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Pricing Psychology: 10 Timeless Strategies to Increase Sales
GREGORY CIOTTI | SEPTEMBER 15, 2015
Pricing can be challenging, complex, and offers no shortcuts. This reality makes “winging it” an enticing option when you don’t know where to begin.
But that’s the wrong move to make; smart pricing is deliberate. While intuition plays a role and you’ll learn more from getting your hands dirty than armchair analysis, it can be helpful to review findings on pricing that have stood the test of time.
In that spirit, let’s take a look at a few enduring studies from the behavioral sciences to provide inspiration and insight on how to effectively set your prices.
When Similarity Costs Sales
Limiting choices helps combat “analysis paralysis,” as too many options can be demotivating. You might expect, then, that having identical price points for multiple products would be ideal, right? Not always, according to research from Yale: if two similar items are priced the same, consumers are often less likely to buy one than if their prices are even slightly different.
In one experiment, researchers gave users a choice of buying a pack of gum or keeping the money. When given a choice between two packs of gum, only 46% made a purchase when both were priced at 63 cents. Conversely, when the packs of gum were differently priced—at 62 cents and 64 cents—more than 77% of consumers chose to buy a pack. That’s quite an increase over the first group.
percentage completing a purchase
The implication isn't to set your identical vintage T-shirts at variable prices. Rather, recognize the why behind the inertia: when similar items have the same price, consumers are inclined to defer their decision instead of taking action.
Price Anchoring
As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch. But why? The culprit is a common cognitive bias called anchoring. Anchoring refers to the tendency to heavily rely on the first piece of information offered when making decisions.
In a study evaluating the effects of price anchors, researchers asked subjects to estimate the worth of a sample home. They provided pamphlets that included information about the surrounding houses; some had normal prices and others had artificially inflated prices. Both a group of undergraduate students and a selection of real-estate experts were swayed by the pamphlets with the higher prices. Anchoring even influenced the professionals!
Placing premium products and services near standard options may help create a clearer sense of value for potential customers, who will view the less expensive options as a bargain in comparison.
Weber's Law
According to a principle known as Weber’s law, the just noticeable difference between two stimuli is directly proportional to the magnitude of the stimuli. In other words, a change in something is affected by how big that something was beforehand. Weber’s law is often applied to marketing, particularly to price increases for products and services. When it comes to price hikes, there is no magic number, but Weber's law shows that approximately 10 percent is the average point where customers are stirred to respond. As always, many variables have an effect on pricing. Weber’s law serves as a testing threshold rather than as an ironclad rule.
Reducing Pain Points
The human brain is wired to “spend ’til it hurts,” according to the field of neuroeconomics. The limit is reached when perceived pain is greater than perceived gain. Research from Carnegie Mellon University analyzed a number of ways to reduce these pain points and, in turn, increase post-purchase satisfaction and retention.
Here are a few select methods:
Reframe the product’s value.It’s easier to evaluate how much you’re getting out of an $84/month subscription than a $1,000/year subscription, even though they average out to around the same cost.
Bundle items purchased in tandem. Professor George Lowenstein notes that the LX version of car packages is a great example of successful bundling. It’s easier to justify a single upgrade than it is to consider purchasing the heated leather seats, navigation, and roadside assistance individually.
Appeal to utility or pleasure. For conservative spenders, a message focusing on utility is more effective: "This back massage can ease back pain." More liberal spenders were persuaded by a focus on pleasure: "This back massage will help you relax."
It’s either free or it isn’t. “Free” is a powerful word, as demonstrated in Dan Ariely’s book Predictably Irrational. In the example, Amazon’s sales in France were drastically lower than all other European countries. The problem was that French orders had a 20-cent shipping charge tacked on (versus free shipping elsewhere). Pricing well means extracting maximum value, but nickel-and-diming can cause more resistance in the long run.
Sweat the small stuff. In another CMU study, trial rates for a DVD subscription increa