The Psychology Of Pricing

Pricing is a vital part of having any business, and understanding the psychology behind pricing can help your company save money. Pricing is one-way companies are in control of their sales, but it also allows them to engage with customers. After exploring some strategies below that will help you price better, we’ll cover how those strategies work on Amazon’s website. The “pricing psychology ending in 7” is a pricing strategy that marketers can use. The psychology of pricing is the psychological process that people go through when deciding how much to pay for something. If you’re in charge of a company or a marketing department, you’re generally concerned with three important figures: cost, revenue, and profit (or margin). Your objective is to keep expenses as low as possible while increasing income. You may even collaborate with a financial executive to create ambitious growth targets for your business. Pricing is a real issue for many company executives. You choose figures to pay staff wages and keep the lights turned on. You choose figures that are highly competitive with the market – after all, it is your customers who will keep your business viable. However, there is one aspect of the price that your company may be overlooking. It’s buyer psychology, as you would have predicted. Pricing is more than just a matter of profit margins. It’s also a marketing strategy that may help your company increase revenue. When it comes to pricing, it’s essential to consider more than just what will cover your company’s running costs and pay the bills. You must choose statistics that will convince your target viewers to purchase. This article will show you how.

Value and Return on Investment (ROI) should take precedence over cost.

Instead of telling prospects how much money they can anticipate spending, show them how much money they can expect to make. As a marketer, you know that expenses are always proportional to the result. Instead of focusing on how your product provides the most excellent rates in the market, emphasize that your product offers unrivaled outcomes. This approach is shown by Bidsketch, a startup that offers proposal templates to agencies and freelancers. Subscribers may develop professional-looking proposals in minutes, a task that would ordinarily take solopreneurs hours (sometimes days). The firm performs an excellent job of conveying the product’s return on investment (ROI) in terms of time saved and revenue generated. Time is more important than money, as business owners are well aware. On its main page, the firm features a testimonial from a customer who was able to reduce proposal time from three hours to 45 minutes. Bidsketch also claims that its customers would be able to halve the time it takes to create proposals. Customers of Bidsketch have generated more than $261 million in new projects, proving that they can accomplish significant outcomes (new business) in less time. Now comes the tricky part: how much is this going to cost? The advantages and value of utilizing Bidsketch are plainly stated on the webpage, but how much time and effort is required to get started? It costs $29 per month. A wise company owner will do a rapid cost-benefit analysis right away: Let’s imagine a proposal takes 3 hours to finish on average. Anyone who owns (or works for) a firm may estimate the value of their time. For clarity, let’s say this figure is $100 per hour. With Bidsketch, you’ll be able to prepare proposals in an hour and a half instead of three, saving $150 instead of $300. When you pay $29 to utilize Bidsketch, you will earn $121. Is the $29 price tag justified? Absolutely. It’s a no-brainer, in fact. In the eyes of the beholder, cost is always relative. Before considering the cost, communicate the return on investment (ROI) initially. Your charges will seem considerably less costly if you can explain outcomes in a clear value proposition. Let’s assume Bidsketch adopted a completely different strategy to marketing and didn’t explain a clear value proposition on its front page; a $29 monthly investment would seem to be considerably larger. Entrepreneurs and small company owners are notoriously thrifty. They typically live off their savings and invest their profits in their company. Why invest $29 on a Bidsketch membership when the money may be better spent on AdWords advertising (or groceries)? Cost becomes a huge factor all of a sudden.

“It’s Miller Time,” says the narrator.

This sort of phrase may seem to be a strange option for a beer firm. However, according to a recent study that touts the advantages of “selling time” over money, it may be the best option. “Referring to time often leads to more positive attitudes—and more purchases” because a person’s experience with a thing tends to build sentiments of personal connection with it. Jennifer Aaker, a General Atlantic Professor of Marketing at the Stanford Graduate School of Business, agrees. So why might selling expertise (or time spent) with a product be preferable to mention the product’s attractive pricing in some instances? According to Aaker, many advertisements (about 48 percent of those examined) featured a reference to time, indicating that many marketers seem to comprehend the value of time to a customer inherently. Unfortunately, there has been very little research done to support this claim. AIn their first experiment, Aker and her co-author Cassie Mogilner used two 6-year-olds to set up a lemonade shop to address this (so it would appear legitimate). This could buy the lemonade offered in this experiment for $1-$3 (customer choice), and a sign was utilized to promote the stand. The following were the three distinct signs used to promote the lemonade:

1. “Spend a little time and enjoy C&D’s lemonade,” the first remarked.
2. “Spend a little money and enjoy C&D’s lemonade,” the second added.
3. “Enjoy C&D’s lemonade,” stated the third (neutral sign)

Even in this lemonade scenario, the outcomes were evident. The movement emphasizing the passage of time drew twice as many individuals eager to spend twice as much. The second research was undertaken with college students (and iPods) to emphasize this. Only two questions were asked this time:

1. “Have you spent a lot of money on your iPod?”
2. “How long have you been listening to your iPod?”

