The Psychology of Pricing

Coins and currency

Pricing can be tricky.

During the course of our tenure here at Relish, we have seen clients employ a wide variety of pricing tactics to get to the “right” pricing system for their products and services. From precision-pricing to charm-pricing, there are LOTS of different approaches to landing on the pricing model that is going to work for you and your business.

Pricing your product or service to entice your customers to buy can be a huge challenge. There are many factors to take into account when establishing pricing that go beyond simple revenue and margin needs.

Understanding some of the thought processes that go into pricing can help you sell your products or services more effectively. For as many resources there are online to learn about pricing, there are just as many schools of thought that drive pricing strategy.

At Relish, we believe small adjustments can result in huge gains. As a business, when creating a pricing strategy, you should focus on the customers’ understanding and perception of your pricing. Many times, businesses will completely overhaul their pricing structure – which can lead to poor results. Instead, slight modifications built around value can create tremendous sales gains. Many case studies are available that demonstrate how a slight alteration in price can drastically improve or harm your sales.

Understanding how your customer perceives pricing before you make adjustments can help you improve customer perception and avoid the pitfalls that can lose you sales.

Emotion vs. Logic

To understand how to price your products and services, one needs to understand the two main relationships to purchasing decisions: the rational and the emotional. Rational purchasing decisions are based on needs and value. Especially when purchasing larger ticketed items, customers will look at perceived value and cost before making their decision. They compare prices and look at the purchase as an investment in long-term satisfaction.

Emotionally-based purchasing is most frequently leveraged for smaller ticket items and can be considered impulse buys or purchases that are made more abruptly. Emotional purchases tap into wants and instant gratification or satisfaction. Think about that last minute impulse buy of a candy bar when you are at the grocery store. That is an emotionally-based purchase.

Sometimes, the lines are blurred between emotional and rational decision-making and marketers of many big-ticket items work to turn typically more thoughtful purchasing decisions into more emotionally-charged selections. Generally speaking however, most decisions fall along the spectrum from emotional to rational purchasing.

Pricing Structures

Specific Pricing vs. General Pricing

When pricing out a product or service, there are a variety of ways to settle on the final number you present to your customer. It can sometimes be tempting (and, actually appropriate) to just round the number for ease of accounting or one’s conversation around price. And sometimes, when selling value not firmly attached to manufacturing costs or hourly activity tracking, round numbers make sense.

However, when selling products, research has shown that, for higher-priced products, it can be more effective to use specific pricing. Specific pricing can create a situation where customers perceive a higher value for the item and therefore, compared to a rounded price, conclude that you are selling something with heightened honesty and transparent intent. The direction one goes with general vs. specific pricing depends a lot upon the type of product or service you are selling, trends within your industry, and whether or not you are commoditizing your offering or if you can truly sell on value.

Tie pricing to successes

What problem does your product or service solve for your customer? If you can define the relative cost-to-benefit and demonstrate the relief your products or services provide, you can effectively win the pricing battle. For example, if using your product saves your customer 2 hours per week and your customer can apply that time savings to work more effectively, or play more passionately without fear of missing out on another important activity, you can establish a direct value to the long-term use of your service. During the course of the first year, you can assign over 100 hours of time savings. Tie this to a dollar figure (say your client can bill at $100/hour), you can then assign a specific value to the use of your product or service during the first year alone ($10,000!).

Another way to demonstrate value is to flip the narrative. How much missed opportunity cost is associated with not using your product or service? Here is a tool you can use to calculate lost-opportunity-cost for your product or service.

Mention Daily Equivalence

If you are selling a service at a fixed rate, one way to demonstrate the relative value of the rounded number is to detail the daily cost of your service when justifying the lump sum. For instance, instead of saying the total service is $3000, mention to your client that this service costs less than $10 a day and reinforce what value they get each and every day for that small amount. By showing a significantly lower daily price, your client will process your pricing this as a deal rather than looking at the whole price and becoming overwhelmed.

Reduce Pain Points in the Sale Process

As you meet with customers, time and again they will use logic to talk themselves out of a purchase. They will create any and all reasons to not purchase something. It’s important you overcome this reasoning before the customer brings it up. Show them value and turn their pain point into an opportunity if they purchase your product or service during the sales process. Mention a barrier in your conversation and then an example of how this product or service already overcomes and addresses that barrier.

Discounts: Price vs. Percentage

In the book, Contagious: Way Things Catch On, author Jonah Berger suggests applying the “Rule of 100” when applying discounts to a product or service. In summary, anything you sell UNDER $100 offer as a percentage off and anything OVER $100 with the actual total number off. Although this seems trivial, in reality, your customer will see these numbers as higher values and will be more likely to purchase the product as it feels like a deal.

Keep prices simple

No matter what you decide to do as a business, keep your pricing simple and intuitive. Certainly, you need to account for all your costs in your final price, but you don’t need to share the pricing breakdown with a customer before they ask. Also, there is no reason to offer a bunch of situational discounts. Keep your pricing simple and understandable so that it urges people to buy rather than feel like they are being nickel and dimed.

These are just some of the best tactics that we and a lot of our clients have used. If you have other pricing advice that has worked well for you and your business, we’d love to hear about it! Please let us know so we can expand our knowledge! Also, if you want some help building out your pricing structures, reach out to us as well. We are always ready to help.