Pros and Cons of Psychological Pricing (Plus 5 Types)
By Indeed Editorial Team
Published October 13, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Many people look for value when shopping for goods or services. Psychological pricing, which relies on mental and emotional processes to influence customer behavior, can be an effective strategy for encouraging sales. If you're interested in implementing psychological pricing, understanding its benefits and drawbacks can help you make an informed decision.
In this article, we define psychological pricing and list 19 pros and cons of this strategy so you can decide if it's right for you.
What is psychological pricing?
Psychological pricing is a sales strategy where businesses set prices that might appear lower or more valuable to the customer. Businesses use this strategy to encourage customers to purchase items more readily or in a larger quantity than they might otherwise. Psychological pricing can occur when communicating initial prices, promotions or advertisements.
Types of psychological pricing
Here are some common types of psychological pricing:
1. Charm pricing
Charm pricing, also known as 99 pricing, is when a business sells a product or service for just a cent below its expected value. For example, instead of pricing a box of soap at $4, a business might sell it for $3.99.
While the actual difference is only one cent, customers might perceive the value to be much larger because the price begins with a smaller number. Many businesses use charm pricing when selling an item near a price that customers might perceive as a threshold, like using $49.99 or $99.99 instead of $50 or $100.
Luxury brands often use the principles of charm pricing in reverse. Because charm pricing causes many shoppers to perceive prices ending in $.99 as discounted, high-end retailers might round their prices up to the full dollar amount to signify luxury. This strategy aims to imply a $600 item is more lavish than a $599 item, even if the quality is the same.
2. Artificial time constraints
Some businesses use psychological pricing to encourage consumers to act quickly to avoid missing out on a discounted price. For example, a department store advertising a one-day-only 50% off sale only to host the same sale the following weekend is using psychological pricing. Online retailers might display a countdown clock on their website, signifying the end of a sale, to create a false sense of urgency that encourages customers to make more impulsive purchases.
3. Anchored pricing
A business might initially list an item at a much higher price than they intend to sell it at and then list the item as 50% off to create a sense of value. The customer might respond to the high anchor price, assuming the product is of high quality.
For example, a furniture store might value a couch at $300, add a $600 price tag to it and imply the couch is 50% off. The store always aimed to sell the couch for $300, but they know a customer might be more interested in it if they think it's a temporary price reduction.
Innumeracy relies on the assumption that people will accept the first information they learn about a price without applying math to calculate the actual value. A common use of innumeracy is the use of the phrase "buy one, get one free" instead of "two items 50% off." Some customers might appreciate the implication that they receive an unexpected gift for their purchase, even if the price of the first item absorbs the value of the gift.
5. Design choices
The way you present information can influence how customers interpret it. Design choices like font size and punctuation might make prices appear lower for some customers. For example, the brain draws connections between size and amount, so many people might interpret prices in small font sizes as lower. Removing punctuation marks like dollar signs, commas, periods and zeros can make the figure appear shorter, implying fewer digits and a lower price at first glance.
What are the pros of psychological pricing?
Here are 12 pros of psychological pricing:
1. Simplifies decision-making
Customers can often choose between many retailers and products when shopping. Price is one of the most important motivating factors for many customers, and listing appealing prices can help them decide quickly about where they want to shop. This is especially impactful if your business focuses on one-time sales.
2. Attracts more attention
Psychological pricing can act as a marketing tool. Advertising an appealing price using commercials, digital content or signage may encourage new customers to explore your products. This might increase brand awareness, even with guests who browse without purchasing products.
You can also use psychological pricing to attract customers to a particular product. For example, if a home decor store wants to sell autumn merchandise to make room for holiday decorations, they might bring attention to autumn items by adjusting prices.
3. Increases overall sales
When used effectively, psychological pricing can lead to a higher return on investment (ROI). If you're looking to increase revenue, implementing psychological pricing might help. You can also use psychological pricing to encourage higher-volume purchases.
For example, an internet company may advertise a bundle price that encourages customers to purchase internet, cable and phone services. Customers might end up spending more than they initially intended because they interpret the bundle as a better value.
4. Puts items into categories
You could use psychological pricing to make distinctions between different groups of merchandise. For example, if you sell designer and discount brands in your store, you might sell all discount clothing at a price ending in ".99."
Customers can use this information to distinguish easily between high-end and discount clothing. Even if the prices in both categories are comparable, the change might influence customer behavior, leading some to choose the more expensive brands.
5. Helps you compete
Many businesses use psychological pricing, so adapting to it can help you remain competitive. In many markets, competitors monitor each other's prices and try to out-price each other. If you use psychological pricing to imply unbeatable prices, you might discourage competitors from trying to offer a lower price, and they might abandon it altogether and opt for a different strategy.
