I recently found myself thinking about the pricing psychology behind how people shop, and inevitably, wondering how and why consumers buy based on how goods and services are priced. I came upon Phil Agnew’s HubSpot article called “5 Simple Ways to Improve Your Pricing”, and it was so good, I wanted to share his insights with you.
One of Phil’s guests on his Nudge podcast was Melina Palmer, host of the Brainy Business, and she explained why irrational prices surprisingly sell. “The framing, the offer, the brand. That’s what makes people buy,” she said. “The truth is that pricing isn’t really about the price.”
Let’s break out five alternatives to lowering prices that can improve your sales.
Break Your Price Down
Big dollar buys are always overwhelming at first glance. That’s why car dealers focus on the monthly payment amount. Still too much per month? Extend the loan out further. Get that monthly payment down into a manageable amount, and customers are four times as likely to see the cost as a good deal and that customer’s willingness to buy increases by 50%. (With today’s high interest rates, seven+ year loans are commonplace)
And it doesn’t just work on big ticket items. Consider something recurring, like mobile phone contracts. Frame them in daily terms versus monthly, and the cost seems more affordable. One dollar per day versus $30 a month. (Working in a brand new phone for another $15 a month, when the phone purchase price outright is over $600 is also a relatively easy upsell). Perception is everything here.
Use Non-Round Numbers
When setting the price for your product or service, a psychologist at the University of California named Michael Santos demonstrated in a 1994 study that utilizing rounded number pricing amounts wasn’t as effective as non. He had researchers dress as street beggars requesting donations. Those that asked for a dollar or a quarter received 60% less in donations than those that asked for precise amounts, like $1.02 or 35 cents. The psychology suggests that the specificity of the amount asked for made the request appear to be more real, which encouraged people to give more. In charitable cases, this also has an emotional reaction for the giver, as they feel exceeding the asked-for amount results in a kind of ‘spiking the football’ feel and gives them a warm-n’ fuzzy feeling of making a difference by overdelivering on the ask.
Another study regarding using non-round numbers came in a 2008 study of 25,000 home sales in Florida. It found that homes that listed their sale price as a specific price sold for closer to their asking price. The HubSpot article noted this example: Listing a house for $249,749 instead of $250,000 would increase the end-sale price. It appears that being precise increases the appeal of one’s price.
Come up with a Premium Decoy
This sounded irrational to me at first, but it works. The HubSpot article suggested creating a premium option that you don’t expect customers to buy. They call this ‘Decoy Pricing’. In the early 2000’s, author Dan Ariely showed how The Economist Magazine used this tactic to their advantage in his book Predictably Irrational.
Originally, the magazine offered two subscription options:
- Web-only subscription for $59
- Print & web subscription for $125
The Economist Magazine later added a third ‘decoy’ option: a print-only subscription, priced as much as the print & web subscription, at $125.
- Web-only subscription for $59
- Print-only subscription for $125 > DECOY OPTION
- Print & web subscription for $125
All of a sudden, adding the expensive print-only subscription, priced the same as print & web, makes the print & web option appear to be the best value. And it worked…before, the $59 option was the best seller. But, after adding the decoy, consumer behavior changed, and the majority of customers chose the print & web option.
It also has proven effective in the world of books, where hardcover books being priced 160% or more than paperbacks helped grow paperback sales by over 16%.
Purchase Limits
We always seem to want what we can’t have, right? Many have seen grocery stores impose a purchase limit on something that is on sale, like “$2.99 12 packs of soda, limit 4.” Well, you may only really want to purchase one 12 pack of soda to get you through the next two weeks, but at that price, you end up buying the limit, because the limit makes the product seem scarce. And as the Eagles sang, “Take it to the Limit”… In the article’s example, this tactic increased sales by 112%. Capping how much one customer can purchase creates increased demand, fear of missing out (FOMO) and the feeling that you’re getting the best deal as a consumer. For the business, it boosts sales volume.
It’s $0, NOT ‘Free’
Often, marketers toss in a bonus item to a sale and say it’s ‘free’. After all, we ALL love free stuff, right? However, in a study that showed hundreds of participants two different types of promotions, ‘free’ wasn’t as successful as ‘$0’. Ads were listed as ‘free’ and as ‘$0’, and the ads utilizing the $0 option resulted in more sales conversions compared to free.
Five tips that have all shown positive results in the world of product sales, all which don’t result in price reductions for your product but can increase your sales. Mix in some psychology and you’ll find it can be better than dropping prices to get consumer intentions to buy.
If you need advice on boosting your bottom line, we at CMOco are ready to help you win and grow your business. Contact us today!
~ Bruce Thiem, CMOco Director of Integrated Media
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