Psychological Pricing

Updated on March 19, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Psychological Pricing?

Psychological pricing is a pricing strategy that impacts the consumer’s subconscious mind, including pricing the goods and services slightly lower than a whole number. For instance, in the retail store, let’s say a commodity’s price is $99 instead of $100. Although the price is slightly lower, for the consumer, it is in two digits and not three. Therefore, it will be more attractive to consumers if $99 is charged for the given commodity, not $100.

How does it Work?

In Psychological pricing, the most common strategy is charm pricing, where the sellers do not round up their prices.  The consumer tends to believe that the prices are relatively lower as they process it from left to right, so that they may ignore the last few numbers of the selling price. Also, this strategy keeps the price within the defined pricing brackets, i.e., some points (0.01 or 0.1) are less than the whole number. That makes the price more affordable in front of the consumers, attracting more customers.

Psychological Pricing

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Examples

Let’s take the example of a retail store. It values all its products for $0.01 less than its round-figure price. i.e., if any product sells at $10 in the market, the retailer would price it at $9.99. The difference in amount is only $0.01. Still, according to psychological pricing, it would attract the customer as they will tend to consider a price from its leftmost digit and ignore the decimal amount.

Strategies of Psychological Pricing

Following are the different strategies that can be used –

#1 – Buy One and Get One Free

Under this amount is paid for one product for which another product or service is given for free. This strategy has a psychological effect on the customer as the customer tends to make purchases to get an item for free. For example, the retailer adopted the strategy of buy one and get two free.

#2 – Prestige Pricing Strategy

This strategy works mainly for the product that appeals to certain customers. For example, the use of this strategy by the luxury clothing brand to present the picture in mind of their customer about the excellent quality of the products. It is a practice of keeping prices higher than normal as this strategy attracts customers who link higher prices with the superior quality of the products.

#3 – Artificial Time Constraints

Under this strategy, there is a constraint on the time limit of sales. It will attract customers to buy the products within the time limit to avail the benefits of the sale. For example, offer stating 1- Day sale on selected products.

#4 – Charm Pricing

Shops may mainly use this strategy to attract customers by presenting lower prices. These prices are set so that they are just below the whole number. For example, instead of $9, the product is priced at $8.99.

Advantages of Psychological Pricing

  • Price Bands – If a customer has a predetermined budget or mindset regarding the purchase, fractional pricing of the product may sometimes come within their budget; it would be easier for them to decide. In this way, it would help in increasing sales.
  • Control – It also acts as a control measure as it would become tough for the cashier or other staff to calculate and steal cash out of the fractional amount.
  • A barrier to Competitors – It targets consumers who are more sensitive toward the product or service cost within any segment of a specific market. It helps eliminate cost control pressure and acts as a barrier in respect of competitive products shortly.
  • Discount Pricing – This pricing technique may be used for pricing a product in discount and mapping with a price ending with a specified digit so that it would be easier to identify the products with discount.

Disadvantages of Psychological Pricing

  • Consistent Demand Level – Its effectiveness can be attained only when there is a constant demand for such a product or service within the market. If the price is reduced because of low demand, it may adversely impact customers as they wait for a further price reduction.
  • Calculation – The pricing calculation may be a bit confusing for the cashier, and he might commit some unintentional errors which result in monetary loss to the organization.
  • Dilute Goodwill – The offer price displayed at the time of confirmation may differ from the final payable amount because of some shipping charges, taxes, etc. It might make the customer feel like they are being cheated, and they may create a wrong impression for the company.

Conclusion

Psychological Pricing is one of the marketing strategies using which the prices of the product are kept in such a way that it appeals more to the consumers of the product or services. It can help the company get more attention from the consumers and consequently increase its overall sales. It also helps the consumers quickly make their decision regarding the purchase. On the other hand, it might impact adversely if it is taken incorrectly by the customers. Moreover, it is also not a sales guarantee for the company. Instead, it is merely a strategy.

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