Understanding how and why people buy something matters. Many business owners focus exclusively on how they can make the biggest margins on a product, while still remaining competitive. What they fail to consider, however, are the very real factors that influence consumers during their purchase decisions.
Much research has been conducted on the psychology of pricing, and we’ve learned some surprising things about how pricing really affects sales. Following are five ways to increase sales using the psychology of pricing.
1. Useless options aren’t always useless
Several years ago, The Economist reportedly offered three different subscription options for their print and online versions. They were:
· A one-year online subscription for $59
· A one-year print subscription for $125
· A one-year online and print subscription for $125
Dan Ariely, professor of psychology and behavioral economics at Duke University, saw this ad, and wondered about the rationale behind offering two options at the same price point; especially considering one option clearly offered a greater value.
He conducted an experiment with some of his students to see how many would choose each option. He found the vast majority (84%) of students chose the third option: the combined print and online version. The rest chose the first option, while no one chose the second one.
In a second experiment, he removed the second, “useless” option to see what would happen. Surprisingly, 68% chose the first option while only 32% chose the third option.
This proved that the “useless” option wasn’t so useless after all. While no one chose the second option in the first experiment, simply having it as an option somehow helped people decide what they wanted; and not only that, it made the third option more attractive, thereby increasing overall revenue.
Takeaway: Test out a variety of price points, and consider adding “useless” options. While no one will likely choose that option, it may make your other offerings appear more attractive, thus increasing sales.
2. Use a higher price first as a reference point
Research has shown that consumers are more likely to find a product “cheap” if they’re first exposed to a product of a higher price. This is why, for instance, grocery stores may tend to put higher priced items at eye level: it makes all the other, less expensive options look even better.
One study found that seeing a higher priced item can impact buying decisions up to 48 hours later, as it provides a context for the price of that product. Consumers mentally categorize product prices as “low”, “medium” or “high”, and products they see later on will be categorized relative to what they’ve seen previously.
The study’s authors write, “These practices reflect a belief that the products consumers see initially influence their later judgments and decisions. In particular, these contextual products create a standard for subsequent product evaluations. Thus, for example, people may perceive a $30 shirt to be less expensive if the shirts seen before it cost $65 than if they cost $15.”
Takeaway: Position your products (whether online or in-store) in such a way that consumers will see higher priced items first. If there’s a particular product you’re trying to promote, first determine your desired price point. Then, position higher priced products before that one on the page or in the aisle.
3. When launching a new product, raise the price of the old one
When introducing a new product, many business owners put a deep discount on older, “outdated” products. They assume that because the product has been around for a while, customers may find it less relevant and of less value than a new product.
However, some research indicates that consumers may actually be willing to pay more for older products. Because of this, the launch of a new product is the actually the ideal time to test out a higher price for your older stock.
The study’s authors write, “The reason is that its “all in” costs may have increased or its inherent value for the remaining customers may not have decreased as much as it has for those that moved on. Indeed, its value may even have increased for some users. All this may translate into a willingness to pay higher prices.”
Takeaway: Resist the urge to automatically offer a discount on your older products. Ask yourself whether the product still holds value for a certain customer segment. If it does, bump up the price and track what happens to your sales.
4. Charm pricing is an old technique that still works
We all recognize and understand charm pricing, even if we don’t know what it’s called. Charm pricing is simply rounding down an even price to a little below the dollar: for instance, $49.95 instead of $50.
The idea is that consumers perceive the item to be a better deal, and are more likely to identify the price as “$49 and some change” rather than $50.
Research shows that the left-hand digit is the one we notice first. So in the example above, we may associate a price of $49 as closer to $40 than to $50. Even if our rational minds know this isn’t the case, it tends to have an influence on our purchasing behavior.
Use caution however: Some research has shown that using .99 may also signal low quality to some consumers. If you’re trying to frame a product as a luxury item, steer clear of charm pricing and stick to round numbers.
Takeaway: Test out charm pricing on a variety of products to see if there’s any impact on sales. If, however, perceived product quality is very important to sales of a particular product (for instance, luxury items, products related to health, etc.), it may be best to use round numbers (or at least not numbers ending in .95 or .99).
5. A higher price may increase perceived quality and satisfaction
Research suggests people may actually enjoy products more when the price is higher. This is likely because they want to justify their investment, and feel they made a good decision.
One of the most famous experiments done on this phenomenon came out of the California Institute of Technology. Researchers offered diners sips of various types of wines, telling subjects the (made up) prices — ranging from $5 to $90 a bottle — of each before they imbibed.
Through the use of magnetic resonance imaging, researchers were able to monitor each subject’s blood flow and pleasure signals while trying various wines. They found that the higher the stated price of a wine, the higher the subject’s pleasure.
Takeaway: Consider reframing your high-end products as luxury products by increasing the price. According to this research, this may not only make your product appear more desirable, it may actually increase the level of enjoyment your customers feel when using your product.
Psychological pricing isn’t about manipulating your prospects into buying. Rather, it’s about understanding how and why people buy so you can adjust your pricing policies accordingly. Test out the five strategies above, and then monitor how they impact sales. You may just be surprised at the difference one small change can make!