The Psychology of Pricing and The Power of Choice

Pricing your products and services is one of the most important decisions business owners make. Unfortunately, there is little information on how to price, other than cost based pricing strategies. Although cost is important, it is not the only factor in determining the ultimate selling price.

To understand pricing strategies, begin with the single most important concept:

Price is always comparative, never absolute.

In order to form an opinion of your pricing, your customers will compare your prices to something. Sometimes it is a direct comparison with a competitor. Sometimes it is with alternatives you offer or with a previous price you charged. Sometimes it relates to some level of affordability or even a false notion of what the price should be, but in any event, too expensive or too inexpensive is comparative.

In a restaurant, people tend to order from the central price points of the menu. It is amazing how often the modal price point (the most commonly ordered price) is very near the median price point. The comparison moves the customer towards a central price – neither too expensive nor too cheap. The wine list is another matter altogether. Then the modal wine price point is the second cheapest bottle on the wine list.

Price and the Control Need

Control is one of the most important psychological needs. The need to control our circumstance and surroundings is commonly used Note passive voice in marketing. Think of the old slogan “Have it your way at Burger King”. By offering the customer a price choice, you are giving the customer control. This pricing principle is called price lining.

By giving the customer three price points representing good, better or best, the customer will tend to move towards the centre price, unless you move the middle price point. By moving the middle price point you can affect the customer’s buying behaviour. Good can look like better or better can look like best depending on where you have centred the middle price point.

Sales and discounts appeal to this notion of price comparison. For example if you offer a 25 per cent off the regular price, you are set-up a false sense of price choice, by suggesting how much a product should cost and demonstrating how little it really costs.

Price Anchors and Direct Marketing Ads

Example: You might expect to pay $99.99…but:
It’s not $99.99
It’s not $89.99
It’s only $79.99

We call the first number offered the anchor. It sets an expectation in the customers mind. In a study by Drazen Prelec and Dan Ariely in 2006, participants were asked to write the last two digits of their social security number on the top right hand corner of the page. They then answered a series of questions on price. Students who had written numbers between 50 and 99 had higher price expectations than those who had written numbers between 00 and 49. The first number written anchored their thinking.

So ask yourself, can you provide your customers with choice? In marketing, this choice is offered through your product mix – – in sales it can be done using your sales presentation. For example, a mortgage broker may not affect interest rates, but can show the customers different rates and the different payment options.

Remember, if you do not offer your customers with choice, they will seek to find a comparative price elsewhere. By creating a price within a price, and you can keep the customer from ‘shopping around’ as they feel they have shopped around within your ‘store’. This provides your customer a sense of control meeting one of the most crucial needs in customer psychology.

Find Out More

To find out more on costing and pricing or products or services attend Small Business BC’s Pricing and Costing Your Product seminar, presented by Bill Erichson, where he will make you question your assumptions about pricing, costing and how they fit into your business strategies.