How do pound shops stay afloat? What is "anchored pricing"? Read our guide to psychological pricing to find out.
What’s the deal with prices ending in 9p?
As a child, I used to wonder why prices were never rounded up. I assumed it was to make them seem cheaper than they were and it worked on me. Little did I know there was more to it and that tactic was one of many.
What is psychological pricing?
Psychological pricing is a strategy based on the idea that certain prices psychologically affect consumers in different ways.
Capitalism is complex and simply marking a price down isn’t enough to maximise profits. That’s why marketers mark employ psychological tactics to gain an edge. We like to think we’re above these Jedi mind tricks and we have an abundance of choice. But studies have shown they can work.
Examples of psychological pricing
One of the most common examples of charm pricing is ending a price in 9 or 5. You often see prices ending in 5 in car or house sales. The difference between £9,995 and £10,000 is only 0.05% but you’ve just turned a 5-figure sum into 4 figures with that fiver. Bargain!
Perhaps an example of anti-charm pricing was the story of Trevor Francis. When he became the first British million-pound footballer for Nottingham Forest, his manager Brian Clough claimed the fee was £999,999, as he didn’t want the million-pound figure to go to Francis’s head.
These kinds of tactics justify the buyer’s decision to purchase in two key areas:
- Specificity: Because most items include some form of tax (like VAT in the UK), 99p appears to contain the VAT and no kind of mark up. This links into the next idea.
- Reduction: This one is technically true but it plays into the need to save money and get more for less, even if it’s a penny off £1 or a fiver off £1,000. By feeling they’re “underpaying”, they’re more inclined to buy.
According to a 2011 paper entitled Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers by Utpal Bhattacharya, Craig W. Holden, and Stacey E. Jacobsen, the idea of ending prices with a 9 (better known as the left-digit effect because the reduction of the left-most digit affects the perception of paying less more than the 9) has been shown to influence stock-market transactions. They discovered that there was “excess buying at just-below prices ($1.99) versus round numbers ($2.00) right above them”, leading to major changes that significantly impact markets.
The left-digit effect has also impacted peoples’ smoking habits, with researchers finding that price hikes (from $4.99 vs. $5.00, for example) were effective in reducing smoking in adults.
This is when goods are priced at a high amount to convey quality.
We all want to save money but at first glance, the higher the price, the more we think we’re going to get for our money. There’s a mental threshold where this can work, as it creeps from “this is too expensive” to “wow, you must get everything for that!”
It works even better in the luxury goods market. People generally don’t trust luxury goods if they’re considered to be cheap in price. Rolex watches are meant to be thousands of pounds, not hundreds.
BOGOF (Buy one, get one free)
For the UK readers, do you remember this Safestyle UK advert?
The classic BOGOF deal plays into the hands of most consumers. Why buy one item when you can buy one and get another free? Even if the initial price of the item has increased to cover the cost of giving another one for free.
Artificial time constraints
Do you want to miss out on a sale that ends TODAY? I thought not. But have you ever noticed how furniture retailers like DFS have sales all year round? One for Christmas, one for Boxing Day, one for New Years, one for Easter, one for bank holidays, one for closing down. They never end. If we don’t buy TODAY, we know the offer will still exist tomorrow, so the urgency to rush to the store decreases.
A few weeks ago, I read about how dollar/pound shops make money. The secret lies in convenience. It’d be cheaper to buy in bulk from a cost per item perspective. But people on low incomes haven’t got the money to do that so they’d prefer to buy single items for £1/$1 and save the money for other things. It’s known as the “poor tax”.
A flash sale offers very high discounts on items for a short period of time which leads consumers to impulse buy.
“If you find it cheaper elsewhere, we’ll match the price!” Heard that phrase before? And how many times have you done it? Probably never. I know I haven’t.
But the idea is retailers who offer this “won’t be beaten on price”, such as Curry’s and CEX. This sounds enticing but with things like price ceilings, the effort to do this with every item you buy outweighs the savings in the long run.
It’s not enough to say there’s a discount – you’ve got to show the customer. Price anchoring is when a retailer establishes a price point or “anchor” so consumers know what the item is worth. Then, when you cut the price and show them, they can see just how much they’ve saved.
A bigger trick is when they increase the anchor price before making a discount.
Say a bar of chocolate is £1. The retailer does a 50% offer, so it’s now 50p. When that’s done, the anchor price then goes up to £1.50. The same offer would then make it 75p. You think you’ve saved 50% when you’ve only saved 25% off the original anchor price.
Dr. Jennifer Aaker from Stanford Graduate School of Business conducted experiments in 2019 to see whether time or money affected consumer choices. While not definitive, her paper, co-written with Cassie Mogilner, showed a possible preference on time-saving over money-saving in marketing.
The advantages and disadvantages of psychological pricing
You’d think the obvious pros and cons to psychological pricing would be:
Pro: You (the retailer) makes more money
Con: You lose trust if consumers realise they’re being manipulated
But it’s more nuanced than that.
- A higher ROI
- Removing the competition with “unbeatable” prices
- Proof of value
- A reputation for low prices can help with brand awareness
- Requires the demand
- They might get tired of constant price fluctuations
- Saturated markets
- Limited success in the UK and US
- Constant demand for lower prices
The Paradox of Choice
Pricing strategies play on the idea that consumers have an abundance of choice. When there are 10 different varieties of toilet roll in a supermarket, you start to question the true value of anything.
But in 2004, a psychologist named Barry Schwartz wrote The Paradox of Choice – Why More Is Less in which he argued that cutting out choices can help consumers and show them true “autonomy and freedom of choice”. This, he suggested, could then reduce anxiety.
Schwartz outlined six parts to a consumer’s final decision:
- Figure out your goal or goals.
- Evaluate the importance of each goal.
