There are two powerful truths at work in business. The first is that every consumer wants to find the best value. The second is that companies must make a profit in a competitive market knowing consumers want to find the best value.
Companies add perceived value. Value that exists only in the minds of consumers. It’s called psychological pricing, and it leverages the brain’s attraction to shortcuts. Here’s how and why it works, and how to implement it yourself if you so choose.
Read also Personalized Pricing through AI
What Is Psychological Pricing?
Psychological pricing is a pricing strategy based on the psychological impact of certain prices. To define psychological pricing, most folks rely on the classic example that $2.99 is more attractive to consumers than $3.00. In fact, the market place platform Gumroad found that conversion rates for prices that end in .99 were over 100% higher than the next whole number ending with .00.
But nobody’s ever found similar jumps in conversion rate when lowering the prices from $3.02 to $3.01. So what’s going on here? Why are people 100% more willing to spend money to save a penny in some instances and not others?
Psychology in Pricing
The psychology of numbers in pricing can be mystifying. Because people don’t appear to make rational decisions. But there’s a logic—however misguided—behind every decision. Here are some of the leading theories about why some prices have an outsized impact on buying habits.
The Left-Digit Effect
As left-to-right readers, we’re biased toward the first digit we encounter instead of by sober mathematical rounding. $3.99 looks closer to $3 than $4 to us.
Prospect theory states that buyers face value uncertainty by basing decisions off a reference point instead of absolute value. In simpler terms, it means that when people see $2.99 they see it as less than $3.00 instead of more than $2.98.
$3.00 is the reference point. Whole numbers are often our reference points because they’re easier to consider. It’s less work for the brain to do. And a price’s value is based on its relationship to the reference point. In $2.99’s case, it’s less than $3.00. We have a winner.
This is similar to left-digit bias in that the only digit being adequately considered is the left-most digit. But in the case of digit ignorance, it’s not because of a bias toward the left digit. It’s because the other digits are ignored. Fractions of a dollar may not be substantial enough to factor into mental calculations.
There may also be a bias toward fractions. Some studies indicate that consumers assume that anything with fractional prices is at the lowest possible price it can be.
Imagine thinking something was a decent price for $20. Now you see it at $19.99. “Wow,” you think, “it must be a pretty good price if they could only afford to knock it down one more cent.”
Whole Number Quality
The pendulum swings both ways. If fractional bias tells consumers .99 prices are great values, sometimes whole number prices communicate quality.
A whole number price infers than an item isn’t discounted. Some people interpret that as a mark of quality. If an item isn’t discounted, people must not need to be incentivized to buy it. Ergo, it must be awesome.
You’ll see this a lot in fine dining menu engineering, where something like a fancy whiskey will be priced at $12.00 flat. This is psychological alcohol pricing. The restaurant is leaning into the perception of quality that comes with whole number pricing.
This is when an item has its price lowered nominally to place it in a lower pricing “band.” It’s common with cars and houses because most people shop for expensive items within a budget. That means they have a maximum price in mind, AKA a pricing band. Take, for example, a car that’s priced at $29,998. This car will show up in searches for sub-$30k cars.
Psychological Pricing Examples
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