We generally assume that when it comes to pricing we all use rational economic thinking but in reality each of us processes numbers differently and when confronted with a variety of price triggers we can be seemingly irrational when it comes to considering prices. Price is generally all in the mind, as customers we buy first on emotion and then we rationalise our decisions later.  Customers all expect a “fair” price, however what constitutes “fair” is in the mind of the beholder.   A business that considers the psychological factors of pricing will have a distinct advantage; here are some things to consider:

It’s all about the Numbers: Perception of Value

Some prices sound like less money than others we know rationally that there is only a $0.01 difference between $9.99 and $10.00 however $9.99 just sounds cheaper and gives the perception of saving.  As a general rule you should avoid ending your price in a 0, end in a 5,7,8 or 9 and you will be perceived as cheaper.  Also being able to say that your product is under $100.00 has psychological advances on perceived value, even if you are selling your item for $99.99.  This is so engrained in us now that if we see something marked at a whole dollar value it can seem a bit strange to us because we are not used to it.

Brand Name Perception

Also under the topic of Perception of Value is Brand Name Perception.  We generally tend to think that the more well known brands are of higher quality than unknown brands, and we are willing to pay more for them.  Therefore from a marketing point of view consistent and strong branding and a focus on brand awareness is of extremely high importance and a subject that is best to get professional advice on.

For example you can get a bottle of perfume from a discount shop for under $20.00 whereas if you want Chanel No.5 you will need to go to a fine fragrance retailer where you are likely to pay closer to $250.00.  Both smell nice and their bottles are relatively the same, both made of glass and designed nicely, but Chanel has a number of psychological value-added features that the discount store brand does not.  People buy Chanel because it carries with it an air of prestige, they know their friends will recognise it and admire them for their good taste.  From my personal experience working in Fine Fragrance I have also noted that if people were to find a bottle of Chanel that was assumed to be discounted too much they would be wary of its authenticity or if it was defective because they expect to pay a certain price for it and have attached that amount of value to the product.

The same goes for retail shop layouts.  If we walk into a tiny stark looking little boutique in a swanky area of town we assume that a fair price for the garments in that shop is much higher than if we went into a large store where there was a lot of clothing loosely piled up bargain basement style.  Immediately when we walk into a shop laid out in the bargain basement style we immediately expect to be paying a cheaper price and assume that we are getting something for less than it originally was.

Value Bundling

Another way to increase perceived value is to bundle items together.  That is you group together a set of related products and give a set price for the combination.  Customers will assign value based upon their perceived probably cost of the individual items.  Value bundling is especially powerful if the price of your entire bundle equals or is slightly more than the price of the most expensive component as this gives the feeling of “something for nothing”.  For example when I bought a new computer the other week, I had the choice of buying the computer alone or to buy the bundle which included the other software that I was going to need to buy separately and other items such as virus protection, a case and a surge protector.  They had even saved me the hard work of trying to figure out what this would cost if I was to purchase individually by putting that number on a sign.  I managed to convince myself that this was a much better deal, even though this would mean that I was to spend more than I intended to and in reality I didn’t really require some of the items that were in the bundle!

So the point is that these psychological perceptions that we have about price and what is “fair” differ greatly between individuals and also individual items, but even those who are supposed to be acutely aware of such pricing tactics can be suckered in – and I did wander home feeling good about my purchase at the time and like I had “gotten a deal”.  Now to think is there a way that you could utilise these pricing strategies in your business.