February 13, 2023

The three magic fields of pricing psychology

Frank Buckler

Co-Founder, Supra.tools

Psychological pricing can be complicated. There are books describing 100 price psychology hacks. Good luck implementing them all 😉 ... The most famous price psychology hacks are artificial time constraints and charm pricing where the price is just below a round price, 0,99 or 99$. The work you have to do is to figure out which phenomenon you should really take advantage of. Just because it works doesn't mean it's worth doing. I would like to offer herewith a guide to figuring out where psychological pricing can pay off for you.

“Books elaborate on >100 psychological pricing techniques. Good luck in trying to apply most of them.”

By now, it should be common knowledge among every marketing manager that price is the biggest profit lever. A 1% price increase increases sales by 1% (if the market does not react). With a profit margin of 5%, that would already be 20% more profit.

Psychological pricing can therefore be scary. This is because “nebulous” effects have a direct impact on sales and profits and are not easy to measure. If there are over 100 psychological pricing tactics alone. How -in heaven’s name- can one ever manage the topic of psychological pricing subject of behavioral economics and behavioral pricing has experienced a renaissance in the last decade. The books on the subject make fascinating reading. But how to implement the right techniques.

More importantly, if customers’ willingness to pay depends on many psychological subtleties, how can I ever validly measure willingness to pay?

Are we throwing the baby out with the bathwater if we discredit methods for measuring willingness to pay because the many psychological unknowns feel overwhelming?

Context-based psychological pricing strategies: "Yes we can".

The good news is that each psychological pricing tactic works best in its context. If you focus on the category you are in, it becomes much easier. If you follow this path, you will be able to:

Separate the wheat from the chaff
Achieve 80% with 20% of the work
Get clear guardrails to help you not only survive but excel in any psychological pricing discussion

Textbooks and internet articles are full of sometimes confusing and at the same time inspiring examples of psychological pricing strategies. One gets the impression that those who only master this highly complex magic are putting the end customer in “price traces”.

But this is not only misleading, but it also is not very effective. What is needed is a concept that can be followed to achieve measurable success.

Identifying the right pricing strategy with the WEW method

There are three fundamentally different approaches to pricing psychology that largely determine when and where they are needed.

VALUE

The first group aims to increase the customer’s perceived value of the product. The more attractive a product is, the more one is willing to pay

EXPECTATION

The second group of approaches controls the price expected by the customer. Whether a customer has ever bought a product group or not. Humans are always programmed to have an expectation. This can be controlled.

REALISATION

The specific visual presentation, as well as minimal changes in the price itself, can have major changes in perception.

VALUE PERCEPTION - Managing prices through price perception

Here are some important techniques that exemplify this category

Color – red is usually a warning signal, whereas green is associated with positive news. A low price should be associated with excitement, not a warning.

Font size: This effect is astonishing. The brain associates a large font size with a large (=high) price. This rule is most often disregarded in practice.

Unrounded: Unrounded values are associated with having been calculated accurately and therefore being fair. The effect is relevant in situations where price fairness, i.e. the feeling of not being taken advantage of, is significant.

Currency Sign: Dollar, Euro, or Pound signs are associated with expenses and costs. The sign sets off an alarm in our brains. A low price should be associated with excitement, not a warning.

Verbal simplicity: 11.11€ reads “eleven euros eleven” and has 2 syllables without euros. whereto against 7.99 reads “you-seven euros nine and ninety” has 4 syllables. There are studies that show that the more syllables a price has, the longer it takes people to understand it. This reduces the willingness to buy, because “Confused minds don´t buy”- “99” – whether a threshold effect exists is still disputed, but it has been clearly proven that the use of the 9 per se is associated with cheap offers. It only has an effect where the price itself is not a value signal. For luxury products, it is detrimental to use this technique because it reduces the expected value of the product.

Charm Pricing/ Fractional prices

The last two effects also show that the techniques can also level each other out. “8 euros” is perhaps better than “7.99” as it is easier to understand, while the 9ct suggests a bargain. It depends on which effect outweighs the other.