Students questioned about time had considerably more positive feelings about their iPods than those asked about money, which is unsurprising given the previous research. According to the researchers,

• One argument is that we have a far more intimate connection with time than we do with money.
• “In the end, time is a more finite resource – once it’s gone, it’s gone — and therefore more valuable to us,” Mogilner adds.
• “What we do with our time speaks more about who we are than what we do with our money.”

Aaker and her coworker, on the other hand, were not finished yet. They ran a similar experiment during a concert to see whether any allusions to money would result in a more negative outcome (the participant being reminded of how much they spent on a product). The “cost” was time rather than money since the performance was free, but attendees had to “invest” time in line to acquire decent seats.

The researchers, in this case, posed the following two questions:

1. First, “How long will it take you to watch the concert today?”
2. Second, “How much will you have paid for tickets to today’s concert?”

What were the outcomes? Even in a situation like this, when time was the most valuable resource, inquiring about time improved positive feelings about the event. Not only that, but the persons who waited for the longest inline, or who paid the most incredible “cost,” rated their happiness with the concert the highest. “Even though waiting is ostensibly a negative thing, it seems to focus people on the whole experience,” adds Aaker. So, what exactly is going on here? Before marketers can begin directing their marketing efforts, they must first become aware of the significance that their goods have in the lives of their consumers. And there’s one more item to consider. According to the research, the only exception seems to be things purchased for prestige value. You won’t have to deal with this if you’re not in the business of selling sports cars or custom-made clothes. Still, the principle remains: “With such ‘prestige’ purchases, buyers believe that having the items reflects key elements of themselves and that owning the object rather than spending time with it gives them greater happiness,” adds Mogilner. Consider these concerns of the value of time the next time you price your goods, and you’ll find that catering to your customers’ most valuable resource, their time, maybe more convincing than even the most extreme price cuts.

Comparative Pricing Should Be Avoided

You enter a pharmacy to purchase a bottle of ibuprofen. You have two choices: a big pharmaceutical brand or a generic. The generic is 30% less expensive than the brand-name version. Why not save some money? The issue with comparative pricing is that it isn’t as flawless as marketers want it to be. Consumer views of items may be influenced in a variety of ways. According to Itamar Simonson, consumers will not always choose the lowest option. Instead, they could select for a consumer brand, which seems to be a ‘less hazardous option. Consumers may also choose to forego making a transaction entirely. According to new Stanford study, urging people to compare costs may have unforeseen repercussions.

To reach this conclusion, this research examines the impact of implicit and explicit comparisons. When a client decides to compare two or more goods, implicit comparisons occur. On the other hand, the marketer or advertiser explicitly mentions or brings up detailed comparisons. Simonson and Dholakia set up two studies to assess the impact of comparative advertising. The first was an eBay auction for CDs. The researchers included (for sale) a number of best-selling CD albums, including Pink Floyd’s “The Wall” (hey, not awful taste either ;)). The price of the CDs for sale always began at $1.99. The auctions were then “framed” in two different ways. The CD was ‘flanked’ with two more copies (of the identical CD) with a starting bid of $0.99 in the first method. The original CD was flanked by two copies, each priced $6.99. The findings were clear: CDs flanked by the more costly alternatives ($6.99) routinely sold for more money than CDs flanked by the $0.99 options. “We didn’t advise them to compare the two; they did it independently,” Simonson said. “And individuals who make these sorts of comparisons on their own have a lot of power.” The researchers re-ran the experiment with the identical parameters, but this time is, expressly asking customers to compare the $1.99 CD with the other options. The findings indicated that when prices of neighboring CDs were mentioned to reach, the bids on the center disc were statistically irrelevant. Additionally, while acquiring CDs, customers become far more cautious and risk-averse: “Just the fact that we asked them to draw a comparison made them feel as though they were being duped in some way,” Simonson added. People were more hesitant in every way possible: less bids, longer time on their initial request, and a lower chance of participating in repeated auctions. “Marketers must be aware that, although comparison selling may be quite effective, it is not without risk.” Consider this the next time you directly compare your product and that of your rivals. Instead, you could better emphasize your particular abilities and emphasize time saved over money saved…

