There are two powerful truths at work in business.
The first is that every consumer wants to find the best value
The second is that companies must make a profit in a competitive market knowing consumers want to find the best value.
So how do companies do that? They do it by adding perceived value. Value that exists only in the minds of consumers.
It’s called psychological pricing, and it leverages the brain’s attraction to shortcuts.
Here’s how and why it works, and how to implement it yourself if you so choose.
What Is Psychological Pricing: Psychological Pricing Definition
Psychological pricing is a pricing strategy based on the psychological impact of certain prices. To define psychological pricing, most folks rely on the classic example that $2.99 is more attractive to consumers than $3.00.
In fact, Gumroad found that conversion rates for prices that end in .99 were over 100% higher than the next whole number ending with .00.
More attractive, indeed.
But nobody’s ever found similar jumps in conversion rate when lowering the prices from $3.02 to $3.01.
So what’s going on here? Why are people 100% more willing to spend money to save a penny in some instances and not others?
Let’s dig a bit deeper into consumer psychology and pricing.
Psychology in Pricing
The psychology of numbers in pricing can be mystifying. Because people don’t appear to make rational decisions. But there’s a logic—however misguided—behind every decision.
Here are some of the leading theories about why some prices have an outsized impact on buying habits.
The Left-Digit Effect
As left-to-right readers, we’re biased toward the first digit we encounter instead of by sober mathematical rounding. $3.99 looks closer to $3 than $4 to us.
Prospect theory states that buyers face value uncertainty by basing decisions off a reference point instead of absolute value.
In simpler terms, it means that when people see $2.99 they see it as less than $3.00 instead of more than $2.98.
$3.00 is the reference point. Whole numbers are often our reference points because they’re easier to consider. It’s less work for the brain to do. And a price’s value is based on its relationship to the reference point.
In $2.99’s case, it’s less than $3.00. We have a winner.
This is similar to left-digit bias in that the only digit being adequately considered is the left-most digit. But in the case of digit ignorance, it’s not because of a bias toward the left digit. It’s because the other digits are ignored. Fractions of a dollar may not be substantial enough to factor into mental calculations.
There may also be a bias toward fractions. Some studies indicate that consumers assume that anything with fractional prices is at the lowest possible price it can be.
Imagine thinking something was a decent price for $20. Now you see it at $19.99. “Wow,” you think, “it must be a pretty good price if they could only afford to knock it down one more cent.”
Whole Number Quality
The pendulum swings both ways. If fractional bias tells consumers .99 prices are great values, sometimes whole number prices communicate quality.
A whole number price infers than an item isn’t discounted. Some people interpret that as a mark of quality. If an item isn’t discounted, people must not need to be incentivized to buy it. Ergo, it must be awesome.
You’ll see this a lot in fine dining menu engineering, where something like a fancy whiskey will be priced at $12.00 flat. This is psychological alcohol pricing. The restaurant is leaning into the perception of quality that comes with whole number pricing.
This is when an item has its price lowered nominally to place it in a lower pricing “band.” It’s common with cars and houses because most people shop for expensive items within a budget. That means they have a maximum price in mind, AKA a pricing band.
Take, for example, a car that’s priced at $29,998. This car will show up in searches for sub-$30k cars.
The Psychology of Numbers in Pricing
Above we state that folks ignore fractions, then we say they bias fractions. An important thing to understand is that psychology is an imperfect science. Studies show humans behave in all of these ways. Some or all of these strategies are at work during any given purchasing decision.
But the takeaway is this:
These strategies are all, controversially, based on the concept of human innumeracy. That people are unable to apply mathematical concepts to their everyday decisions.
In other words, most people are either bad at math or uninterested in using it.
What Is Psychological Pricing Strategy?
Consistently using psychological pricing in marketing and sales is a psychological pricing strategy.
The vast majority of companies use this disinterest in math to their advantage. That’s what informs most psychological pricing strategies.
Here are some psychological pricing examples.
Psychological Pricing Examples
This is the other word for the classic .99-cent pricing strategy that we outlined above. Again, for a variety of reasons, $2.99 is more attractive than $3.00.
As we saw, whole numbers can communicate quality. This is a version of that, but the digits to the right of the decimal point are chopped off.
For example, the whiskey priced at $12.00 would be simply “$12” on the menu. This method is often even more effective at communicating quality and luxury than sticking to a whole number with its decimal places intact.
Here’s an example of a la carte menu with this psychological pricing strategy:
Sometimes higher prices communicate value, too.
Robert Cialdini tells a great story in his seminal marketing work Influence about prestige pricing:
A jewelry store owner was having trouble selling turquoise jewelry. She tried everything. Half off. Buy one get one free. Psychological pricing. Nothing moved the needle.
She was leaving town for a few days and left a note for a sales associate to, yet again, mark prices down on the turquoise jewelry by half. The associate misread the note and doubled the price of all turquoise jewelry.