This is also one reason why a simple descriptive evaluation of prices and sales leads to no or contradictory results.

In the end, two aspects are really decisive in determining whether the topic of price perception should be in focus for you.

1) Do you operate in a low-involvement product category with your pricing?

In this area, customers’ purchasing decisions are made intuitively to a large extent. Small details can guide intuition. However, for products where consumers take much time or where you make the buying decision with someone, the decision is more thought out and considered from multiple angles.

2. do you sell directly or through retail stores / e-commerce?

All these tactics are reserved for retail and cannot be controlled by the brand. Only in the case of the direct-to-consumer channel can it intervene.

EXPECTATION: Psychology Pricing - Managing Price Expectation

Here are some important techniques that exemplify this class

Strike price: The strike price signals the “real price”. The more this is above the current price, the more likely the price will be cheap in comparison. Depending on the context, there are other techniques to present a reference price before the actual price is presented to the potential customer. This technique is usually used excessively.
Category selection: Each product category is associated with a price level. milk costs about 1 euro, but certainly not 3 euros. A screw costs Euros, certainly not hundreds of Euros. Sometimes it is possible to sort products into other categories. A milk slice, for example, is sweet, but in the chiller cabine,t it is sorted as food. Chocolate can be staged as a gift with the right packaging. A beer can be categorized either as a soft drink or as a stimulant alongside whiskeys. These categories massively control the price expectation.
Product range: The own product range serves as a price anchor. Consumers have a natural tendency to choose the middle product. Intuitively, it is high quality but not too expensive. VW or Audi sell by far the most Golf or A4 and not the entry-level products Lupo or A2. The highest-quality product usually has the purpose of serving as a price anchor when setting prices. Audi’s A8 costs 80k euros upwards in Europe. The 35k upwards for an A4 seems almost a bargain. After all, it is also “an Audi”.
These are only the classic examples of expectation management. In individual cases, it can become deficient why a boilerplate-like listing is not purposeful.

Techniques that manage price expectations are effective when the consumer himself has little price knowledge. If a consumer has learned “1 euro costs a milk”, a strike price, packaging size, or a prestige pricing product sister, will make little impression on him.

Especially with new or subjectively new products, price knowledge can be low. This is especially true if the new product has truly novel features or looks different and therefore stands out from the category.

VALUE: Managing value perception

Value perception depends on 8 areas at its core.

– Core benefits: This is about whether customers form a “this I can use” or “this is useful” assessment. These three example areas are often managed for this purpose

Packaging design – which makes the core benefit more noticeable
Understandable messaging: clearer communication about what the specific benefit of the actual product is.
Packaging size: “Bigger is more” is what our subconscious knows. Bigger tablets, for example, have been proven to work better. No wonder that crisps manufacturers have found out that filling crisps bags with air increases the perception of value.

– Easy to use: Products are particularly valuable when they are very easy to use.

– Easy to start using: With new products, there is often a lack of knowledge or practice about how to use it. This is exactly what can become a barrier and can lower the perceived value

– Compatible: some products are useful and easy to use, but are so new or different that they do not fit into habitualised daily routines or lifestyles and require consumers to break entrenched habits.

– Appealing design: The design of the product itself plays a central role in some cases.

– Unique: If a product is subjectively new, a central question in the decision heuristic is “What is special now?”. It must be immediately clear what is special in the sense of “different”.

– Trustworthiness: If consumers do not trust the brand, the best arguments are of no use.

– Perceived buying risk: Customers may understand and value the benefits of the product. However, if you doubt that these benefits are real and always occur (“it might be different for me” effect), this can also lead to a reduced perceived value.

Some of these points are inherent in the product. Many, however, can be controlled by design and copy.

Interestingly, the importance of the 8 components varies greatly depending on the product category. Therefore, it is advisable to find out exactly this with the help of driver analyses (better still, Causal AI).

To the point

There are hundreds of psychological pricing strategies, tactics and even more individual tips/tricks on how to implement marketing pricing decisions with regard to a psychological pricing strategy. Most of them are not relevant for you as a brand in a category.