Read more: Competitive Pricing: Definition and Tips
6. Attracts online shoppers
Many online shoppers sort their choices in order of price to identify the most affordable items. If customers filter items by the lowest to the highest price, psychological pricing can help your products appear sooner in their search.
Similarly, online shoppers sometimes use price comparison tools that scour sites for the cheapest products in targeted categories. If a competitor sells an exercise machine for $200, you might choose to price the same machine at $199. The tools might report to the customer that you have the cheapest price for the machine they want.
7. Offers a pleasant experience
Many people enjoy the feeling of getting value. Psychological pricing can help customers feel more confident in their purchases, and they may start to associate accomplishment with the experience of shopping at your business. This can increase customer loyalty.
8. Collects data on strategies
Testing different psychological pricing methods might offer you data about what strategies your customers respond to. Because psychological pricing is simple to implement, you can easily try different strategies and compare success rates. By collecting and analyzing this data, you can commit to a tested, long-term strategy that works.
9. Stimulates more sales
You can use psychological pricing for a quick boost in sales by creating a sense of urgency. This might help you meet goals, generate traffic and demonstrate success to stakeholders. For example, if you're hoping to meet a sales quota before the end of the month, advertising a one-day-only sale might encourage high-volume purchases from customers who don't want to miss temporary low prices.
10. Saves time and money
Compared with other sales strategies, psychological pricing is easy and inexpensive to implement. Instead of spending resources on product development or designs, you can test psychological pricing with minor adjustments and simple advertisements. It can also be an effective strategy to boost sales with minimal investment or preparation.
11. Inspires recommendations
Social proof can be a valuable marketing tool. By offering your customers a sense of value, you might increase the chances of them recommending your products to others. Psychological pricing can drive up demand and increase interest in your products. Customer reviews, social media posts and endorsements from public figures might also strengthen your reputation.
12. Encourages research
To decide on the details of your psychological pricing strategy, you might research market activity. It's important to understand competitors' prices, popular approaches and consumer behavior so you can make data-backed decisions when pricing. This research might reveal valuable insights about your customers and competitors and can help you refine your overall business strategy across all departments.
What are the cons of psychological pricing?
Here are seven cons of psychological pricing:
1. Relies on demand
Some psychological pricing techniques require consistent demand to be successful. Consumers typically only interpret value when they're willing to buy the product at its original higher price.
Methods that rely on urgency also usually work better when products are in high demand because customers might make quick purchases before inventory runs out. To counteract this, build a comprehensive marketing strategy to encourage demand using factors other than pricing.
2. Risks loss of trust
Acting with integrity can be vital when establishing loyalty and trust with your customers. Some customers might recognize psychological pricing and feel deceived, resulting in potential revenue loss and damage to your reputation. To foster positive relationships with your customers, offer transparent information about pricing and only choose strategies that match your company's values.
For example, if you advertise a discounted rate online without including shipping prices, you might add an itemized breakdown of shipping costs, taxes and fees on the checkout page to give customers a full understanding of the price before they finalize their purchase.
3. Sets unsustainable expectations
Using psychological pricing consistently can influence customers' understanding of standard prices for your products. If a customer usually gets what they perceive to be a significant discount for a product, they might be unwilling to buy from you at full price. To avoid falling into a long-term cycle of psychological pricing, plan to use this method sparingly and with careful consideration.
4. Loses effectiveness in global markets
Psychological pricing is most common in the United States. If you're aiming to reach global customers, this strategy might not generate as many sales as it does with domestic customers. You can research effective pricing strategies in different countries to choose an approach that matches the demographic you're targeting.
5. Yields inconsistent results
While psychological pricing relies on the principles of human psychology, customer behavior can sometimes be unpredictable. Some consumers might not respond to psychological pricing the way you'd expect. To help you meet your goals, consider communicating prices in different ways to reach a larger pool of consumers.
6. Exhausts customers
Though sales and promotions can be exciting, some customers might tire of changes in price. Consistency can be appealing, and it's important that buyers know what to expect when budgeting.
To mitigate the risk of customers choosing a competitor with more stable prices, aim to use psychological pricing on special occasions like holiday sales. It might also help to use consistent reductions each time, like running a "buy one, get one free" sale every major holiday.
7. Implies lower quality
Some consumers associate discounted prices with lower-quality goods. Using psychological pricing consistently can damage your reputation by implying your products lack prestige.
To maintain a positive perception of your products, ensure consistent quality standards and offer shoppers clear information about the materials you use to manufacture your goods. You might also use marketing to associate your products with luxury by selecting high-profile spokespeople and curating your inventory carefully.
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