Consider these 3 pricing studies before setting the price of your product or service in stone.
Nailing pricing is something retailers, both large and small, struggle with. Although most of us don't delight in running endless columns of numbers, if it were only a matter of doing the math and figuring out total cost and profit margins, pricing would be fairly simple. But alas, there many more factors at play. Perception for one plays a particularly pivotal role, and there is of course, the competition to consider. Picking your customers' brains and implementing psychological strategies are imperative aspects in the quest for the pricing sweet spot, and a bit of testing and tweaking can work wonders on your bottom line. Before you go ahead, and set anything in stone, here are some studies to consider.
Nine is the charm in Chinese culture, and apparently in the world of retail pricing as well. In a joint experiment conducted by The University of Chicago and MIT the same article of women's clothing was offered to consumers at $34 $39 and $44. Wonder of wonders, the $39 dress outperformed the others by 40%. This is because as consumers we've been conditioned to perceive prices ending in the number 9 as being a bargain or a good value (Tweet This!).
Despite being well aware of the fact that .99 is just one cent away from the next whole number, this preconceived notion, coupled with "left digit effect" (when our mind conveniently pays a disproportionate amount of attention to what is to the left of the decimal) has us falling for the .99 trick time and again.
But before you go ahead and start adding the number 9 to your price tables indiscriminately, it is important to remember that reverse is true as well. Research indicates that just like the number 9 sends brain signals implying a bargain, whole numbers, specifically those ending in 0 suggest superiority and higher quality (Tweet This).
So what it actually comes down to, is understanding your product and the target demographic you are catering to. Are you offering a steal of a deal to a savvy set of bargain hunters, or do you offer the high end premium product those who are willing to shell out a bit more? Whatever it is, your pricing should match the perception you wish to convey.
Bring on the Choices
We've all encountered and been bowled over by the sheer proliferation of options that comes along with entering any store or considering any service. While clearly indicative of the excess and materialism that we've come to know as #firstworldproblems, there is actually a science behind all the madness.
In an experiment where people were offered a cheaper beer versus a premium beer, the premium beer was favored by about 80 percent. When a super bargain beer was added to the mix, the original cheap beer, now placed squarely in the middle, became the preference, again by about 80 percent. Replacing the bargain beer with a super premium beer resulted in the original premium beer skyrocketing to the drink of choice by about 85-90 percent.
The takeaway: We all like to do well for ourselves. By bracketing the option you would like your customers to go ahead with with a lower and higher end option, you create a perception of value that would not otherwise exist.
Anchor like a Boss
In another study, researchers invited professional appraisers to appraise a house for sale. They changed the listing price a couple of times, and found a direct correlation between the price of the listing and the appraised value the expert found the house to be worth. For example, when the house was listed at 125,000 it was appraised at 119,110 whereas when it sported a 149,900 price tag, it was suddenly valued at 130,200.
Our fickle human brains rely rather heavily on the first piece of information received when making a decision. Just look at the way car salesmen operate. By quoting a completely ludicrous number in the beginning of the negotiations, they make the haggled down price seem not only perfectly reasonable, but insanely cheap.
In most of lines of business however, negotiating is not a standard part of the pricing/payment process, but that doesn't mean you can't take advantage of anchoring. Take a look at this case study for example. SilverSpeck is a discount jewelry shop that is all about helping woman sparkle without breaking the bank. To accentuate the value they offer, every jewelry piece has both a 'list price' and an 'our price' making their already discounted prices seem all the more enticing. A little mind trick that does wonders for their online sales conversions.
Indeed, there is a lot more to pricing than what meets the eye, and these three studies are just a wee tip of a very large iceberg. Unfortunately, there is no sure fire formula, so your best bet is to just keep experimenting, and perhaps get a degree in psychology. And you thought pricing was about math-pffft.