Decoding the Psychology of Pricing: How companies make you buy

“It’s all in your head!”, they say.

Well, even in business development? Yep.

Millions are invested by businesses today into product research, development, marketing and promotional activities. There have been enough discussions and information available in these regards too. But the initial point of customer contact (especially in India) into buying any of these products is often overlooked. Every top quality product requires a smart pricing strategy to support what its value is worth. And well, it’s even more important for brands lacking quality in their products! In either case, having the right psychology of pricing in place can go long way for any company.

Psychology of Pricing

There are some very definite and well known factors that comprise pricing psychology. One of the most popular and visible one is the 9 ending price factor. This refers to how brands like Amazon Prime prefer selling their Prime membership for ₹999 instead of ₹1000, thus providing a much comfortable three digit pricing instead of a four digit pricing for the customer. This strategy is also known as “Charm Pricing” where you reduce the number of digits in the price by 1.

Decoding the Psychology of Pricing: How companies make you buy
All the offers ending with the digit “9”. Source: Amazon website

There are multiple such intentional pricing strategies that are adapted by brands after studies and research over the years which suit the psychology of the normal customer. A classic example here would be that of an experiment conducted by MIT and the University of Chicago. Here, women’s clothing was tested at prices $34, $39 and $44. The researches were surprised to see higher sales at $39, even though it was higher than the $34.

How is a price finalized?

When brands are stuck with what price to finalize, it is important to note that the left digit looks attractive while comparing two prices. A ₹949 is no better than a ₹999. But a ₹999 gives a much bigger psychological advantage than a ₹1000 despite the magnitude difference being much smaller for the latter.

A myth of 70s and 80s (a theory by Ted Nicholas) stated that pricing ending with 7 works better than the other digits. Psychotactics conducted an experiment in 2002 where they changed their prices ending with not only 7 but also with 2 and 8. They noticed no difference in sales; however, they mentioned increased demand when prices ended with a 9.

Now, is this universal for every product? Of course not.

The Luxury angle

In case of a luxurious or a ‘high class’ pleasure oriented product, it is suggested to resort to a round figure pricing ending in 0’s. Consider Rolex for example. The round figure pricing reflects a sense of quality and exclusivity when a customer buys a Rolex.

Decoding the Psychology of Pricing: How companies make you buy
Pricing ending in 0’s. Source: Rolex website

Now within luxury products too, some brands resort to precision pricing to make the amount seem less. This is seen a lot among jewelry brands. A diamond ring priced at ₹51264 has a better buying probability (1.5 x) than the ring priced at ₹51000.

Decoding the Psychology of Pricing: How companies make you buy
Pricing of Gold Bracelet. Source: Tanishq website

Let’s consider a B2B sale or any 1v1 product sale approach. A lot is emphasized on negotiation skills, which is undoubtedly critical in such deals. What helps further is how a particular price is presented.

When speaking, express the amount with the fewest syllables. E.g. Expressing ₹9400 as “Ninety four hundred ruppees” instead of “Nine thousand four hundred rupees” goes a long way.

Ego pricing is also observed a lot in modern day deals. This is when a deal is priced as per the buyer’s personal details. If the buyer’s birthdate is 27th April, then a social media package for e.g. priced at say, ₹2704 will have a higher and personal impact than the package priced at ₹2500.

This approach may not guarantee a better impact, but a lot of modern day individual centric deals are priced keeping this psychology in mind. Well, not to forget, emotions do play a role in our country. 🙂

How is a price framed?

Let’s focus on one of the most relevant models today. For any subscription model which is high priced, prices are framed in terms of smaller recurring units. Consider a Harvard Business Review newsletter or any OTT platform membership pricing. A ₹900/month membership can be reframed as ₹30/day.

Setting a context to a price is also very crucial. Would you buy a 2BHK flat outside Mumbai for a crore rupees? Or live on the outskirts of Mumbai in a 2BHK surrounded by botanical gardens?

Brands use gain-framed messages to maximize the benefit of any pricing model. This stands true for any FMCG brand too. The focus has shifted to experiential factors from money factors. “Yes, I can save 100 bucks, but tell me what do I gain experience wise?”

Let’s dig deeper into how context in pricing models is used to a business’ advantage. Brands offer a third more expensive option to draw attention to the next-most expensive option. Rings a bell?! Yes, you’re right. Smartphone brands do this every 6 months. They offer an inferior model option so as to lure the customer’s attention to the target model.

The OnePlus 8 and OnePlus 8 Pro is the latest example of this strategy.

Additionally, presenting models from most to least expensive works better, especially for less knowledgeable consumers.

Digital pricing strategy

Artificial time constraints along with pricing are often used to display demand for a product and ignite a sense of urgency in the customer to buy the product. This is often seen on online educational and e-commerce platforms. Remember the Lightning Deals at Amazon?

Decoding the Psychology of Pricing: How companies make you buy
Lightning and time-based deals. Source: Amazon website

Talking about e-commerce, this brings us to how additional charges are included in the overall pricing strategy.

This also depends on the product category. For low surcharges, partitioned pricing is preferred, where the surcharged amount is smaller in font than the base price.
E.g.  $29.99 + $3.99 S&H

Also, it is important that all the surcharges are consolidated into a single partitioned surcharge. Clubbing packaging fee, credit card fee and shipping fee together has a much better psychological impact as compared to a segregated surcharge fee for the customer.

But in case of high unreasonable surcharges, it is seen that the surcharge is included as the total price of the product. Eg: a ₹500 mobile cover case which has a shipping fee of ₹150 will sell better if it’s displayed as “₹650 (Shipping fee included)” than “₹500 + ₹150 shipping fee”.

Also, putting products in the context of large numbers gets people to buy and subsequently pay more.

How to position discount pricing strategies?

Research has shown that there is a higher probability of a consumer buying a product if the original price is presented before the Sale Price in case of a lower discounted product. The Sale Price should be smaller in font than the Original Price. Another differentiator is to place the Sale Price further away from the Original Price.

But if the discount is massive, it makes absolute sense to highlight the discount price.

The left digit factor is critical while discounting prices too. The difference between the left digits of the Original and Sale price should be maximized.

E.g. ₹900        ₹799

If the left digits are the same, the right digits should be low numbers.
E.g. ₹9666      ₹9111

It is also important to make it easy for people to compute the discount they are getting. Discounts are sometimes displayed in percentage format when it has a higher impact than the absolute discounted value. For ease in visual calculation, prices are stacked vertically to highlight % discount and horizontally to highlight absolute discounts.

decoding-the-psychology-of-pricing-amazon-example-casereads
Premium phones showing the discounting price. See how promotional and slashed prices are connected? Source: Amazon website
In conclusion

Nothing compensates for a good quality product. But an able and smart pricing model taking care of pricing psychologies of the target audience goes a long way into improving the first contact of the consumer with the product. Few simple but efficient tweaks in the pricing strategy eventually results in a few more millions in revenue in the bigger scheme of things for a business.

Go beyond and think why you’re okay paying 1001 in Puja and not okay with paying 1000 for Amazon Prime? It’s all in your head 🙂

It’s time YOU answer the question now – In business too, is it all in the mind?

The piece was put together by Saurabh Salimkumar, drop a thank you when you can! If you found this read useful, share us with your best friend on WhatsApp and LinkedIn.

Have a good one!

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