Psychology of Pricing

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1) Charm Pricing for High-Quality Products

Imagine you’re buying a shatterproof iPhone case

Does it matter if it is priced at £49.99 or £49.95?

Well, yes.

Gendall, Fox, and Wilton (1998)¹ ran an experiment with fast-moving consumer goods (fly spray, cheese) and durables (electric kettles).

They found that prices with endings in 99 cents are more attractive for low-priced, fast-moving consumer goods (FMCG) than 95 endings.

However, for high-quality, high-priced products, ending in 95 made the demand higher than endings in 99 cents.

2) Right-Digit Discounts

One of these ads seems like better value.

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But it's not the cheaper one.
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In 2007, Coulter and Coulter² showed these discounts to different groups of consumers.
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Turns out, consumers were more likely to buy when the prices ended in small right-hand digits (£244 to £233), compared to prices ending in higher right-hand digits (£199 to £188).
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Why?
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Researchers found that people more easily differentiate smaller numbers.
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The difference between 4 → 3 seems more salient than 9 → 8.
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Next time you run a discount, make the sale price and RRP less than five.

3) Avoid Charm Pricing For Hedonic Products

When buying Valentine's Day flowers, which price feels better: £45.78 or £45?

For the flowers, it’s probably £45.

Wadhwa and Zhang (2015)³ found that round prices feel more right for hedonic, emotion-based products, whereas odd prices are appropriate for utilitarian, cognition-based products.

In the experiment, participants had to indicate their purchase likelihood for two products:

A hedonic product: a bouquet of flowers,

And a utilitarian product: a calculator

Prices were set at three levels: rounded ($40), non-rounded/low ($39.72) and non-rounded/high ($40.28).

Turns out, customers indicated a higher likelihood to buy a hedonic product at a rounded price.

The opposite is true for utilitarian products.

Customers prefer non-rounded prices to rounded prices.

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Hope you enjoyed today's newsletter — Phill ​