July 14, 2019

If you run a marketing team or business, you probably focus on three key metrics: revenue, profit, and cost.  No doubt, your goal is to minimize cost and maximize revenues. You may be considering working with a finance leader to help you set long-term growth goals for your organization.  

This mainly covers tasks that involve pricing service and products to add value to your business and make profits. But how can you do that effectively? What are the strategies you can use to price your product to increase sales and profits with little effort? 

One way is to master the skill of pricing your product. And to do that, you need to not only understand psychological pricing but also leverage the right strategies.

Below we discuss some key strategies deduced from the theory that certain prices have a huge psychological impact than others. Whether you’re a customer service manager, business leader, or professional service leader, the strategies are helpful for all. 

Psychological Pricing Strategies 

1. Charm Pricing

A research study conducted on psychological pricing found that consumers perceive prices lower as compared to prices that are one cent higher when you change the left-most digit to a lower level.  

The strategy is also referred to as charm pricing as it involves prices that end on “9” or “99”.  In this strategy, businesses reduce one digit in price by rounding off one cent.  For instance, the human brain processes $4.00 and $3.99 as two different values: to your brain $3.99 is $ 3.00 and is cheaper than $4.00.    

2. Prestige Pricing 

This strategy is an opposite of charm pricing. It makes values into rounded values, like $19.99, can be converted into $20.00. It happens because rounded numbers, like $20.00, are more appealing to consumers than non-rounded numbers (e.g., $19.99). That means rounded figures “feel right” to consumers. 

3. BOGOF– Buy one get one free

This is one of the most popular pricing strategies where customers pay the full price for a service or product to get another one free. Many entrepreneurs make some changes, like: 

• Buy one get four free
• Buy one get 25% off on the next purchase
• Buy one and get two bonuses valued at $70, for free

4. Visually Highlight Prices

According to Keith Coulter and Robin Coulter research, this strategy triggers an immense fluency effect.  The consumers interpret any visual difference to a big numeral distinction. That means, if you change the color, font, and size of the signage for the existing price and place it away from the previous price, it will likely increase the number of purchases.  

The customer sees the new price as a better deal than the last placed price. 

Final Thoughts 

Overall, the given psychological pricing strategies are effective for various types of businesses, but it is important to test different strategies on different products to determine if they suit your business.  

Sources 

• https://production.wordpress.uconn.edu/businessmarketing/wp-content/uploads/sites/724/2014/08/size-does-matter.pdf 

• https://www.jstor.org/stable/10.1086/678484?seq=1#page_scan_tab_contents 
• https://psycnet.apa.org/record/2005-05742-007 
• https://www.entrepreneur.com/article/279464 

Want to learn more?

Click Here to learn how to craft your perfect pricing, and click here to learn how we can help!

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Imagine this scenario. Your team has worked extremely hard to bring your latest cloud subscription service to market. Now, you’re walking into a meeting with Product and Marketing, with a goal of devising the final prices for your new service. You’ve done lots of research with target customers and have a pretty good idea of a price range. (Your research suggests somewhere between $18 and $20 would be the best price for your lowest-tier subscription offering.) But how do you come up with that final number that becomes your price? And, how can you support that price with the best call to action? Here we will describe some psychology that will help you in deciding between pricing your product at $20, $18, and $19.99, and in deciding the optimal number of words to use in your call to action.

Tip 1: End Your Price With 9

If you’re deciding between offering your cloud service at $19.99 per month, or $20, go with $19.99.

Why is that?

According to a paper published in Quantitative Marketing and Economics by researchers at MIT and University of Chicago’s Graduate School of Business, the effect is true. A price ending in 9 increases demand. It’s called price-ending effects, and there is a fair amount of research done on the topic. The MIT/Chicago researchers reviewed years of literature on the topic and found several possible theories explaining the effect. Some theories suggested that the price-ending affects the left-most digit, while others suggested its importance is an impact on the rightmost digit:

“The literature contains a range of explanations for price ending effects. These explanations fall into two broad categories. Explanations in the first category posit various reasons for why customers ‘‘drop-off ’’ the right-most digits and therefore overweight the leftmost digits. The most common of these explanations is that customers round prices down (Gabor and Granger, 1964; Lambert, 1975; Schindler and Kibarian, 1993) and essentially ignore the right-most digits. For example $59.99 might be coded as $59 or, in an extreme case, as $50.

