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The Psychology of Pricing

Updated: Jun 28

Psychological pricing is the craft of using knowledge of human behaviour to influence shoppers’ spending patterns. It exists at the intersection of brand strategy, marketing, design and behavioural economics. Leveraging psychology in pricing aims to build an alluring offer that captures consumer attention and makes a product or service more desirable.


To understand how methods for psychological pricing work, we should have a basic grasp of human behaviour drivers. Maslow’s Hierarchy of Needs is a theory of how humans prioritize different things in their lives. At the bottom of the pyramid are physiological needs: the things we humans truly need for continued survival. These include food, water, shelter, rest, oxygen, and more. Above the physiological needs are safety needs. After we feel secure, the theory states that humans begin to care about belonging and community. We want to love and be loved by other people. The next tier above belonging is “Esteem ” and the top tier is “Self-Actualization.”

A hierarchy of needs chart.

Graphic by illustrator Eli Voca.

Maslow’s Hierarchy is a foundational element of modern marketing theory. We bring it up here because it can be used as a framework for an effective pricing strategy. Psychological pricing works because these methods are based on a deep understanding of what drives people. When we people, we understand customers.


Psychological pricing strategies are everywhere, and are employed by top global companies and small businesses alike. Their ubiquity, however, is by no means makes them unimportant. In the remainder of this article, we will outline some psychological pricing tactics that you should be aware of when deciding what number to put on the tag.


Tiered Pricing & the Decoy Effect

Tiered pricing is effective. Strategically pricing your set of options can encourage people to sway towards an option more frequently due to perceived value. We commonly see this done in movie theatres. Let’s say you have three popcorn sizes at three price points: Regular for $5.00, Large for $9.50, and Super-Size for $10.00. In this scenario, the large is the decoy— hardly anyone will buy it because they can get a super-size for only $0.50 more. Here, the seller used the decoy effect to influence popcorn shoppers to buy the more expensive option because the perceived value is so much more for a low price jump. The decoy does not always need to be the middle option. A similar strategy can be leveraged for service offerings as well. You may want to offer shoppers three options to work with you: the done-by-you, done-with-you, and done-for-you. In this model, the price increases depending on how much customization the customer receives. For example, at the Atelier, we are service-based. We leverage tiered pricing to serve different needs and budgets, giving those who want to support our business ample opportunity to buy. Our done-by-you option would be to use the resources in our shop, such as The Essential Guide to Visual Branding to borrow our knowledge on brand strategy and visually execute your own brand identity design. Our done-with-you option would be our consulting services, where we can discuss your business with you and strategize without performing the actual work. The highest-ticket offers we have are done-for-you services. These are the custom designs we create for our clients, that you see in our portfolio and on social channels. None of these tiers are necessarily “decoys,” as the pricing each of them truly reflects the value of the offer— however, we understand that the least amount of people will go with the highest-ticket offer. This is quite all right because there is a limited capacity for how many clients we can serve at the done-for-you level. Having a few full-service clients a year is enough, while we can do dozens of consulting sessions comfortably, and sell thousands of digital products without becoming over-extended and compromising our quality. Knowing this, we have priced accordingly. You can leverage tiered pricing the same way in your service-based business.


Magnitudes & Diminishing Sensitivity

The way humans think about magnitude is essential for pricing and brand messaging in general. For example, you may market the price of a $5 subscription as how much a buyer would spend on a coffee. This feels like a low-level commitment. You can also flip the script, emphasizing impact by highlighting that your brand’s mission is to “save 1-million panda bears,” for instance, noting to your customers that their purchase is making a significant positive influence. Magnitudes also play a role in price-demand sensitivity. Typically, the higher the original price of an offer, the fewer people will care about relative price differences. For example, a customer will walk to the next store to save $10 on a $20 purchase, but on a $1000 purchase, they are less likely to care. Either way, it is the same $10— but humans are less sensitive to it when larger numbers are being discussed. A price difference as small as $1000 vs $1010 can mean little to customers but a lot for company-wide profits when you start selling at large volume. Because of this, diminishing sensitivity is certainly something to keep in mind when determining price.

A graphic explaining diminishing sensitivity

In the above diagram, the orange circles are the same size but relative to their surroundings they are perceived as different. This illustrates the concept of diminishing sensitivity.


Endings

$999 feels cheaper than $1000. Companies will often use "-99" endings to influence buyers. Although only one cent or one dollar is at stake, this is effective. On the other hand, luxury services may price evenly to emphasize quality. The customer who will quibble over a couple of pennies is not their target market. This is a move that establishes authority and confidence in quality. Depending on your target audience, you can strategize your endings.


Price-Quality Heuristic

Customers may draw inferences about quality or exclusivity based on price. Ambiguous experiences lean on expectation and pricing can effect this. For example, in a product like wine which is very nuanced and subjective, the customers expectation will greatly influence their liking. So, pricing the wine higher may improve how sophisticated and good people think it is. Cheap wine may be assumed to be of lower quality simply because of the lower price tag. However, this is less of a factor when the expectation for an offer is less abstract. A lawnmower with no blade is going to be nearly impossible to sell. There are no marketing or pricing antics that will change people’s minds about the quality of the product because it simply needs to cut grass to be worth any money.


Fairness

The goal of this article is not to empower you with tools to trick people into spending money that they shouldn’t. It is, instead, meant to assist you in staying competitive in a market that uses these tools when you have a legitimately valuable offer that you would like to sell and make a profit from the time and effort you put into creating. This being said, fairness is essential. The pricing sweet spot is somewhere between the cost of production and perceived value by the customer. Pricing your offer a bit lower than the perceived value will allow your customer to feel it is fair, and there is still lot of value captured by your business. When your customers do not think a rice is fair there are consequences. These come in the form of indirect reciprocity through bad word-of-mouth, social media venting, and poor reviews. Customers may also enforce fairness via formal institutions like litigation, or reports to business bureaus. Be fair because it’s the right thing to do, and there will be no need to worry about these consequences.


Ethics

Shoppers consider ethics when they are making purchasing decisions. Do not be afraid to make an ethical decision (like paying your team fair salaries, buying from a sustainable vendor, or prioritizing inclusive practices) if it means you need to increase your pricing. Being clear on your brand’s core values will help you know what to prioritize over profits. You may also want to bring this into your messaging so that consumers understand what is going into your pricing and have the option to make ethical shopping choices.


These methods are widely used but often go unnoticed. When we understand psychological pricing, we can leverage it for our businesses. To work with our team on brand strategy like pricing, reach out at atelier@oluwatosin.net, and we can support you with our knowledge and experience in making decisions that will help you reach your goals.


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