Willingness to pay can be controlled in three ways: First, by making the customer expect a higher price. Secondly, by making the price unconsciously not seem so high and thirdly, by increasing the attractiveness in the broader sense of the product.

Some tactics work against each other. For example, it is often unclear whether 7.99 USD is really better than 8 USD. How well a bundle of price-psychological measures really works is difficult to predict. Even and especially experts overestimate themselves fundamentally.

Therefore, there is no way around measuring price willingness in market research experiments (e.g. via Implicit Intelligence for Pricing) or trying out tactics in real life. If the experiment is possible, think about varying different tactics at the same time and then measure the influence of the individual tactics via modeling.

For example, Supra offers free pricing strategy sessions for qualifying companies. Just contact wolgang@supra.tools.

Psychological pricing tactics are very powerful, but highly complex. There is no way around measuring how tactics work before launch.

Learn which price your target customers are willing to pay.

Start finding your profit-maximizing price in no-time and comparably “no costs” thru Implicit IntelligenceTM

Pro Hack

Today pioneers use the latest pricing survey tools that use Neuroscience + AI

Interested professionals can use some tools even for free and explore on its own

You can access supra tools free here.

Deep-Dive / Theory

Origins of psychological pricing come from game theory

Kaushik Basu applied game theory in 1997 to argue that rational consumers value their own time and effort in computing. Such consumers process prices from left to right and tend to mentally replace the last two digits of the price with an estimate of the median “penny share” of all goods in the market. Source: https://en.wikipedia.org/wiki/Psychological_pricing

Psychological pricing strategies often lower prices as numbers directly below “whole” numbers (charm pricing), i.e. numbers slightly smaller than a round number, e.g. €9.99 or €19.99. Customers tend to round prices that are lower than they actually are to the next lower monetary unit, even though the absolute price difference is hardly relevant. Therefore, prices such as €1.99 can lead to them being perceived as “€1” rather than “€2”.

This estimate depends on the experience and knowledge of the individual and is usually a subjective perception. This assumption helps to explain why consumers will negotiate less for a price of 12.99€ than for a price of 13.00€. Even though this theory seems plausible at first glance, it has some weaknesses. For one thing, the thesis is only valid if the price is read from left to right. In many cultures, however, price is read from right to left, which calls the entire argument into question.

Odd-even pricing is a strategy in which the final digit of a product’s or service’s price determines the pricing strategy. An odd pricing strategy would be used for prices ending in an odd number, such as $1.99 or $78.25, while an even pricing strategy would be used for prices ending in an even number, such as $200.00 or 18.50. There is no definitive answer as to whether odd or even pricing is more effective, as it depends on a variety of factors, such as the type of product or service being offered, the target market, and the overall pricing strategy. However, research has shown that consumers tend to perceive prices ending in .99 as being lower than they actually are, which can lead to increased sales. Additionally, odd pricing can help to create a sense of urgency or scarcity, as it suggests that there are only a few products remaining at that price.

The laboratory test by Ruffle and Shtudiner (2006) shows that Basu’s equilibrium of 99-cent prices is significantly supported.

Benford’s Law

Benford’s law states that in many real numerical data sets the leading digit is likely to be small. In data sets that obey the law, the number 1 appears as the leading significant digit about 30% of the time, while the number 9 appears as the leading significant digit less than 5% of the time. If the digits were evenly distributed, they would each appear about 11.1% of the time. Benford’s law also makes predictions about the distribution of second digits, third digits, combinations of digits, etc.

This result holds for a wide range of data sets – from electricity bills to death rates. This has been proven by a variety of studies that have examined different factors. By looking at different constants, researchers have been able to determine that this result holds true in most cases.

The law is named after Frank Benford, a physicist, who formulated it in 1938 in a paper entitled “The Law of Anomalous Numbers”. However, it had already been formulated by Simon Newcomb in 1881.

The law is similar in concept to Zipf’s law, although not identical in distribution.

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February 13, 2023

The three magic fields of pricing psychology

Frank Buckler

Co-Founder, Supra.tools

Context-based psychological pricing strategies: "Yes we can".