Boost Your Revenue and Profits with Psychological Pricing Strategies
Business owners and executives have a love-fear relationship with raising prices: They’d often love to raise prices, yet fear customers will choose to go to a competitor.
A combination of sharply increased optimism on the part of business owners and a continued increase in operating expenses – particularly labor – has resulted in a wave of price hikes by small business owners, according to the National Federation of Independent Businesses.
While pricing increases may be a tactical tool to react to financial pressures, concerns about potentially losing customers aren’t fanciful. Sometimes the trade-off may be worth it, as when Netflix raised prices by 60 percent and lost only 4 percent of customers. However, when you lose too much business, those price increases may not be such a good idea.
Psychological pricing strategies are ways to nudge people towards spending more without scaring them off. Here are four techniques you can use to potentially help you avoid negative customer reactions.
1. Use the pennies-a-day technique
You’ve undoubtedly seen the pennies-a-day pricing strategy. Marketers break the cost down from a single expense into a series of smaller ones, even though customers may still make the aggregate payment. According to the Journal of Consumer Research‘s “Pennies-a-Day: The Effect of Temporal Reframing on Transactional Evaluation,” the approach succeeds through consumer perception. Even though both the full pricing and break-down both appear, the pennies-a-day pricing causes consumers to focus on small, ongoing expenses rather than the single larger one. The difference between the two may, “significantly influence subsequent transaction evaluation and compliance,” as the study notes. That’s research-speak for customers being more likely to buy.
2. Offer the right framing
Long before winning the Nobel Prize, economist Richard Thayer ran an experiment in which he told lab subjects to imagine they were sitting on the beach during hot weather. Thayer then asked how much they’d pay for a beer if another person would get it for them. The subjects were willing to pay more if the beer provider was an expensive hotel rather than a corner store, according to the New York Times.
Consumers assume an upscale business will charge more and therefore see the extra expense as fair. By contrast, consumers expect value- or mid-range-positioned companies to charge less, even if the product is the same. The context is known as framing, where the “positioning of choices prejudices the outcome,” as the Times reports. If the context matches the high price, people often accept that they must spend more.
While some consumers may choose to find a different context — like looking for a discount seller — framing is one reason why high-end brands are careful about not discounting their prices. The action alone might undercut their ability to charge what they already get. By framing your prices in a way that matches your brand positioning (value, mid-range, high-end for example) customers may be more likely to purchase.
3. Present pricing in an attractive way
Ending a price in 9 is a way for prices to appear lower to consumers, while still adding margin. This may be an old pricing trick that still works as the study Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments explains. The last digit in a price can increase demand, even when researchers tested prices a few dollars lower.
Additionally, researchers found that a longer-looking price can change how customers react, according to a study in the Journal of Consumer Psychology.
People translate visual representations of numbers into verbal equivalents, e.g., 72 becomes “Seventy-two.” So the longer a price is in the verbal equivalent, consumers mentally equate that with a higher price. To combat this effect, shorten lengthy prices by eliminating commas and decimals where possible. If you communicate a smaller verbal equivalent price, you may make the product psychologically more palatable to a consumer. Which, in turn can increase sales.
4. Focus messaging on experiences
People don’t only buy products and services; they also purchase experiences. That is why many consumer campaigns emphasize how people will feel by using a product, instead of lower prices.
In The Time vs. Money Effect, Stanford Professor of Business Jennifer Aaker and Cassie Mogilner tested the concept by having six-year-olds operate lemonade stands. One sign read, “Spend a little time and enjoy C&D’s lemonade.” The second read, “Spend a little money, and enjoy C&D’s lemonade.” The third read, “Enjoy C&D’s lemonade.”
People could choose to pay between $1 and $3 for a cup of lemonade. Those who bought when the sign stressed time paid twice as much, because of their emotional response to the sign.
There was one exception to the findings: Ads for products people acquired for prestige did better when stressing money. The pleasure was in the possession of the product and status of the higher price, not the experience using it.
Psychological pricing tips are complex, and may even seem contradictory at times, because they are ultimately about people. Some tactics may work on certain consumers while others don’t — meaning it is likely you will need to experiment within your marketing strategy to see how they work for you and your customers and prospects; however, an investment of a little time and effort may be a small price to pay to boost sales.