The Psychology Of Pricing
Key Strategies for Pricing Flowers and Floral-Related Products.
By Brenda Silva
While innovative merchandising and distinctive displays often serve as methods to draw consumers into a retail shop, it’s more likely that the perceived value in a product’s retail price is responsible for the final sale. As such, retailers looking to increase their sales should consider how their products are priced and what value their pricing strategies offer to consumers. In addition, creative displays that feature options to upsell complimentary items, as well as offer bundled products, can also allow retailers to move more merchandise, as long as their pricing is presented and perceived as the best value to consumers.
Effective Pricing Strategies
According to ProfitWell, a Boston, Mass.-based business platform that researches pricing-strategy data, one of the biggest mistakes made by companies is not understanding the importance of having a pricing strategy. In its free downloadable guide (profitwell.com/recur/all/ psychological-pricing), ProfitWell asserts that, “Through a variety of psychological pricing strategies, stores are specifically designed to encourage [customers] to spend more than [they] intend.” In the guide, ProfitWell defines psychological pricing as “A pricing strategy that utilizes specific techniques to form a psychological or subconscious impact on consumers” and “Setting prices lower than a whole number.”
To help retailers understand and optimize pricing strategies, the in-depth guide offers an example of psychological pricing. “The idea behind psychological pricing is that customers will read the slightly lowered price and treat it lower than the price actually is. For example, an item that is priced $3.99 is often perceived by the consumer as $3 rather than $4.”
The ProfitWell guide cites four examples of psychological pricing that explain consumer perception and the impact certain pricing strategies can have on potential sales.
1.Artificial Time Constraints
Signs that say “One-day only!” create a false sense of urgency and are designed to “act as catalysts to get consumers to spend.” The guide explains, “If potential customers believe that the sales are only temporary, they’re more likely to make their purchases today rather than next week. Consumers are afraid of missing out on obvious deals, so they make the purchases in order to avoid a potential feeling of regret or missing out.”
2. Charm Pricing
ProfitWell defines this as “The official name for all those 9s you see at the end of prices in stores. Studies have proved that prices ending in 9 create increase customer demand for products. This is driven by the fact that we read from left to right, so when we encounter a new price at $1.99, we see the 1 first and perceive the price to be closer to $1 than to $2. In essence, ending your prices in a 9s convinces customers that you’re offering a great deal.”Other studies indicate that some consumers perceive products with prices ending in .95 as being of higher quality than products with prices ending in .99. Simply put, a price of $19.95 could give a product more cachet in some consumers’ minds than a price of $19.99.
Defined as “The phenomenon where consumers are unable to recognize or understand fundamental math principles.” For example, the consideration of which is a better deal between two options, such as “Buy one, get one free” or “50% off when you buy two.” A recent study showed most consumers are more enticed to purchase by the first option, even though the cost of the items is the same in both options. Most consumers like to get something free, even if they have to pay full price for the first item. Use the “Buy one, get one free” strategy especially when you want or need to move lots of a specific item or items.
This psychological pricing method involves listing prices “$19” instead of “$19.00,” which can impact how customers perceive the value of the products offered. “Longer prices appear to be more expensive for consumers than shorter prices, even if they represent the same number. This is because, subconsciously, the longer prices take more time to read. This effect is compounded by the use of a “$” sign for prices.”
One way to utilize this strategy is to omit the “$” signs from your pricing, and if you’re pricing at a whole number, forget the “.00” as well; e.g., simply 19 instead of $19.00. This pricing technique can also give products (and the store) a higher perceived cachet. If you want to combine this tactic with charm pricing, consider making the “.99” in a smaller font than dollar figure (19.99).
Examples to Enhance Sales
In addition to the four types of psychological pricing offered by ProfitWell, Entrepreneur magazine, located in Irvine, Calif., adds three more examples of psychological pricing that can have an affect on sales.
Explained as “the complete opposite of odd or charm pricing,” this type of pricing involves making all numerical values into rounded figures. For example, when $99.99 is converted to $100 (or 100), consumers are more likely to make a purchase based on the appeal of rounded numbers versus non-rounded numbers, which are viewed as less visually appealing.
Entrepreneur asserts that this may be the most effective psychological pricing strategy. It involves “offering two similar products simultaneously but making one product’s price much more attractive than the other.” As a “psychological game of choice” for customers, they must choose between two products that are similar but have different prices. Some consumers will automatically opt for the lower-priced option while others will assume the higher-priced item is of higher quality, has more or better features, or is simply better in some way.
3.Highlight Different Prices
The theory here is that when you offer a sale with a previous (higher) price posted side by side with the new (sale/lower) price, you make more sales because customers feel they are getting a bargain and are not interested in researching the drop in price, according to Entrepreneur. In order to make the new pricing strategy work effectively, Entrepreneur suggests changing the font, size and color of the new price, which can increase the number of purchases because customers see the new price as cheaper and a better deal than the previous price. However, when employing this strategy, the pricing difference should be no more than $10.
The Pros and Cons of “Bundle Pricing”
The U.S. Chamber of Commerce, located in Washington D.C., suggests another pricing option that can help increase sales and decrease losses: Bundle Pricing. “Bundle pricing” is defined as bundling two or more products together and pricing the bundle for less than the sum of the products’ individual prices, and it is considered a good way to move a lot of inventory quickly. Further explanation by the U.S. Chamber asserts that “A successful bundle- pricing strategy involves profits on low-value items outweighing losses on high-value items included in a bundle.”
The Harvard Business Review (HBR), based in Boston, Mass., provides an alternative slant on the concept of bundle pricing, stating, “Common pricing practices like price bundling serve to mask how much a buyer has spent on a given product, decreasing the likelihood that the buyer will actually use it. And a customer who doesn’t use a product is unlikely to buy that product again. Retailers who employ those pricing tactics without considering their impact on consumption may be trading off long-term customer retention for short-term increases in sales.”
HBR continues, “We found that price bundling influences consumption considerably. Quite simply, it is far easier to identify and account for the cost of an individual product in an unbundled transaction than within a bundled transaction. The one-to-one relationship between price and benefits in an unbundled transaction makes the cost of that item obvious, creating a strong ‘sunk-cost effect’ and a high likelihood of consumption.”
As a final comment, HBR notes, “Research suggests that consumption is driven not so much by the actual cost of a paid-for product as by its perceived cost. This perception is influenced greatly by the manner in which the product is priced. Some pricing policies highlight the perceived cost of a paid-for product while other pricing policies mask the cost.”
Summing up psychological pricing, the U.S. Chamber points out, “Pricing your inventory properly is essential for business success. You may have the best product in the world, an excellent team and a beautiful storefront, but if you can’t price
your products effectively, your sales will ultimately struggle.”