The Psychology of Pricing

May 8, 2018
By Zack Poelwijk

Examining how you price your products and services can go a long way toward increasing your bottom line without much effort on your part.

There’s a distinct psychology to pricing that takes into account what people perceive as a good deal, even when there are better deals to be had. You can also use this trick to make a “value” package of your products or services. Do this by combining a slow-moving product or service with one that gets a lot of attention.

Certain prices, and comparisons of certain prices, have more psychological impact than others. Retailers have long known that prices ending in the digit 9 are perceived by the brain as cheaper, even though it’s only cheaper by one penny. For instance, $2.99 is perceived as closer to $2 than closer to $3, even though that penny barely makes a difference.

In an experiment conducted by the University of Chicago and MIT, prices for women’s clothing were set for $34, $39 and $44. To the amazement of the researchers, the items sold best at $39 even though that price was more expensive than other options.

Comparison pricing works well when customers feel they are choosing between a cheaper product and a more expensive, but similar, product. An example of this is well-illustrated by a famous case study involving the company Williams-Sonoma’s bread machine. They introduced a $275 bread machine, which almost no one purchased. Then they introduced a $415 model and, amazingly, the $275 model started selling well. People thought they were getting a “deal” because it was similar to the more expensive mode but cheaper.

So, think about how you can combine your products or service packages into comparison groups with the goal of having the customer pick the one you really want them to pick . . . the one with the higher profit margin. If you have a small and a medium package, add a large package. Some will choose the large package, but many more will choose the medium package, which is where you’ve bundled your most profit-generating items.

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