The Psychological Aspects of Pricing

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Pricing is an important aspect to market a product or service such that it reaches the maximum targeted customers as well as profits the organization to keep continuing its production. Being an integral part of marketing, it is critical to decide and come up with sound pricing strategies that “facilitates customer value creation, structure price decisions, and earn profit” (Kienzler and Kowalkowski, 2016). It drives the supply and demand of a product of service in the market or can be other way around, i.e. supply-demand will influence pricing. Many researches have established that demand is directly proportional to customer’s desire and thus, it is important to understand the psychology behind prices and sales. As a result, prices are often focused on cost-base or competition-base. There is a need to shift this to value-based pricing which considers how consumers perceive a product’s benefits in relation to price. Moreover, other aspects like numbers, colors, and other presentation factors also play an important role in how customers perceive a price. This paper summarizes various psychological aspects of pricing.

Pricing usually starts with setting up a calculated initial price by analyzing its break-even point while considering that the price corresponds to the value delivered to the customer. Although these numbers and values show how prices and profitability relate, it is still based on assumptions on how customers react to the product. The economic and psychological approaches to study consumer behavior cannot be perfectly logical and can differ from what was initially assumed. Hinterhuber (2015), in his research mentions that customers as well as managers violate principles of rational choice since no all customers check prices before purchases or not all pricings are shortsighted or based on market rates. As mentioned before, managers try to manipulate customers’ perspective to influence purchase decisions. Some customer perceptions assumed during pricing are discussed in this paper.

Features of Customer Perception of Pricing

The Price-Quality effect

Studies suggest that there is significant relationship between price and quality (price as an indicator of quality). Purchasing expensive products instills increased brain activity of pleasantness for picking better products, and thus, increase demand.

Adding Irrelevant Attributes

Managers often add irrelevant attributes to a product and increase price to give it a dramatic and meaningful differentiation from other products. Although customers realize that attributes associated with the brand or product do not have value, increase in price makes it relevant. For example, taurine is added with several energy drink brands like Red Bull, Monster and Rock Star as an evidence that it helps muscle function and aid athletic performance.

Framing

This concept is a method of changing context of price presentation without changing the price itself. It is based on the theory that when outcome is framed to be a gain relative to part or reference price, customers become risk-averse whereas, when framed as a loss, they become risk-seeking. A few ways this strategy is used includes framing savings as a free bonus pack or percentage price reduction.

The Price-Precision Effect

Precise prices increase sales by 0.6% since it increases the customer’s willingness to pay. Hence, even though the exact price would round off to a whole number, prices avoid the last digits to be zero.

Endings

When prices end with 9, they are read from left to right (lower digits read first), giving a perception of discount or less price and leading to increase in sales (Asamoah & Chovancová, 2011).

Sale Signs, Deal Obsession and ARPs

Presence of ‘Sale’ sign increases probability of purchase because of the feeling of getting a deal. It is for the same reason marketing something free or showing advertised reference prices (ARP) clouds customer judgement and induces willingness to pay.

Discount or Unit Representation Format, Color, Size

Studies suggest that representing discounts as a percentage for low-priced products and as a monetary savings for high-priced products increases perceived attractiveness of an offer. Moreover, attributes that involve numbers, like guarantee/warranty, when expressed as a higher digit (12 months instead of 1 year), increases willingness to pay. Prices in red are attractive to males. Lower sale prices in smaller fonts increases likelihood of purchase. Smaller price values include cents whereas expensive goods eliminate longer syllabic length.

Happily Paying More

Customers prefer paying flat-fee over variable billing. They also feel more satisfied to qualify for minimum purchase requirement and offered lower discounts over larger discounts without purchase requirements.

Price Partitioning

Partitioned prices with each attribute priced relative to its perceived benefit helps to underestimate the total price.

Scarcity, Decoy and Compromise Effect

If a product is perceived to be scares, it will be bought in higher quantities. When it is placed in market as either an intermediate option between the best and worst products, they are preferred through compromise effect. Decoy effect includes introducing an irrelevant option to make an unappealing option look more attractive.

Practical Application

The various findings of customer perceptions of pricing are the major reasons for a success or failure of product/service in the market. It is established that these perceptions can change, vary and be contrasting among different people and target segments. Hence, the findings can be used relative to target customers. Value-based pricing, which considers these researched psychological effects as well as information about customer perceived values can help to understand what pricing strategies would work on a product of service and provide maximum profits to the organization. (Kienzler, 2018) The various strategies listed in the paper helps with increasing sales through bulk purchases, attracting customers through visuals and discounts, providing anchoring and justified discounts or positive perception of increased price by relating it to quality or making them feel happy about paying more for convenience. Since they are all based on intangible and variable aspects of psychology, they need to be continuously studied and determined with changing trends, psychological studies as well as customer feedbacks to ensure pricing strategies are conveyed in favorable manner to the end users. Kienzler & Kowalkowski (2017), also summarize the need for continual behavioral and psychological research for the same.

Conclusion

Prices set the position of brand by setting different expectations among consumers which can attract, repel or target different segment altogether through tactics like quantity discounting. It is necessary to understand and use these tactics to ensure that products are marketed in the right manner with attractive prices.

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