Pricing Strategy & Human Psychology
Is your pricing strategy HELPING or HURTING your bottom line? These proven pricing strategies can boost your sales overnight.
Bryan Curley
April 22, 2024
Did You Know? Conversion rates for prices that end in “.99” were over 100% higher than the next whole number ending with “.00.” (Source)
Happy Monday, Marketers!
Last week we looked at Mio’s rebrand as attempt to repackage the same product in order to change how their target audience perceives that product, all in the name of increased sales.
Here’s Mio before…
Add a dash of marketing magic…
And here’s Mio after.
That’s because it isn’t always what you sell.
Sometimes it’s how you sell it.
Large-scale rebranding campaigns aren’t the only places we see this.
Pricing strategy is a major driver behind sales and revenue, and a major component of pricing strategy is pricing psychology.
We’ve explored aspects of pricing psychology before in previous editions of Data-Driven Marketing, specifically about a 1995 study that examined the decoy effect.
A study of how MIT students perceived subscriptions to The Economist showed the potential to increase revenue by 43% simply by adding a crazy “who would choose that?!” third pricing option.
Pricing Model A
$59 online only subscription
$125 online + print subscription
Pricing Model B
$59 online only subscription
$125 print only subscription ⬅️ 🥸
$125 print + online subscription
Target customer’s thought process: “If it costs $125 for the print subscription alone, that means I’m basically getting the online subscription for free! What are great deal!”
There are all sorts of other pricing strategies rooted in human psychology that can punch up your revenue.
You don’t need to be an MIT student to guess what’s coming next.
8 effective ways to use psychology to increase revenue
Here are 8 more ways beyond decoy pricing where you can use human psychology to your advantage.
1/ Put your preferred pricing model front and center
We’ll start with this one because it works especially well with the decoy effect.
Put your preferred pricing model front and center. People’s eyes naturally are drawn to the middle of graphics, like this pricing table from CrazyEgg.
2/ Charm pricing
This is the ol’ “end the price in a 9” technique, which is famous for a reason—it works.
You already saw the stat in the “Did You Know?” section at the beginning that showed prices ending in “.99” converting over 100% better than prices ending in “.00.”
A study on women’s clothing found that pricing items at $39 increased sales by 24% compared to pricing those same items at $44.
I think the use of “sales” instead of “revenue” indicates quantity of items sold, which means the net change in revenue (not profit, for the record) was a 9.9% increase.
What’s fascinating is that same study also found that $39 items sold more often than those same items priced at a lower $34!
3/ Price anchoring
If you have a product with an MSRP or you’re offering a limited time deal, advertise that MSRP or original price and then put all of the deals, savings, and slashings right next to it for that wow factor.
This is called price anchoring, where you anchor the original price as a point of comparison.
Price anchoring is even more effective than charm price, at least according to some studies. Consider these two displayed prices pit against each other:
In this split test, the $40 product outsold the $39 product!
Of course, this version outsold both:
As far as how to display the price, I’ve seen it written that you should both make the sale price larger than the original price and you should make it smaller (because numerical magnitude is tied to font size). Right now, I’m not sure for certain which is better. It’s probably pretty case-specific, so don’t be afraid to A/B test!
4/ Raise prices to convey quality
What perception is your brand trying to convey?
If you’re aiming for quality and exclusivity, charm pricing and price slashing probably aren’t for you. Your target audience isn’t as price averse and they don’t mind paying top-tier prices for top-tier products.
In their minds, if something’s too good to be true, it probably is.
Sometimes the best way to increase overall profitability is to change the perception of your product. Can you raise price and still generate more total revenue even if you sell fewer units?
As a bonus, you can more easily weed out the deal-shopping customers, who often make up an oversized part of your customer service budget.
Gif by sunnyfxx on Giphy
The catch, though, is you still have to deliver on that elevated price point.
5/ Innumeracy
In the 1980s, A&W—the root beer people who also have hundreds of fast food restaurants around America—tried to compete with McDonald’s by beefing up their product, literally.
A&W announced a marketing campaign called “Third is the Word” that promoted their 1/3-pound burgers as being better than McDonald’s 1/4-pound burgers. But there was a problem.
We were aggressively marketing a one-third-pound hamburger for the same price...but despite our best efforts, including first-rate TV and radio promotional spots, they just weren't selling.
As it turns out, customers thought 1/4 was bigger than 1/3, because 4 is bigger than 3.
As this well-known example clearly shows, the average person is pretty bad with numbers.
From a pricing perspective, you can use this to your advantage by phrasing your pricing in the most appealing way possible.
For example, consider two ways of phrasing effective pricing model for a $10 product.
“Buy one, get one free!”
“Buy two, get both half off!”
Effectively, both result in the consumer getting two units of product for $10, but the “buy one, get one free!” strategy sells better.
6/ Drop the decimals
$12 seems cheaper than $12.00 because it has fewer digits.
According to the resource I just linked, it even comes down to how many syllables numbers have. They reason that “7” would perform worse than any other number because it’s the only digit with two syllables, and saying prices like “seventy seven” is five syllables whereas “eighty four” is just three.
Maybe it would have sounded like a more dramatic wait if Rose had said, “It’s been 77 years…”
Full disclosure: I have not researched this, but it’s now on my list!
7/ Then ditch the dollar sign
For some industries—like upscale-casual restaurants, for example—simply removing the dollar sign from prices increased revenue by 8%.
8/ Offer a lifetime subscription
Subscriptions are everywhere these days. A large reason for that is the blindness we’ve developed to the subscription model. The average person spends $219 per month on subscriptions but thinks they only spend $86!
If you have a subscription-based product and you know your CLV, consider a one-time payment model for customers who want to pay once and be done with it. The higher initial price can encourage use, as people want to get what they paid for, and it can give your customer a sense of ownership.
Everyone say, “Hi!” to Cameron C 👋
Question: If you could make any rule for one day and everyone had to follow it, what would it be?
Cameron C’s Answer: “My rule would be that everyone has to pick up and throw away at least three pieces of trash they normally walk past every day.”
Gif by IntoAction on Giphy
ChatGPT-Generated Joke of the Day 🤣
Why was the math lecture so long?
The pi didn't end.
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