They sold out immediately.
If consumers don’t have a frame of reference, it can help to provide one. Placing an item next to a more-expensive version of itself can drive sales in two ways.
Let’s consider coffee. A coffee roaster places a $12 blend bag on the sales floor next to an $18 single origin bag. Serious value hunters will either perceive a lot of savings for the $12 bag or a lot of quality for the $18 bag.
Learning how to upsell is a good way of introducing comparative pricing on the fly.
When we read anything, even numbers, we also process them in auditory form. We say them to ourselves.
A 2012 study found that the more syllables a number had when spoken, the greater the perceived magnitude of the number was.
That $27.70 (7 syllables) would be perceived as larger $26.50 (5 syllables), for example.
Partitioned pricing refers to breaking up a product’s total price into multiple components. Research has found that partitioned pricing is often more attractive than not.
And this usually takes the shape of separating shipping and handling costs from the product cost.
Why is this effective?
Again, it has to do with innumeracy. The typical consumer is not likely to undertake the mental effort required to accurately add component prices together. The base price of the product carries outsized weight.
Another mental shortcut, then. An accurate one? Not quite. But a shortcut nonetheless.
So should you be rolling out a psychological pricing strategy? Let’s take a look.
Psychological Pricing Strategy Advantages and Disadvantages
Benefits of Psychological Pricing
Perhaps unsurprisingly, there are many benefits to psychological pricing:
- It’s based on perfectly reasonable science. It’s proven to work. If you use psychological pricing, you’ll convert more sales. Them’s the facts.
- It benefits from historical data. You know what prices work and don’t. If you have access to your historical sales data, you can make confident decisions about pricing changes.
- BinWise Pro helps bars and restaurants across the country manage inventory and analyze data in real time. Just sayin’.
- It’s easy to do. You can roll out a whole strategy by changing a number. Not too shabby.
- It lends itself to A/B or period testing. Because pricing tweaks are easy to implement, you can change them whenever you want. Then you can observe any change in conversion rates. You’ll be able to draw conclusions about which pricing strategy works best. This benefit is most apparent if you’re using an eCommerce platform like BlueCart Digital Storefront that gives you the ability to change price immediately. Or a QR code menu that can be updated instantly.
- You’ll stay competitive. If your competitors are leveraging modern psychology and you’re not, well, you’re at a disadvantage.
- It can create customer loyalty and repeat customers. Any time there’s perceived value the relationship between business and consumer strengthens.
So, what are the downsides?
The Disadvantages of Psychological Pricing
Messing with peoples’ minds isn’t all fun and games. Sometimes it can backfire.
- If you do it too much, it loses its power. Something that’s discounted 100% of the time is actually discounted 0% of the time, right?
- It can create long-term price expectations. Someone who gets something for $2.99 may balk at $3.00 next time, silly as it may be.
- Having lots of discounted items can hurt a brand’s reputation. If that reputation is based on prestige, luxury, or quality, that is. As we’ve seen, some people think discounts speak poorly about the quality of a product.
- It can make people resent you. A small minority of people aware of psychological pricing may feel like they’re being manipulated. Which is a totally reasonable way for them to feel. Now, is it reasonable to be upset about it? Probably not. Nevertheless, some may be.
- Everyone does it. Literally everyone. There’s a fine line between staying competitive in your market and looking identical to your competitors. If everyone is pricing at $2.99, what sets you apart? Not much.
Menu Pricing Psychology
Menus are an interesting case study in psychological pricing. Much of what has been described so far is usually applied to menus, too.
Menus use charm pricing, prestige pricing, whole number bias, the lot of it. It’s a big part of bar profitability, to be honest.
But some psychological pricing strategies show up in menus in unique ways.
The Goldilocks Zone
Take, for example, comparative pricing. Often this shows up in all types of menu as the rule of three. Also known as good-better-best pricing.
Offering three steaks is a great example: a sirloin, a New York, and a filet mignon. Good, better, best. What usually happens is that the mid-option sells the most.
Call it a psychological goldilocks zone.
The Expensive Decoy
Eye-scan patterns show folks tend to read menus in an F shape. They start at the top-left corner and scan the page in the shape of an F.
Placing a “decoy dish” in the early sight path is a method some restaurants use. Let’s say the first one or two things a diner sees is a $32 cedar-plank salmon entree. Well, imagine their relief when they continue their scanning and find the $26 seabass. Or the $18 tilapia.
You get the point.
Pricing isn’t easy. Look at restaurant wine markup, beer pricing, or wine by the glass pricing. There’s a lot to consider. And it gets a whole heck of a lot easier with a beverage inventory management system like BinWise.
So feel free to take a page out of retail’s handbook and fold in some psychological pricing strategies into your gameplan. Psychological pricing even works on a prix fixe menu, so give it a try,
The mind, after all, is a terrible thing to waste.