Understanding the Psychology of Pricing

Everyone wants a deal these days, whether they are buying a European appliance or a Chinese sink. But what is a deal? And what is a high price? A low price?

It’s all in the mind of the buyer and how you frame the discussion, according to the latest findings on the psychology of pricing. There are many signals that communicate price, from the look of your ads and Web site, to the appearance of your showroom, to your brand reputation, to, yes, even the number itself and how it’s presented on your proposal or price tag.

“Though a price is just a number, it can evoke a complex set of emotions – something now visible in brain scans,” explains William Poundstone in his new book Priceless.

Setting Anchors

Research shows consumers don’t know prices, even on common grocery items they purchase frequently. And, they have even less of an idea about infrequent purchases such as a kitchen or bath.

That’s why the concept of anchoring is so important. If I think an expensive kitchen is $50,000 and a cheap one is $10,000, then a price of $80,000 seems ridiculously high. But if you or your Web site tell me that an expensive kitchen (not necessarily those you do) is $200,000, then your $80,000 kitchens seem reasonable. And a $50,000 one might feel like a compromise.

It’s up to you to set the anchors, providing they are reasonable. Just don’t be afraid to set them high enough. A good way to do this is on your Web site so consumers can educate themselves.

“For products they are unfamiliar with, customers tend to use the highest-price model within a category as an anchor on which to base their decisions,” writes Rafi Mohammed, a pricing expert, in The Art of Pricing. “Starting with the top price, customers evaluate whether the trade-offs of fewer attributes…are worth the lower price.”

“In the grimmest recession since the l930s, Ralph Lauren was hawking a ‘Ricky’ alligator bag for $14,000. Who would pay that?” Poundstone asks. “That’s just what you are supposed to ask yourself. High prices…convince shoppers that somebody must be paying that kind of money.”

Offering a third choice can help frame pricing by adding a choice people will not want.

Poundstone explains that if you have a bargain brand, you can sell more by introducing a lower cost option. And if you have a premium brand, you can grow its share by introducing a super premium brand. The super low end and the super high end become “decoys,” driving more business to the products next to them.

So, an item that sells infrequently, such as a $5,874 THG Paris Papillon Lalique faucet in your entry, can change what does sell, because people tend to buy in the middle. So where do you want your middle to be?

Perception Pricing

What else affects perception of price? Ambiance communicates a price expectation. One study showed executives were willing to spend $1.50 more on the same beer when they thought it was coming from an expensive hotel versus a run down bodega.

You’ve always been told to keep your showrooms impeccable. But Home Depot founders intentionally scuffed up the floors the night before opening their first store to give the impression of being less expensive. People buy more T-shirts piled up willy-nilly rummage-sale style than they do when they are neatly folded. Consumer research I did showed that consumers spend about the same on a kitchen from a home center as from a comparable dealer, but they perceived getting a better deal from the home center.

This is not to say, trash your showroom, but be sure it communicates the right price message. People in business attire? Or in casual polos and khakis?

Your ads, Web sites, logos and other marketing materials communicate a price message, too. Lots of elegant white space and clean, crisp design, either traditional or modern, connote a higher price. A busy graphic design with star bursts, exclamation points, lots of type and pictures on angles says lower price.

Too often, high-end firms fumble here. If your unusual and expensive marble is priced for the top 10% of the market, why do your overwrought marketing materials visually scream “home center granite?”

Your reputation affects perception of price. You might spend $100 on steak at Morton’s but certainly not at Ye Old Local Steak Joint. You may be expensive but worth it, in terms of ambience and service – especially for a “once-in-lifetime” purchase like a kitchen or bath.

The name of your business, and the name and province of what you are selling, can affect the price you can command. People may not spend $3 on a cup of coffee with milk, but will fork it over for an Italian latte.

While brands have traditionally signaled a price, there are some indications that brands alone don’t have the clout they used to. Their attributes have to be explained and justified more now than in years past. “Consumers have found high satisfaction in mid-tier brands they have traded down during the recession,” says Wendy Liebmann, CEO and Chief Shopper of WSL Strategic Retail, shopper strategists and shopping futurists.

This brings up the pricing principal called “Don’t Wrap All the Christmas Presents in one Box.”

“…marketers should devote less energy to promoting how wonderful their product is and more to breaking it down, feature by feature, or selling several products in one bundle,” Poundstone reports. You’re not just getting a pantry cabinet. You are getting a 96"-tall custom cabinet with two hand-sanded and hand-finished American cherry doors, and five heavy-duty chrome pull-outs on high-tech German-engineered hinges.

A pricing tactic called bundling has been shown to encourage consumers to spend more, in part because it makes comparisons more difficult. Bundle the price of the sink, faucet and side spray. Bundle towel bars, toilet paper holder and robe hooks at a special price. It’s the burger, fries and a drink concept.

The physical presentation of prices themselves is important. The old saw about a price ending in “9” seems to hold true. In one experiment, when the same item of clothing was priced at $34, $39 and $44, the $39 price point generated the most sales, not the $34 price. Pricing ending in “9” (so called ‘charm’ pricing) connotes a bargain.

However, even numbers are more upscale and connote quality: $150, not $149. Fancy restaurants don’t use dollar signs, or decimals. The grass fed, French-style 4"-thick filet mignon with beurre blanc is merely 30. Not $30.00. And certainly not $29.99

Another pricing strategy is the “pennies per day approach.” Rather than one big number, the cost per month or per day to enjoy a new kitchen or bath makes an expenditure seem easier. That makes it perfect for today’s consumer.