Option Overload Should Be Avoided

Pricing is a field in which art and science collide. On the one hand, you want to provide a wealth of information to your consumers. You want to be adaptable, and you want to provide “premium” services. But here’s the thing: less is more when it comes to price. As Oli Gardner of Unbounce puts it: Consumers are continually confronted with “analysis paralysis,” which occurs when there are too many alternatives to choose from and no decision is made. Oli Gardner elaborates on this idea with the Toothpaste Trance, a strong example. This is a psychological condition that has influenced everyone at some time. Here’s how it goes down. Because there are so many options for the same product, you wind yourself selecting at random. You’ve become overloaded, and you’ve stopped looking at items for their distinct advantages and features, instead of seeing them as ‘one in the same.’ A well-known experiment involves supermarket jam. Researchers S.S. Iyengar and M.R. Leper performed a shopping survey in 2000. What’s the premise? Shoppers were allowed to taste the many jam varieties that were offered for purchase. The effect of changing the number of options from 24 to 6 was examined in this study. Only 3% of those who tried the samples went on to buy the jam, compared to a 30% purchase rate when only 6 kinds were offered. Customers will be unable to make a clear selection if you provide too many alternatives. In the same vein, your price tables must be free of distractions. Choose 3-5 services where your firm shines. Combine alternatives into these services, then provide the data in three simplified bundles. The important thing is to package your goods and services to make sense for your target clients. It’s just as crucial to convey your pricing professionally to offer your fundamental price points. Consider the following Visual Website Optimizer case study: BaseKit, a famous website builder, wants to make its price page run better. After seeing the ‘ Plans and Pricing ‘ page, the number of users who went to the ‘Buy Now’ page was used to determine success. (For follow-up studies, Visual Website Optimizer suggested that BaseKit track income as a success metric.) Because most of the traffic to the price page is paid, it is highly targeted at visitors interested in the product. The first version of the price page looked like this:

The price on the variant page is brighter, bolder, and more noticeable, as well as a testimonial and a more evident currency choices. Conversions increased by 25% once the price page was redesigned:

Within 24 hours, the revised design had attained statistical significance at the 95 percent confidence level. In addition, the page improved by 25% throughout the experiment.

Value vs. Price

Is pricing a good indicator of worth? According to research done by Goldstein and colleagues in 2008, this is not the case. When individuals don’t know how much wine costs, they “do not get greater pleasure from more costly wine,” according to the research. However, according to another study, there is a strong link between price and perceived value. When participants were informed that wine cost a lot of money, they awarded it a higher grade. The researchers went a step further in their investigation by looking at honest brain reactions to the wine tasting activity. When informed that wine was more costly, research participants’ brain areas connected with sensations of pleasure were activated more. Consumers are allowing pricing to impact how they feel about items and services to some level. In similar research, Dan Ariely discovered that students who paid more for cold medication felt better than students who bought the same treatment at a lower cost. However, being more costly does not necessarily imply better. A wide range of budgets influences consumers. Some customers just cannot afford higher-priced goods and services. While they would like to pay more for higher quality, they do not have the financial means. One of the most fundamental notions in contemporary economics is “need vs. luxury.” The concept is simple: individuals prioritize spending on basics such as food, housing, and clothes above luxury things such as designer products, high-end materials, and high-end automobiles. Some shoppers are obsessive about price comparisons and locating bargains that fit their budgets. However, this is not always the case. Online merchants utilize comparison shopping as a technique to surpass their competition. You may have heard of comparison shopping engines such as ShopStyle, Google Shopping, or PriceGrabber, making it simple to compare prices.

Here’s the deal: According to research, ‘comparisons’ may make your items (or services) seem inferior, even if they are identical. Does this sound perplexing? One idea is that comparative shopping encourages people to wander their thoughts. Inevitably, youngsters begin to inquire why certain things are more affordable than others. Therefore, consumers may persuade themselves that the more costly item provides them with more excellent value. The tale’s lesson is that there is no one-size-fits-all response to the dilemma of whether to raise or cut pricing. Some segments of the population will be more price-sensitive than others. What firms must do is build a highly targeted market. To discover your target audiences’ values, talk to them and do qualitative research studies. Then, create price models based on what you’ve learned. But be aware that you won’t be able to satisfy everyone. You’ll most likely exclude others if you concentrate on a few consumer categories. That’s all right.

