What is Psychological Pricing? Definition, Strategies & Example

March 14, 2018 Topics :

Have you ever wondered why most of the price tags around are somewhat odd? Or why most of the products offline and online are tagged with prices that end with 9?

Well, that discount or odd price plays a key role in marketing. Those oddly priced tags actually help create the illusion that you are paying significantly less than you actually are. Thus, to the conventional human mind, Rs. 299.99 seems closer to Rs. 200 than to Rs. 300, just as it begins with “2”. This type of pricing is a part of something that is known as psychological pricing.

When it comes to ecommerce product pricing and increasing ecommerce sales, it is essential to come up with an effective pricing strategy. In today’s competitive edge, determining Ecommerce product pricing strategy that will make your products fly off the shelves while still generating profits is a tricky task. Here it becomes essential to understand what, how and why your customers think and make purchase decisions. Thus companies who want to make their prices more attractive to customers don’t need to reduce the prices. The psychological pricing strategy that relies on the nature of human psychology helps to maintain the price while making it appear more attractive to customers. Thus, the psychology of pricing is an integral aspect to consider. Psychological pricing strategies prove to be very effective in increasing sales.

  • What is psychological pricing?

What is psychological pricing?

It is a pricing tactic, which is based on the idea that certain prices have a psychological impact on the consumer. It basically uses the consumer’s emotional response in order to encourage sales. Odd pricing conventions make products or services appear attractive and significantly cheaper than they actually are. Customers have an innate inclination to respond to certain types of pricing. Instead of appealing the rational side of consumers, the psychological pricing appeals to their emotional side.

Consider the two price tags, Rs.1000 and Rs. 999. The first price tag is a 4 digit figure and somewhat creates mental barrier while favoring a 3 digit price. Discount of just a single rupee goes a long way and convinces the consumer. The price is perceived as reasonably priced.

The prices are processed from the leftmost digit first by the human mind. Therefore, when prices are processed from the leftmost digit, the next lower tens or hundreds, or thousands, and so on create an illusion of price being closer to the leftmost digit. So, even the price Rs. 99.99 is perceived as reasonable as compared to the price tag of Rs. 100. The 49 and 99 stores are popular and the reason is the buyers do not realize it is actually 50 or 100. It is perceived as 40 or 90.

  • five basic types of psychological pricing strategies

    • Prestige pricing

A variation of psychological pricing is also when businesses sell products at a high price and pass it on as a premium product.

    • Odd pricing

In this type, the price is set up slightly lower than a rounded number. It creates an illusion that the product is tagged at the lowest possible price. This kind of pricing appeals to the consumer psyche by creating honestly priced image whereas rounded-off price tag looks somewhat dishonest and manipulated.

    • Price lining

Companies with an extensive product line can use this strategy. In this strategy a price range for a particular line is created like a budget cloth line with all items priced less than Rs. 500.

    • Promotional pricing

Promotional pricing

    •  In this type, a price is temporarily reduced to grab the attention of customers.
    • Multiple pricing

In this type, items are bundled together, like two for Rs. 500 rather than Rs. 250 per item. It creates a sense of value and thus encourages the purchase of multiple items and boost sales volume in turn.

  • There are manifold benefits of using psychological pricing strategies including

benefits of using psychological pricing strategies

    • Businesses can implement this strategy and make the most out of it without making significant changes to the product.
    • Selecting the appropriate psychological pricing strategy makes the product look like the best deal on the market. Thus, it helps boost the sales.
    • Discounting can prove beneficial if a company wants to increase the sale of selected goods. It is beneficial as just by altering the ending digits of the price, it becomes easy to quickly identify the products as being on sale. Simply put, discounted items can be easily segregated from the regular-priced items with this strategy.

For example, 10% discount on all the product prices ending with “.98’’.

Odd prices offer the benefit of better control over the financial flow. It becomes difficult for a person to manipulate sales transactions due to the fractional pricing.

With all above mentioned points, it is clear that setting prices correctly is a key aspect to have an edge in a highly competitive market. The Psychological pricing strategy has lots of advantages. While choosing a psychological pricing strategy, it is important to understand that the target audience is a prime consideration as it evaluates how are the products/ services priced? So, first determine exactly whom you want to reach and then choose a pricing strategy that works best for your business.