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Psychological Pricing: How Companies Lure Customers Through Pricing Strategies

Sep 24, 2020 8:47 AM 5 min read
Editorial

All things are subject to interpretation. Whichever interpretation prevails at a given time is a function of power and not the truth.

- Friedrich Nietzsche

 

Have you ever wondered why your favourite brands always charge ₹1 less than the round figure? Are they trying to give you a hefty discount of ₹1 or are they using it as bait to attract customers?

While every product/service you will ever lay your hands will have a price, you’ll be amazed to know that there is a whole lot of psychology involved behind fixing the price of any product/service.

 
What is Psychological Pricing?

Psychological pricing (also known as price ending or charm pricing) is a pricing and marketing strategy based on the theory that certain prices have a psychological impact.

The theory was initially based on the assumption that lower pricing institutes greater demand if consumers are perfectly rational. However, post multiple pieces of research and survey, it was found that price endings psychologically help the customer to encode a lot of information about a product. For instance, consider ₹299, ₹300 and ₹294. While all these prices are more or less the same, there is often a huge difference in how people perceive them. ₹299 often suggests a discounted or lower price, ₹300 signifies high-quality product. ₹294, on the other hand, comes across as a vigilantly determined price.

Speculations on the Types of Price Endings

The meaning of price ending is incomplete without understanding the hypothesis, speculations, and psychology behind different price endings. The proposed meaning can be divided into two broad categories - price attributes and non-price attributes.

Price attributes under the charm pricing strategy make consumers interpret the price of the product as appropriate or worth its “value”. On the other hand, non-price attributes refer to the aspects of the product that do not relate to its monetary value, such as its quality. The way a product is priced can be interpreted differently, influencing the buyer’s decision.

The distinction between cost and price is key to explaining how pricing strategies can be linked to purchasing decisions. Price is the amount paid for a product, while the cost refers to the amount incurred during production.

According to some theories, a price ending with 00.99 connotes that the price of a product is lower with respect to its cost. Another research shows that pricing just below a whole figure ending, for instance, ₹299 instead of ₹300, characterises that the product is of low quality and hence, discounted. It can also show a lack of sophistication on the part of the retailer.

 

60% of the brands have a price ending of 00.99 because psychologists argue that when a customer sees a price of ₹799 they associate it with ₹700 versus ₹800. While it's still a valid argument, most customers in the economy have begun to understand this tactic. So when they see ₹799 they consider it ₹800.

Last comes the round figure price ending i.e ₹800, ₹4,500 which may suggest that the product is of high quality, known as prestige pricing. Shoppers of luxury brands may not be interested in saving a few rupees. Their focus is on the brand value and status attached to it. Luxury brands, along with selling high-quality products, also sell a brand image. 

 

Psychological Pricing: How Companies Lure Customers Through Pricing Strategies

 

Do These Pricing Strategies Really Work?

Retailers these day also opt for prices like ₹488, ₹597 - which have a unique price ending. The unique price ending changes the consumer sentiment towards the retailers. Such a signature price ending can portray a mischievous image of the brand. For instance, for many years the Lechmere stores in the Boston area used 00.88 endings in their price advertising simply because the flagship store had the address "88 1st Street". Unique price endings often connote some hidden messages or agendas. Another example is Walmart, which uses a 00.88 ending on their prices to convey a lower price. This becomes all the more interesting considering that Walmart's rivals use a 00.95 ending. It looks cheaper. It sounds cheaper. It is cheaper.

 

Several companies use psychological pricing, that is, prices ending with 00.99, 00.95 etc to increase sales. Shopping centres and e-commerce portals also make use of these strategies. 


Gumroad is an online platform that enables creators to sell products directly to consumers. It sells music, comics, software, books, and films directly to its audience. Now let's see the conversion rate of the company Gumroad when they use different price endings:


 

The chart shows that price endings with 99 have a larger conversion rate than the round figure price endings. This strategy solely works because humans always read the price from left to right and then encode the price before reading the full amount.
 

Now let's look at an example of an unusual price ending. Zara is an apparel retailer, specialising in fast fashion. Zara usually has a price ending of 00.90. This may be because they want to differentiate their products from other brands. By this unique pricing, they are trying to position them as a luxury brand. Zara has a dual function price ending, that is, it has a round figure price ending but it also portrays a vigilantly determined price. 

 

Psychological Pricing: How Companies Lure Customers Through Pricing Strategies

 

Conclusion

Numbers do more than just count; they have a visual impact that people don't realize. In the way they are designed, numbers and prices say a lot about the kind of deal you are entering into, and the quality of the goods/service. Pricing is a crucial decision for retailers to make not just for their profits, but also for how their store or brand is perceived. From the buyer’s perspective, certain prices may nudge them towards purchasing a product than others. Therefore, psychological pricing serves as an important tool in a retailer’s toolkit.

 

Written by Aditi Gupta

FIN.

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