“The more you ask for, the more you get”
– William Poundstone
The buying process isn‘t as rational as our common sense would have us believe. Our everyday decisions are manipulated by a great number of explicit and implicit pricing tricks, including “time-limited” offers, discounting, “charm” prices like 15,99 or 1,89, anchoring or decoy prices.
When it comes to developing a smart product pricing strategy, behavioural economics and psychology can help you increase sales.
In the research conducted by Antonio Rangel and his colleagues, 20 volunteers tasted 5 wine samples which, as they were told, cost: $5, $10, $35, $45, and $90 per bottle. 3 different reactions were described in the study.
- When the participants knew the prices they liked the taste of the $90 bottle wine more than the $5 one. And the $45 wine more than $35 one.
- Although the participants had been told that they would taste 5 different samples, they actually tasted only 3 wines. When the volunteers were told that the wine cost $90 per bottle (its actual retail price) – they liked it; at $10 per bottle – they didn’t (they tasted the same product).
- When the participants didn’t know the price they rated the cheapest wine as the tastiest one.
What is the result of this experiment: Price is not just a number, it’s a psychological weapon that can change people’s attitude towards product for better or worth.
So, what do you know about the psychology of prices? Sit comfortably – we’ll give you 3 frameworks to help you boost sales.
Here we come.
#1. DO YOU HAVE ONLY ONE PRICE FOR YOUR PRODUCT?
When you’re being told “Don’t think of a pink monkey” you start thinking of it. To estimate something, we need a starting point, a certain anchor – something like “a pink monkey.”
Prices are just numbers, and we better understand numbers only in relation to one another.
William Poundstone, the author of “Priceless: The Myth of Fair Value (and How to Take Advantage of It)” explains the example of 2 bread makers, priced at $279 and $429. When the $279 bread model was released sales were ok, but when the $429 model was introduced, sales for the cheaper bread doubled. Not because the more expensive bread was awful, but because it made the cheaper variant look more attractive in buyers’ eyes.
This is the classic example of the anchoring effect – we’re willing to pay higher priced when they’re compared to even higher ones.
Anchors can make big numbers seem small.
Have you ever heard about the decoy effect?
One more classic pricing trick – where the introduction of a third variant suddenly makes one of your earlier variants look better.
Marketers give customers multiple options of the same product and will guide you to buy the one THEY want to sell you.
Dan Ariely in his lecture “Are We In Control of Our Decisions” describes several interesting experiments. He found that giving customers more options to choose from can influence their purchase decisions.
One more example from his lecture. When people were given 2 options:
- a weekend in Rome with free transportation & breakfast
- a weekend in Paris with free transportation & breakfast
it was hard to choose from.
But when a third option was added:
- a weekend in Rome with free transportation & breakfast
- a weekend in Paris with free transportation and breakfast
- weekend in Rome with free transportation, breakfast AND free coffee
most people have chosen the 3d variant. Because such a slight difference in coffee made Rome with coffee look superior Rome without coffee.
How you can use it: Offer 3 different options with similar or almost equal prices to two of them. Don’t forget to make one of the two look more attractive for customers.
#2. CHANGE THE PRICE PERCEPTION
If you’re thinking that your prices are too high and you need to lower them to win or retain customers, we’ve got one word for you. Starbucks.
They sell coffee for $3 and more while their competitors offer lower prices. What is the secret? The experience of buying.
Example: I know a girl who became quite successful in selling macaroons, although she set up prices twice higher on them. What did she do to attract people?
She was and is very active in social media, esp Instagram (beautiful photos of macaroons and its ingredients, the process of cooking, detailed recipes and even the rules how to eat macaroons to enjoy their flavor in full manner), amazing hand-made package and exceptional service.
If you’re creating something new, there’s no price reference and people are much more likely to accept any price you name. But if you want to change more than the market average, then make your product/service look fabulous.
How you can use it: Create a story about your brand. Make your product be not only super useful, but also make it look interesting for your customers. All people are visuals.
#3. SEGMENT YOUR CUSTOMERS
Companies often forget that different customers have different requirement for your product. So the price strategy must reflect that difference.
According to the research there are 3 customer types that ecommerce merchants should take care of:
- Spendthrifts (15%): These consumers spend more than they would like to spend.
- Tightwads (24%): These consumers spend less than they would like to spend.
- Unconflicted (61%): Such consumers spend as much as they usually spend.
The perception of your product changes for each group of people. Thus your price realization strategy should include multiple options.
I absolutely like the example from W. Poundstone’s amazing book Priceless. When offering 3 variants make your customers choose between the options you offer and not between “to buy it or not”.
How you can use it: Try offering 3 packages, and place the product you want people to buy in the middle.
Put it all together:
No matter what you sell, developing a pricing strategy is the key factor: too low prices and you’ll miss out on profit, too high prices and you’ll miss out on sales.