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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