- Array the options.
- Evaluate how likely each of the options is to meet your goals.
- Pick the winning option.
- Modify goals.
How can psychological pricing affect digital marketing?
While researching this article, I asked some digital marketers their thoughts on psychological pricing in the digital sector.
- How do you think psychological pricing affects digital marketing?
- What do you think of SAAS companies that don’t explicitly state their pricing?
- What pricing strategies do you think work best?
Ally LaBriola of Museum Hack, a museum tours company in New York, said the best pricing strategy they’d found for their renegade museum tours was to be upfront from the start and clear about what was included.
“Our tours are not cheap, but we are 100% transparent about what goes into the ticket price (guide fees, museum admissions, wine, etc.) so that we leave it to the consumer to make the purchase decision versus tricking them into buying.”
Cathy Colson of Pure Visibility agreed with that upfront transparency, although she said it was “pretty rare” to have transparent package pricing within B2B SEO. That’s why the agency decided to take a leaf out of the SAAS pricing playbook and create SEO services based on common needs, including clear monthly costs on their website.
“In less than a year, we increased our revenue from SEO by 93% while all but eliminating scores of time-wasting, unqualified leads from our website. Additionally, our prospects are better fits because their expectations are more clearly set from the start.”
For them, explicit pricing was the right move.
Alex Kehoe of Caveni Digital Solutions was on the same page.
“We’ve tried both tier pricing and customer-choice price ranges. In our experience, being upfront about the overall range of services cost is the best way to have the average consumer engage in general. […] Refusing to explicitly state your price is a great way to lose potential leads; there is intrinsic value even in low balled range pricing since you gather their information and may convert them down the line in their customer life cycle.”
The effects of psychological pricing were dramatic for Sarah Franklin, the co-founder of digital PR firm Blue Tree. She said charm pricing (pricing items at an odd amount) created a new standard for products marketed online. She also said businesses who applied this strategy to their financial plan started seeing increases in sales.
“As a team we have altered our pricing tactics to see the change we desire in leads and sales with more customers.”
The only person to mention an advantage of hiding prices was James Canzanella of Internet Marketing Nights (although he did say he thought it was “much more helpful when a company stated their full pricing”).
“There are suitable times to hide the much higher-priced plans for an option that states ‘Please contact pricing for this plan’ which prevents any type of sticker shock. If a company wants to increase its sales, then I think that offering multiple pricing plans is the way to go, and as long as the business can provide more value than what they are asking for? Then the offer should be able to sell itself.”
Cost-based pricing, market-based pricing and value-based pricing
There are three main strategies to determine prices. Funnily enough, it’s much more than selling items a bit cheaper than your competitors. It’s all about maximising profits.
This is the method people are most familiar with. The vendor sets the price based on all variable costs they might incur and the added mark-up. It’s also known as cost-plus pricing as you’re adding a set amount on top of your costs for pure profit.
The advantage to this strategy is by using the costs and profit you’ll be making, it’s simple to calculate and you’re covering your costs immediately. However, the downside is customers don’t know if they’re getting value for money because they don’t know what the costs are or what they mean. So they might be reluctant to buy as they can’t psychologically set the price.
If you have a lot of competitors, you can leverage their prices and stand out. Again, this is simple to do and allows you to gauge what the true value of your product is in a crowded market.
But basing your pricing structure on your competitors means they’re the focal point for your business. That’s not great. You need to be in control and by using your rival’s prices, you’re always the returner and never the server, to use a tennis analogy.
Finally, there’s value-based pricing. This is similar to how Bandcamp allows musicians to set a “pay what you want” price on their releases. The end goal is the customer pays exactly what they want and get the products they need.
The clear advantage to this method is a deeper relationship with your customers, fostering a sense of loyalty. You will also know what improvements need to be made and how much they’ll cost. Generally, if a customer wants more, they’ll pay more.
Given that they aren’t overwhelmed by the number of psychological methods tied into one product. This is where many retailers go wrong.
And, akin to market-based pricing, you’re not calling the shots. Customers still don’t really know how much things cost so they’ll always want to pay less and that could eat into your profit margins.
Psychological pricing is a deep subject and I’ve only touched the surface. The following list of resources go further, delving into real-life case studies and their results.
Effects of $9 Price Endings on Retail Sales
In 2003, a paper called Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments suggested $9 price endings used by US retailers had “little evidence of their effectiveness”. The paper presented a series of three field-studies in which price endings were experimentally manipulated and the data came to two conclusions.
The Williams-Sonoma bread maker
If you’re still unsure what to set your prices to, check out this case study on the Williams-Sonoma bread maker. Sales were lacklustre upon launch but once they did some market research and shifted to a value-based pricing structure, things changed for them.
Don’t Just Roll The Dice
Software CEO Neil Davidson wrote Don’t Just Roll The Dice which outlines the economics, pitfalls, and perceptions to pricing in the software industry. A must-read for any software developers or product owners interested in the subject.
And if you want to find an expert on this subject to help your brand, you’ll find plenty of options on our Marketplace.
The Price Is Right is probably the most entertaining example of psychological pricing. The premise of the show is value-based and you get to see regular people jump through hoops in the name of guessing the prices of goods.
Amongst all the fun is a valuable lesson in how we as human interact with value. When there are incentives involved, we think more about what things are worth. We also realise we had little to no idea in the first place.
That lack of understanding is where pricing tactics can take hold. Savvy shoppers know there isn’t an actual discount and can be put off by the pretence. But it might have been worth much less. So the vendor makes a profit regardless while the customer subconsciously thinks they’ve saved money.
The perfect balance would be retailers selling their products at the price customers can afford and customers understanding how much the products are worth. It seems that being upfront about prices and with a bit of honesty on both sides means there won’t be a need for any Jedi mind tricks.
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