In any business, it is possible to have the most superior product or service and have excellent sales, but if the wrong price has been set, the business will ultimately fail. We price products in business to make a profit. Obviously, profit depends on variable and fixed costs, selling price and the number of items sold.
Anyone who runs a business knows that price is the center of all commerce. From oil and airlines to cola and TV, everything is about price, even if it doesn’t appear so on the surface. If you can raise prices, you can affect profits substantially. If you can’t raise prices, you feel like your business is under attack, regardless of what is happening with cost, quality, or service.
Seems like an easy answer: raise prices in line with what the market will bear, and maybe even mark it up a bit. But what if there was a more of a psychology to setting prices that ensures you will make a profit?
In fact, pricing your products and services is not as simple as calculating your cost and marking it up by a reasonable percentage. All pricing isn’t logic. Buyers have irrational psychological nuances that make them prefer certain numbers or buy a more expensive product rather than an identical cheaper one.
Pricing is more than facts and figures; it is about perception. In many cases, the psychology of pricing is more important than the actual price. Small businesses that comprehend how pricing psychology can work for them will succeed.
We’ve connected some of the leading thinking on the topic of product pricing psychology and boiled it down to the most relevant points. The following topics are designed to help you understand product pricing psychology and apply it to your own business.
Why Should I Pay Attention to Price?
Price is one of the four major components of marketing; the others are product, place, and promotion. Over the past two decades, marketers and businesses have become more sophisticated with the latter three. Expanding and specializing products and services, as well as distribution, are usually the first thing looked to drive revenue growth. Businesses have also become more sophisticated marketers, aggressively communicating the message of their products and services through new forms of advertising and marketing.
But price largely has been ignored. It is rarely looked to as a lever for significant profit potential.
Here’s why: Many consumers are willing to pay more for a product or service because it is felt the product or service is of higher quality or possesses brand or manufacturer prestige. Usually above-market pricing can be done only when the product is unique or distinctive, or when the seller or manufacturer has acquired prestige in the field.
By understanding price psychology, you will be in a better position to negotiate and command prices at the high end of the market. Remember: Price is a major marketing decision and deserves the attention and study that the other three components of marketing receive. We must, collectively, focus on the value we provide and price accordingly, always respecting the psychology that affects human behavior.
Product Pricing Psychology 101
Pricing psychology consists of two components: 1. Price leverage and 2. Pricing emotions. Price leverage is basically the question of who has the most price sensitivity at a given point in time. Before any services are rendered, the professional possesses the leverage. After the services have been performed, the customer has leverage. The lesson is that you want to set all of your prices when you have leverage; that is, before the engagement begins. Next comes the pricing emotion component. There are three primary pricing emotions each customer will encounter at various times through the buying cycle:
- Price Resistance
- Price Anxiety
- Payment Resistance
Price resistance is what is known as “sticker shock.” As long as you are dealing with people, you will run into price resistance. The best way to overcome it is by educating the customer to your value proposition. Price resistance is usually encountered at the beginning of the negotiating process and is therefore easy to recognize.
If you cannot overcome price resistance through education, then the customer may not be a fit for your product or service. Never lower your price in order to acquire a customer feeling price resistance. Ultimately, that cheats your company’s most valuable customers and supports your least valuable customers who are only coming to you for the price. Those will be the first customers to defect once they find a lower price.
Next is price anxiety, also know as “buyer’s remorse.” You overcome price anxiety by constantly communicating with your customers and assuring them that they made the right decision in hiring you. This can also be achieved by exceeding their expectations.
Payment resistance is simply the customer’s unwillingness to actually pay. Surely, no one likes to pay bills, however, you can overcome payment resistance by involving the customer in creating the payment terms of your service.
This can be done effectively by developing a one-to-one relationship with them. In this manner, your customers have another factor to judge your value besides just the bill you present. Developing a personal relationship has a way of lowering a customer’s payment resistance and should be used as frequently as possible to speed up your collections.
There is always someone willing to perform the work you do for less money. Remember, customers are value conscious, not price conscious. The goal is to provide more value to the customer than the cash price they are paying you.
It’s All About Perception
As any psychologist and they’ll tell you that some of the various schools of psychological thought differ on one thing: perception. That applies to pricing psychology as well. There are actually four different types of perception as related to pricing:
- The Perception of Savings. Think about those retailers that end their prices with $0.99 instead of a 0 or 1. The difference between $5.99 and $6.00 is only one penny! Yet customers look at items with prices ending with “.99” more favorably. The perception of savings makes for a powerful pricing strategy.
- The Perception of Value. A common tactic of retailers is to bundle their products and offer some for free. This strategy gives customers the perception that they are getting way more than what they are paying for.
- The Perception of Discounts. Discounts from 10% to 85% off never fail to attract buyers. Of course, the bigger the discount, the better! People just love to feel that they are saving and getting good value for their money.
- The Perception of Unbundling. Unbundling of price into routine payments also affects the decision to purchase. Marketers have discovered that price unbundling can make the very same cost inconsequential to customers and therefore, more attractive (reference).
Keeping Price In Perspective
Although there is no question about the overall importance of pricing to the success of a business, overemphasizing it is a common mistake. Surveys of buyers of professional services consistently show that cost is never even among the top reasons clients give for choosing a supplier. Typically, surveys show that cost ranks around tenth in importance, always lower than quality, service, dependability, flexibility and convenience.
Understanding the psychology of pricing is important because most clients accept that quality, results, and price go together. The higher the quality, the better the result, the more something is thought to cost. This belief is especially relevant to the services market because clients place orders or sign on without seeing what they’ll be getting. They make purchasing decisions on the anticipation of quality and results based on little more than samples of similar projects and their confidence in a firm or individual.
That being said, low pricing in such situations sends the wrong signal. It can lead clients to expect a reduction in quality and results. It can also lead to a destructive pricing cycle: the more price-competitive a company is seen to be, the less their work will be valued; and the less their work is valued, the more competitive they will need to be in the future.
Take the time to think through your pricing strategy, remembering the role of psychological factors and perception. Surely, your first question is, “what price do I charge?” However, you also need to think about how your charge. Customers will react differently if you break the price into parts, bundle the product or service with other items, request for payment late or early.
Of course, you need to remain honest in pricing, marketing and advertising. Yet as long as you are not making deceitful claims, you can use the power of perception — or the psychology of pricing — to your advantage.
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