Jose Palomino

Pricing Psychology

August 18, 2011

pricing psychologyBuyers are, after all, only human.

By their nature, humans do not always make rational decisions.

Their buying decisions are no different. Not only are not not always rational – they don’t even repeat the same decision with certainty.

Pricing is a critical component of your product, service or business’ Value Proposition. And good pricing strategies must take into account the psychological effect a given price has in the customers’ mind. A price is not just seen as the amount a brand wants in exchange for their product. Prices are relational. That is, they are related to your product, to customer expectations of features and value, and even to customers’ perceptions of themselves.

Within every product category there are pricing anchors. These are prices for services the buying public is conditioned to accept as reasonable and expected for a given category. To go above those anchor price points your product needs to have significant value added features which resonate with the buyer’s sense of value. In other words, bumping your price up to the next price range in the category, buyers expect your product to have certain features. If they conclude your product doesn’t meet that higher expectation, their disappointment is startling.

Buyers who pay a bumped up price, higher then the expected “anchor,” may not be buying your stated feature package. They may be buying based on their perception of themselves, “I can afford better than the cheapest model.” In other words, overbuying to ensure quality, hoping to lengthen the time before needing to replace their purchase (“I bought the Sony because it’s more reliable than the Vizio” – although both could be the exact same TV!)

If you chose to go with a bumped up price, set the price so it’s clear that it’s an upgrade from the anchor. When a price is only slightly higher than anchor pricing, buyers’ perception may be that you are “just slightly better than,”  or even “just more expensive than” – and not truly an upgrade from the low-price alternative. And of course you must deliver quality that fits hat perceived position. Your product must rise to meet buyer expectations.

One of the most common and obvious other pricing strategies is charm pricing – setting prices slightly below a round number, such as $29.99 vs $30. There is a proven rationale for this, even for luxury brands – it works! Consumers rationally know $29.99 is $30, but their perception is that the price is in the $20-$29 range rather than the $30-$40 range. Therefore, they perceive the price as lower.

  • What anchor price exist in your product niche?
  • What bump price points exist and what feature expectations do buyers have at those price points?
  • Does your price point end in 9? If not, why?

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