A second class of theories posits that price endings provide information about relative price levels and/or product quality (Schindler, 1991). In these theories, customers pay more attention to the rightmost digits because of the information that they convey. This contrasts with the customer’s emphasis on the left-most digits in the ‘‘dropping off ’’ theories. Researchers have suggested that one inference customers may draw from $9-endings is that a price is low, discounted, or on ‘‘Sale’’ (Schindler and Warren, 1988). For example, Salmon and Ortmeyer (1993) describe a department store that uses a 0-cent ending for regularly priced items and 98-cent endings for clearance items.”

After completing their review, the researchers found most convincing evidence for the rightmost digit theory, although it’s not crystal clear, with several studies reporting evidence for the leftmost digit theory. It appears to be context dependent, and it’s clear that there are still gaps in understanding the mechanisms behind price-ending effects. In any case, that shouldn’t stop you from experimenting with achieving price-ending effects.

Implement A Price-Ending of 9 In Your Pricing!

• Price your products with the rightmost digit ending in 9.
• Any other number will not work as well. (There is a gap in the research as to why a price ending with a number other than 9– for example $19.80 or $19.50– would not be as favourable an effect as a price ending in 9.)
• Effects are best for “new items that customers have seen less frequently in the past”  (Anderson, Simester, 2003.)

Tip 2: Make Your Call to Action Seven (Plus/Minus 2) Words

You just learned that ending your price in 9 is powerful, and you’ve updated your prices with this principle. Now, how can you support your well-formed pricing with the most engaging call to action? Now it’s time to apply Miller’s Magic Number.

In one of the most highly cited research papers in psychology to date, cognitive psychologist George A. Miller discovered that the maximum amount of elements that humans can store at once is 7,± 2. These “elements” can be letters, digits, or words– and Miller found that 7 seems to be the limit of our capacity for short-term memory. This magic number 7 can also be “stretched”, by categorizing information into related groups. How can you apply Miller’s Magic Number to pricing?

Use The Magic Number in Your Call to Action

Try using it on your call to action, by constraining your copy to Miller’s number– 7± 2 words.

As an example, let’s take a look at Salesforce.com’s Sales Cloud pricing page. Notice how each call to action follows the principle of Miller’s Magic number, and as a result, how easy it is to digest the information. Each call to action uses a limit of 7 ± 2 words, which allows customers to absorb the entire call to action at once. In contrast, let’s examine an instance where Miller’s principle is not followed: take a look at the Dropbox business pricing page. In this example, notice how it seems much harder to process the information here, even though these call to action statements are only a few more words than the Salesforce example.

Use The Magic Number in Your Features List

You can also apply Miller’s principle to the number of bullet points in your features list. This will help you ensure your customers are reading and retaining everything you’ve worked so hard to build them.

This may be challenging in practice, with so many benefits that your team is excited to convey. The point here, is that by constraining your content to manageable chunks, you can get customers to read all of your benefits, rather than overwhelming them with a long list that seems like work to read. To observe this in action, let’s take a look at some examples of companies’ feature lists. First let’s revisit our previous Salesforce example. Notice how this page violates Miller’s principle in its lengthy product descriptions for each tier. How do you feel when reading this? Now, compare it to the company’s Marketing Cloud pricing page, which sticks to Miller’s principle for the benefits of each tier. Notice how the information is much more easy to consume with this offering. This is a great example of how you can design your features list into manageable “chunks” to fit within your customers’ short term memory limits. (Although, the prices are not listed on the website, which we never recommend!)

In the example depicted in this photo, the call to action statements are too wordy. However, the number of items in the features lists do fit within Miller’s principles.

Implement Miller’s Magic Number in Your Pricing Page!

• Craft calls to action that are your best 7 ± 2 words.
• Extend this learning to your product description, with a maximum of 7 ± 2 bullet points to describe each offering.
• Consider other ways to limit your content to chunks following Miller’s principle.

Now, back to our scenario from the beginning. You attend your meeting, eager to share your customer research, and your recommendations to price the new service at $19.99. Your team moves forward with the pricing, as well as a refined call to action statement and feature list. By the end of the meeting, the team has a well-formulated pricing strategy, and an appreciation for considering customers’ psychology for optimal results.

