Wednesday, May 21, 2014

The psychology of pricing and how your customers think.

Understanding how customers think and feel about prices can be a huge advantage when it comes to influencing buying decisions. Prices set too low can erode profits while prices set too high can scare customers away. So, how can you find the right balance? Here are some great insights on the psychology of pricing to help small businesses make their prices more appealing to customers

Compare At Your Own Risk
Asking customers to compare your product to a competitor’s may seem like a smart idea, especially if you offer a lower price point. But that strategy often can backfire. Consider, for example, a sign at your local drugstore encouraging customers to compare the price of the store's brand of aspirin to a national brand. But rather than choosing the cheapest product, customers may buy nothing or purchase the national brand because they perceive it as a less risky choice, according to a study by the Stanford Graduate School of Business.

It turns out consumers tend to put greater weight on the disadvantages of each choice rather than the advantages when they make comparisons. In two separate trials, researchers found that placing differently priced products together to encourage shoppers to make their own comparisons had positive results. In contrast, asking customers to make a comparison made them much more cautious and risk adverse. Small businesses need to understand that while comparative selling can be powerful, it’s not without risks.

Time vs. Money
A focus on selling time, or how a customer experiences a product, may get better results than a focus on price. For many customers, the concept of time can evoke a personal connection with a product, which typically leads to more favorable attitudes and purchasing decisions. In contrast, asking customers to think about the money they’re spending to purchase that product can create a more negative reaction.

Researchers did find one important exception: When social status is a driver for buying a product, such as designer jeans or a luxury car, focusing on money can actually help increase sales. The bottom line: It’s critical to first consider how consumers most identify with a product (through experience or possession) and then highlight either their time or money spent accordingly.

Drop The Dollar Sign
A study on how prices were presented on menus offers interesting insights for small businesses in any industry. Lunch customers at St. Andrew’s restaurant at the Culinary Institute of America in New York were offered menus with three options: Prices listed with a dollar sign ($16.00), prices listed as numbers without a dollar sign (16), and prices that were written out (sixteen dollars). Guests given the numeral-only menu (16) spent significantly more than those who received the other menus, researchers found.

Other research highlights the power of 99 cents. Consumers tend to compare prices by looking at the left digits first, while often ignoring the digits on the right. So a price with a lower dollar amount that ends in 99 cents can lead to greater sales. There’s a reason we see .99 so frequently, and small businesses should consider doing the same; especially when price comparisons are important to sales.

Weigh The Anchoring Effect
Anchoring a product between similar items with higher and lower prices encourages value-minded customers to purchase the middle item as the “compromise choice”. In a study of subscription prices for The Economist, subscribers were offered web content for $59, print-only content for $125 or a combined print and web subscription for the same $125 price.

Logic says hardly anyone would pick the middle option when they could get print and web access for the exact same price. But when the middle option was taken away, more customers gravitated toward the cheapest option. In contrast, having the middle price point changed the decision process by making the combined web and print subscription seem like a better deal. Context is critical when setting prices.

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