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What is psychological pricing?

Psychological pricing is a pricing strategy that utilizes specific techniques to form a psychological or subconscious impact on consumers. It integrates sale tactics with price.

It can also be described as setting prices lower than a whole number. The idea behind it is that customers will read the slightly lower price and treat it lower than the price actually is.

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Apple product prices usually end up with an ample number of 9. This is connected to the human brain's thought process before deciding to buy a product, and it's proven that the last number of a product's price matters a lot. Studies have proven that there's a drastic difference in pricing a product at $999 rather than $1000. Customer brain will perceive that $999 as $900 which is lower and cheaper than $1000.

This is called  "Psychological pricing" or "charm pricing" strategy. Throughout the years, Apple has consistently applied this price strategy to all of its goods worldwide. When it comes to everyday essentials when deciding to purchase something, decisions are made in a matter of seconds; this pricing model is even more important. For the most part, Big Basket's website uses this price strategy.

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The Example of Prices

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1. Generate more sales

The number one reason to use psychological pricing is to increase sales. Using a range of tactics, or sticking to one that has been proven to consistently work, maximises profits for the services and products a company offers.

2. Implement with ease

Psychological pricing is an easy and fast tool to employ.

A business looking to boost revenue doesn’t need to go through time-consuming, costly product development or spend money changing packaging. Instead, it can use psychological pricing tactics to quickly update prices on the shelf or on a website to see an immediate increase in sales.

3. Test different pricing tactics

Tangible data is every business’ friend. It demonstrates without a doubt the success or failure of different business strategies. Sales data will show immediately whether a psychological pricing tactic has worked or not. It is therefore straightforward to test different types of pricing to see which resonates most with customers.

Every business and its customers are different, so a tactic that works for a supermarket might not work for a subscription-based SaaS company, a gym or a telesales business.

4. Direct buyer attention to targeted items, services or ranges

Psychological pricing focuses buyers’ attention on specific products, services or ranges.

For example, if a shoe company is looking to shift its stock of old season sneakers before the new season’s arrivals, then tweaking the prices to make these items seem more appealing to customers will help to sell them.

5. Differentiate sales items from full-price items

Updating the price tags of sales items can make it obvious for customers to see immediately what’s on sale and what isn’t.

For example, all sales items could be priced at 99p. Or a percentage discount could be automatically applied to sale products on an ecommerce store. The less friction between a customer and a sale, the better. If a customer is confused or feels misled about what is on sale, they won’t buy.

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1. It requires consistent demand levels to be effective.

Psychological pricing is only effective when demand levels for products or services are kept consistent. If you start lowering prices over time, for example, then you may find that consumers wait for the lower prices before upgrading to the next item. Many psychological pricing strategies cannot be implemented over a long-term period because consumers eventually grow wise to the fact that the perceived deals are not that strong.

2. It can create long-term pricing expectations.

If you use psychological pricing all the time to encourage sales, then consumers will expect to see the lowest price possible, whenever possible. When they see a price that they feel is unfair, then they’ll go to a competitor’s product without a single thought. Customers who are always looking for the cheapest price are loyal to the price, not the company. Even worse, a business who appears to cater to cheap pricing will generate questions about the quality of the brand that may stop new customers from coming around.

3. It may drive customers away.

Some pricing strategies in this category lower prices, even if it is only by a penny or a currency equivalent. Others use tactics that might seem like you’re hiding the true cost of the item. If you know a shirt costs $10 and that’s what you can afford, getting blindsided with another $10 in shipping costs during checkout will cause that customer to abandon their card. If you don’t like the idea of getting blasted with hidden costs, there’s a good chance your customers are going to despite it as well.

4. It could hurt the reputation of your brand.

Some psychological pricing strategies are accepted, and even sometimes appreciated. Others create a different result. If a customer is expecting one price, but the final price is different, and that difference is unexpected, then it will create a negative perception of your company. When negativity is what influences consumer reactions, it spreads like a contagious disease to their entire network. It can be difficult to overcome a poor experience, especially when the issue was based on pricing and not a poor customer service reaction.

5. It could cause customers to feel like they’re being manipulated.

Many psychological pricing strategies are based on the idea that customers are purchasing off of impulsive moments instead of well-researched thoughts. If you’re pricing items in a way to manipulate how customers trend through your business, in person or online, then you’re creating the risk of having unhappy people talking about what you’ve done. People who stop to think about a purchase will spot manipulative pricing schemes and either try to beat them or leave your business to shop with someone else.