These insights are just an initial starting block for learning lots more about pricing psychology for your business. To get started, try implementing one new idea, and be sure to arrange a plan to test and understand the results. The greatest rewards will come when you continue to tweak and understand how these insights are relevant to your specific business.

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Have you ever visited an airline’s website intending to just buy a flight, and then had to actively deselect in order for the add-on trip insurance, hotel and car rental to be removed from your flight purchase? If you’ve encountered this, you’ve been a part of a default option marketing strategy.

What exactly are default options?

According to Christina Brown and Aradhna Krishna in their 2004 research paper The Skeptical Shopper: A Metacognitive Account for the Effects of Default Options on Choice, a default option is “the choice alternative a consumer receives if he/she does not explicitly specify otherwise.”

In the case of the airline example, the default option is the full upsell: you would purchase all the bells and whistles along with the flight unless you opt out of those options one at a time. As you might expect, default options can be powerful up selling tools. In Skeptical Shopper, Brown And Krishna tell us how the research confirms this:

“Park, Jun, and Maclnnis (2000) found that when buyers are presented with a fully loaded car and given the opportunity to remove optional features for a cost savings, they end up with a more expensive set of features than those presented with a basic model and given the opportunity to add features for more money.” So, if you are presenting cloud buyers with a set of monthly license packages to choose from, add in some options like an extra bundle of 5 hours of customer support and let them decided if they want to de-select the additional option.

 

Why does it work? According to some of the leading behavioural economists of our time, the default effects occur because of a mental framing that happens. We begin to think of the default option as the standard, and anything less– feels like an emotional loss.

The power of default options is the key message of the best-selling 2009 book, Nudge: Improving Decisions About Health, Wealth, and Happiness by researcher Richard Thaler, and the book’s companion blog, Nudges. Both great reads by the way!

But be careful not to over do it, the process of perceiving a default option is not as passive as you might initially think. There is a “correcting” of inclinations and could counter your default effect. If your offer default appears biased (in the sense opposed to the buyers natural tendencies) ot may reduce the size of the default effect … or even suffer a negative (backfire) effect…”

In Skeptical Shopper, Brown and Krishna explain that “there is a fairly involved cognitive process in which buyers review the information provided by the default, draw a conclusion about the risk, trustworthiness, or competency of the seller, and correct their initial inclinations according to this conclusion.” So, there it is. Default options can work, if your buyer believes that you are trustworthy.

How can you make yourself trustworthy to a customer?

Ideally, you can build trust by offering your customers genuine value with your default options. The key here is offering default options with the products and services that they really want and need – such as training, customization, integration with other systems, etc. (Not what you want them to want.) Including these options as a default, should help your customer get up and running quickly and improve the adoption of the system and accelerate their return on the investment, or help them alleviate key problems you know they will likely run into. Funny enough, once you stop trying to use default options as “up selling” and start using default options to solve your customers’ needs, the defaults will also work in your favour!

Examples – great default options:

• An automatic renewal system so that customers can continue their existing service without the hassle of renewal administration. The renewal system is:
  1. Well-advertised to customers,
  2. With clear reminders sent in advance, and;
  3. An easy process to avoid the renewal, optimizing customers’ trust and transparency.
• A default option that’s customized to a specific user type, and his or her specific pain. For example, adding a weekly email marketing campaign service to a CRM subscription would likely be a useful, customer-relevant default option for a large corporate marketing team. Default options should be grounded in a deep understanding of who your customer is.

Examples – poor default options:

• Adding a feature to your standard CRM product that’s clearly an upsell, something that your customer does not always need and won’t enhance their ability to get up and running quickly with their new solution.
• An automatic renewal program for clients without any warnings about the upcoming renewal, or any automatic renewal program that is difficult to find or to cancel.

How to create great default options:

1. Use Empathy. With your key customer personas in mind, put yourself in each persona’s shoes, and design default options based on their needs.
2. Co-create them. Have your customers help you create default options, consisting of the products and services that they would want to have as choice defaults.
3.  Test! As you create default options, test them out on customers before you unveil. This way, you can avoid any backlashes well before anything ever goes live.

Here’s how you can think about it: default options can be a great tool to help guide your customers to the best products and services for their needs. If you keep your customers’ interests at the forefront, then there’s nothing to worry about.

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