Techniques of the Trade

CBS News compiled an excellent breakdown of the methods that merchants use to get customers to purchase. The following are some of them:

Dollar Signs: How to Get Rid of Them

According to a Cornell University research from 2009, dollar signs on pricing are associated with reduced customer expenditure. In this study, guests in upmarket restaurants spent much less when the term “dollars” or the dollar symbol “$” appeared on the menu. What is the explanation behind this? We’re drowning with information. Words and characters add to the amount of data we have to digest. Using a minimalistic approach (‘24′ vs. ‘$24′), restaurants encourage their customers to concentrate on the cuisine rather than the price.

‘Ten for ten dollars’

These deals can be found at almost every grocery and pharmacy. Consumers believe that in order to obtain the bargain, they must purchase ten goods, therefore they will fill their shopping carts. The truth is that it’s a marketing tactic. You don’t have to buy all ten to obtain the discount. You can get one for a dollar. The tale attempts to get you to buy more by promoting ’10 for $10.’

Limits for each customer

You’ve undoubtedly encountered this wording at the grocery store as well. This terminology gives the impression that a commodity is a limited resource. As a result, you feel pressured to purchase more immediately if the shop runs out. It’s simply a marketing gimmick, after all.

The Influence Of The Number ‘9′

‘Charm prices’ are prices that finish in 9, 99, or 95. We’ve been socialized to connect 9-ending pricing with reductions and more fantastic bargains. William Poundstone (William Poundstone, William Poundstone, William Poundstone, William Po Priceless: The Myth of Fair Value and How to Take Advantage of It is the author of Priceless: The Myth of Fair Value and How to Take Advantage of It. We also encode a price like $7.99 as $7 since we read numbers from left to right. This is particularly true if we read too rapidly. The “left-digit effect” is called: Before we read all the numbers, we mentally encode them. -Vicki Morwitz is a research professor of marketing at New York University’s Stern School of Business and the president of The Society For Consumer Psychology. Prices that finish in “9” may be found at almost every retailer (online or brick and mortar). We’ve all heard why it’s employed (to make the price seem cheaper), but is it effective? Is a $99 pricing point vs. a $100 price point going to make a difference? The usage of “charm prices” has been coined due to this strategy’s success. In his book Priceless, William Poundstone examines eight research on the use of charm pricing, finding that they improved sales by 24 percent on average compared to neighboring, ’rounded’ price points. A middle women’s apparel item was examined at costs of $34, $39, and $44 in an experiment conducted by MIT and the University of Chicago. Surprisingly, the item sold best at $39, much higher than the reduced $34 price. Is there anything that can beat number 9 in terms of sales? When split tested, researchers discovered that discount pricing that highlights the initial price appears to win out number 9.

Easy Math

Humans have short attention spans—every tenth of a second count. We don’t have time to figure out what commas and decimal places mean. Retailers will thus utilize real, flat numbers. Some businesses may put a product on sale and display the original price before discounting it. The sign may state that the actual cost was $10 and that the price is now $8 instead of $7.97. This is because ‘$7.97’ is an odd number. Even though ‘$7.97’ is less expensive, it takes longer to process and compute the savings. It’s simpler to get to $8 since buyers can immediately calculate ‘$10-$8.’

Font Size Reduction

According to marketing academics at Clark University and The University of Connecticut, consumers perceive discount pricing to be a better deal when presented in a tiny font rather than in a big, muscular style. This is one area where marketers often go astray. According to the hypothesis, the human mind equates to physical and numerical magnitudes. However, keep in mind that not all human eyes are made equal. In addition, small fonts might be difficult to read, particularly on a computer screen. Don’t make your audience read, but don’t flood them with large text promoting your deals.

Conclusion

There’s more to pricing than simply numbers. Consumers are usually seeking a solution to an issue or a way to alleviate a significant pain point. Speak directly to your audience’s requirements and values while determining the ‘appropriate’ pricing. The value of the solution you can deliver will far transcend the numbers you choose. Instead of focusing on random figures, concentrate on facts relating to customer demands.

• As much as feasible, make the user experience as simple as possible. Keep pricing points near round figures and avoid choice overload. Remove decimal points and commas if you’re offering a discount or comparing prices with a rival; they’ll confuse your readers.
• Keep in mind that context is everything when it comes to price. Some people will be more price concerned (and sensitive) than others. Some people will go out of their way to save money and discover bargains. On the other hand, others will be more flexible in terms of how much money they are ready to spend. These people are more inclined to value their time above saving a little cash. Your pricing plan should be aligned with your company’s go-to-market strategy. To find out — precisely -what your consumers want, talk to them, perform a poll, and undertake qualitative research. Are they price-sensitive, or can they be more flexible with their spending? Concentrate on your target market and provide precisely what they want. Some consumer groups may be left out, but that’s alright.

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