Pricing to maximise revenue

In our last post we talked generally about generic pricing strategies. Where our price should be in relation to our product strategy, competitors and customers.

That’s great but it really doesn’t help to understand how you should set the FINAL tactical price. Fortunately, that’s where data driven consumer psychology can help.  And now I’d like to go to a micro level in setting actual pricing to add value to your operations.

Based on research in cognition and behaviour, certain prices are more effective than others. Even if you don’t find the exact sweet spot, you can make small — and powerful — adjustments to maximise the effectiveness of your price. All for free.

Understand Consumer perceptions on pricing

For the past couple decades, the marketing world has been inundated with “charm” pricing — prices that end in 9, 99, or 95.  And so people believe, wrongly, that if they end their price this way, they are boosting sales and revenue.

And the results speak for themselves. Check out internet retailer Gumroad’s sales:

gumroad-salesSource: Gumroad

When people see those positive results, they often credit the 9’s in the price with the positive result. They are wrong. The culprit responsible is the left digit.

PRICING TACTIC 1: Reduce the Left Digit By One

This type of pricing tactic is most effective when the left digit changes. A one-cent difference between $3.80 and $3.79 won’t matter. However, a one-cent difference between $3.00 and $2.99 will make a huge difference.

Why is the left digit so important? It involves the way our brain encodes numerical values.

Our brains encode numbers so quickly (and beyond conscious effort to understand) that we encode the size of a number before we finish reading it. Thomas and Morwitz (2005) explain that:

“…while evaluating “2.99,” the magnitude encoding process starts as soon as our eyes encounter the digit “2.” Consequently, the encoded magnitude of $2.99 gets anchored on the leftmost digit (i.e., $2) and becomes significantly lower than the encoded magnitude of $3.00”.

Bonus Tip: You could emphasise the new base digit by visually minimising the digits after the decimal.

pricing-tactic-1

Consider Using the Right Amount of Fluency

When determining the numbers in your price, you should also consider processing fluency – the ease with which we process information.

Consumers infer certain characteristics about a price, based on the ease of processing (i.e., easy processing vs. difficult processing). This section will teach you how to choose numbers with the proper amount of fluency.

PRICING TACTIC 2: Use the Right Amount of “Roundedness”

One aspect to consider is the “roundedness” of your price. Round prices (e.g., $100) are processed fluently, easily, whereas non-rounded prices (e.g., $98.76) are processed dis-fluently, difficult to understand. Use these characteristics to your benefit.

Could one choice or the other generate more sales? Researchers think so- Wadhwa and Zhang (2015) found that round prices — because they are fluently processed — work better for emotional purchases- in a restaurant, buying sweets or candy.  When consumers can process the price quickly, the price “just feels right.”

The researchers also found the opposite to be true. Consumers need to use more mental resources to process non-rounded prices. So those prices seem more fitting with rational purchases- buying a house, apartment or car.

Despite the direct evidence, I’ll propose a caveat.  Even if your purchase context is emotion-based, you should still avoid rounded price intervals (e.g., $100, $5,000). People assume that those prices are artificially higher, consumer perceive that these rounded prices were plucked from thin air (Janiszewski & Uy, 2008).

So where can roundedness help? That principle can help you determine whether to add cents to your price.

If your purchase is based on emotion, then leave out the cents.  An example of this is restaurant buying, such as buying pizza in the picture above. You are there for a celebration, or a date, or a family gathering, these are emotional events and so in setting pricing use this emotion to your benefit.

pricing-tactic-2

If your purchase is based on rationale, then add some cents.  If you are selling technology, or a product people have to consider and assess options, then to justify your price, add the extra digits to show that you have spent time thinking about what the real price should be.

pricing-tactic-2-2

These are they key tactics for setting your base pricing… left digit minimization and appropriate roundedness… plus there emperical evidence in support of the claims on pricing too.

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