Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits.
But how do you access the full power of pricing? The key is to understand the psychology that goes into a pricing strategy, and this article is a perfect place to start.
To continue our series of articles about different pricing strategies, in this article we’ll discuss what psychological pricing is, how it works, and what you need to build a great psychological pricing strategy.
What is psychological pricing?
Psychological pricing is the practice of using the power of psychology to push consumers to spend. It’s a joint effort of pricing, marketing, and sales to build an attractive offer that captures consumer attention and makes a product so desirable the shopper can’t wait another day to buy it.
Psychological pricing techniques are nothing new, and clever vendors have used these strategies throughout history to influence consumer behavior for quite some time. Before price tags, store clerks had to learn the art of haggling to create deals that were mutually beneficial for customers and the store, and since price tags emerged, marketers have leveraged the power of price to achieve the same results.
However, just because psychological pricing strategies are ubiquitous doesn’t mean they are unimportant. In fact, they’re so important and foundational to pricing, marketing, and sales that you should have a deep understanding of how these strategies work.
Why does psychological pricing work?
To understand why psychological pricing works, we need a quick lesson in marketing and pricing psychology.
Take a look at Maslow’s hierarchy of needs, which is a theory of how humans prioritize different things in their lives. At the bottom of the pyramid are physiological needs — you know, the things we as humans truly need for continued survival. These include food, water, shelter, rest, oxygen...et cetera.
Above the physiological needs are safety needs. In other words, once you have the basics of survival covered, humans become more concerned about their general safety and security.
After worrying about safety and security, the theory states that humans care about belonging and community. We want to build friendships, experience love, and the “gezelligheid” that comes from being around other people.
After community, people begin caring more about themselves and their aspirations. The next tier above belonging is “Esteem” and the very last tier (the one at the tip of the pyramid) is “Self-Actualization.”
Chances are you know all of this already, especially if you work in e-commerce marketing. Maslow’s hierarchy is a foundational element of modern marketing theory...so why am I bringing it up?
When you, your pricing team, sales team, and marketing teams want to create a psychological pricing strategy, you should refer back to Maslow’s hierarchy to serve as guidance for the strategy. As you’ll see shortly, this framework gives you the freedom to be creative in your strategy, while also making sure it is effective.
Related: Price: The Most Important P in the Marketing Mix
So the answer to why psychological pricing works is because these strategies are based on a deep understanding of what drives people, not just customers. To even get started, marketing teams, pricing teams, and sales teams need to have a deep understanding of what drives people, not just customers.
Related: How Will the Coronavirus Affect Retail?
Examples of psychological pricing strategies
Psychological pricing strategies are everywhere, and are employed by some of the top global companies like Amazon, Hershey, Motorola, Apple, and Costco.
In this section we’ll highlight a few examples of psychological pricing tactics, many of which we’ve already written about extensively on Omnia’s site.
1. Value based pricing
Value based pricing is a “basic” pricing strategy, but it’s one of the hardest to pull together because it requires an excellent understanding of the market and a lot of self-reflection. In a value based pricing strategy, you use your price as a way to control consumer understanding of your product. Do you want to be seen as a luxury brand? Then you probably should have a luxury price. Do you want to come off as the best value-for-money option on the market? Well, your price should reflect that.
Value based pricing requires a lot of research into your target market, competitive landscape, and business goals. That means a lot of cooperation across departments, but that cooperation is a great way to build a more cohesive strategy.
Learn more about value based pricing in this article: What is a Value Based Pricing Strategy?
2. Odd even pricing
Odd even pricing is a psychological pricing tactic that uses the power of number psychology to drive consumers to action. The odds and the evens refer to the numbers in a price: “odd” retail prices feature mostly odd numbers (like €7.99), whereas “even” prices feature mostly even numbers (like €8.00).
Most often we see prices that end in odd numbers, but even prices have their own power. Odd even pricing can be used strategically in several different ways, whether it’s to offer strategic discounts or just create a price that is memorable. Below is an example of how Uniqlo does exactly that — the company is discounting a shirt that originally cost €24.90 (a mostly “even” price) down to €7.90 (a more “odd” price).
We wrote an entire 1,000-word article that goes deeper into odd even pricing so we won’t go into too much detail, but check out: How Odd Even Pricing Helps You Utilize the Power of Psychology.
3. Charm pricing
Charm pricing is very similar to odd-even pricing. In a charm pricing strategy, companies use prices as a way to elicit an emotional response in consumers and drive them to action.
Some of the most notable examples of charm pricing can be seen in late-night infomercials. These pricing strategies are notable for their specificity, exceptional bundling strategies, and, often, their delivery.
Learn more about charm pricing in our article: What is Charm Pricing?
Psychological pricing is everywhere
If you pay attention, you’ll see examples of psychological pricing in marketing everywhere. Once you start looking, these examples are impossible to ignore. Browse through sports stores, look at real estate listings, even check the barcode on the books on your shelf. Even alcohol companies and gas stations employ charm pricing or odd even pricing to pull in more customers.
Psychological pricing advantages and disadvantages
Psychological pricing strategies are extremely advantageous, but are also hard to set up. Here are a few of the pros and cons for these techniques.
Advantages of psychological pricing
- Get a better understanding of the playing field: When you aim to use a psychological pricing strategy, you need to do a lot of research into who your competitors are, what strategies they are using, and what your target audience thinks of those pricing strategies. This research gives you tons of insights that you can use across the organization.
- More organizational alignment: A psychological pricing strategy should never be carried out by an isolated pricing team. Instead, these strategies require serious cross-department commitments and communications.
- More strategic: With a psychological pricing strategy, you can actually be proactive in your strategy. Rather than just trying to maximize profits or break even, you can consider things like public perception of your products, competitor comparisons, and more.
Disadvantages of psychological pricing
- Complex: Psychological pricing strategies are complex. They require a lot of cross-organizational cooperation and insights. This makes them hard to set up and stick to.
- Time consuming: Because psychological pricing strategies require in-depth research, they can be time consuming to set up. If you invest in software (like Pricewatch or Dynamic Pricing) the job becomes easier, but it still takes a lot of energy.
The term “psychological pricing” can cover any number of pricing strategies, several of which we’ve covered in this article. But there are no limits — in all honesty, any pricing strategy that uses consumer ideas about product value is inherently psychological, so feel free to be creative.
What is most important though is internal alignment. Psychological pricing strategies work best when they align with marketing and sales to ensure a cohesive experience for the user across your webshop.
Grace Baldwin is a pricing and marketing specialist at Omnia Retail. Before Omnia, Grace gained experience in content management at EDIA and through a freelance content management business. She holds a B.A. in Government from Colby College.