’re spending money, goes the logic, you’ll be more likely to indulge.

This sways our heuristics away from bargain impulse decisions and more on the actual context of what we’re buying. We’ll be more inclined to compare items based on our cravings with prices being less of a factor.

number only menu

Real-world example:  A study by Cornell University found that people spent more – significantly more, in fact – on restaurant fare when the prices were displayed numerically without the dollar sign, rather than in traditional dollar and decimal form. This actually went against the psychological theory of written prices yielding the most influence. This was a small study and the report mentioned many other situational factors at play.

7. Targeted & Target Pricing

What it means: The value menu at any fast food chain. They know you’re in a hurry, they know you don’t want to spend more than 5 bucks, and they know you know it’s enough to satisfy your craving.

value menu

But how does this manifest in digital environments? Think landing pages and remarketing. We tailor entire pages specifically for the transactional and informational needs of targeted customers. We can split test price points and move quicker than stores.

Targeted pricing synergies with other strategies listed here, such as high value perception, anchor, and reference.

Target (without -ed) pricing is a fluctuating cost that is based of our base price and profit goals. These are costs such as utilities, gas, fruits & vegetables, and paper. They all change daily based on an equation the business determines. This equation usually makes the price both competitive and profitable, but also accounts for slow moving products. When expiration dates edge closer we see bigger discounts on these items. These discounts are representative of their target price.

Real-world example: McDonald’s has long targeted low-income groups with its Dollar Menu, which offers value items at very low prices. Though the restaurant has been criticized for the strategy, it’s been effective. Students with little money are some of the biggest consumers of these value menus.

8. Experiential Pricing

What it means: When you have a low-priced item or a sale, it makes sense to emphasize the price point above all else. However, consumers are also very taken with experiences. Our heuristics are vulnerable.

 Humans easily become addicted to experiencing certain emotions.   
Anything that makes them feel on the bleeding edge, relaxed, elegant, etc. This experience can be “sold” through well-researched and planned product marketing, and once it has been optimized to literally “sell an experience”, we can strategically shape the value.

When someone feels comfortable with a product, they are more likely to make purchases from the brand. When this is the case, the brand can raise pricing without worrying about the consequences; they’ve already won the trust and loyalty of the customer, so there’s actually little reason to bring down the price. This is explained in part because people tend to value time over money. They see giving their time to the product in question as an investment, and so the money part of the equation feels secondary.

Real-world example: The slogan “It’s Miller Time” doesn’t really tell you anything about the company. Neither does “Just Do It.”

Both Miller and Nike are selling you on their attitude rather than their great pricing. Same with Redbull, Gatorade, and P90X. They sell the experience and “temporary powers” we receive from using their products.

This completely alters the consumer buying process. Instead of deciding to purchased based on the cheapest price/best value, the price becomes a means to acquiring an experience. So the question shifts from “what’s the cheapest” to “is it worth it?”

Targeted pricing strategies synergize with experiential. We can set reasonable price points to reduce the amount of consideration given to figuring out the “worth” with pros and cons, and more time instilling the experience of owning our product or service. This is why so many software-as-a-service businesses offer free trials. It’s just like those tantalizing cheese samples, but more effective. Even if we like the cheese sample, we don’t depend on it. Free trials give us enough time to start depending on the software, so when our time is up it really seems like a loss if we don’t pony up for a subscription.

Which pricing psychology strategies do you use?

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Hadley Thompson

Hi there! BrainyClick founder here. I'm a marketing consultant with over 5 years of experience helping medium sized businesses increase conversions using data analysis and marketing psychology.

10 CommentsLeave a comment

  • Wow! You’re on a roll Hadley. I love these long, in-depth posts and I’m learning a lot from your articles. Just shared this with my team.

    We use a lot of anchor pricing in our digital efforts (mostly SAAS clients) and have seen good conversions using a mix of front and center free trials, and anchor pricing plans. We’re currently testing a landing page that doesn’t even include a price – just the free trial. I’ll let you know how it turns out!

    • Thanks for stopping by again Gloria, I’m really glad you’re getting something out of my writing!

      That’s a very interesting strategy and I’d love to follow-up with you when you’re done testing.

  • Great post Hadley. Removing the dollar sign seems like a very interesting way to make online purchases feel less “transactiony”.

    • Thanks Mark! If sites like Aeropostale started removing their dollar signs – or at least changed this for a test group – I personally think it would add elegance to the online consumer experience.

  • Hadley- tripped upon this article and it’s perfect for what we need right now developing new lines of our consumer product, FreshTape® (throw away your bag clips – this is “made in USA” resealable eco-friendly tape for food bags in cool designs). Covers a ton of bases and totally relevant. I’ve forwarded the link for my team. Thanks much.

    • Thanks so much for stopping by and sharing Laura! I checked out the FreshTape website and it looks like a great foundation to build upon; I’m sure your team is considering many options and I think you’ve done a good job keeping it clutter-free. Looking forward to seeing what your team does with video, hover effects, and of course, pricing strategies :)

  • I read a lot of interesting content here. I can tell you put a lot of time into these posts and I found your information very valuable. Thank you.

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