Psychological Pricing Strategy

Psychological pricing or odd price strategy was introduced as a means of marketing, way back in the early 1900s. It is a pricing strategy that helps create a positive psychological impact on buyers and tempts them to purchase a product. One of the oldest proponents of psychological pricing happens to be Tomas Bata, the world-renowned shoe manufacturer. The strategy was widely used by Wal-Mart and Chicago Daily to deal with cut throat competition in the market at the time of their respective introductions. Let us now understand the basic principles of psychological pricing.

Pricing Strategies

Customer Psychology: The demand theory of economics rightly assumes that an average customer makes his buying decision by thinking rationally. However, this pricing strategy is designed to make an average customer buy a certain product by playing with his emotions. In majority of psychological pricing cases, the customer fails to think rationally before finalizing his purchases. And not to forget, these very customers take pride for finding a cheaper deal!

Five Dollar Benefit: To help you understand this situation better, I will give you an example. Let us assume that two competing brands of cars named A and B are priced at $13,995 and $14,000 respectively. The price of car A is lower than that of car B by a mere $5. However, if the price is rounded off, both the cars are actually equally priced. Here we see that the manufacturer of car A is using the psychological pricing strategy. An average buyer fails to think rationally under such circumstances. Instead of rounding off the price to $14000, he tends to round it off to $13000. Here, the seller plays with buyer’s mind by displaying 13000 prominently in the price.

Using Superscripts: Another pricing variation is to display prices with the use of superscript. Here is an illustration to make this concept better. A pizza at a restaurant costs $5. However, the restaurant displays the price as $499! Interesting, isn’t it? Most of the customers look at $4 but fail to notice the remaining 0.99 cents. This variation is also used for quoting gasoline prices in the US.

Hidden Conditions: A number of business units around the world lure customers into their outlets by displaying product prices exclusive of taxes. There is of course, a tiny asterisk in the corner stating this fact. But the asterisk and its corresponding declaration is in a fine print. The customer realizes the ultimate price of the product much later.

The Number Play: A typical pricing strategy involves usage of specific numerals for product prices. A research conducted by Marketing Bulletin found out that numerals 9 and 5 were most commonly used in psychological pricing. E.g. A product worth $100 might be sold with a price tag of $99 or $95 or $99.99. As far as psychological pricing is concerned, the usage and popularity of numerals 9 and 5 stand at 60% and 30% respectively. The numeral 0 follows close on the heels of numerals 9 and 5. It is used in approximately 8% of psychological pricing strategies. The rest of the numerals are used only in 2% instances of psychological pricing.

Why is Psychological Pricing Used?

– One of the main motives behind use of this marketing strategy is to play with the buyer’s emotions and make him believe that he is paying lesser than the regular price. And it is a fact that some of the most rational and price-conscious customers fall for this strategy.
– By fixing an odd price for the product, the manufacturers can make the buyers feel that the products are sold at the most honest and lowest possible prices. On the other hand, customers have a tendency to assume that goods with rounded up prices have a huge profit margin.
– This strategy is assumed to help manufacturers or storekeepers keep a control over cash thefts. The assumption is made on the principle that cashiers are likely to steal some cash if customers pay the rounded off amount for their purchases. However, cashiers are forced to record a sale in their cash register if the amount is odd. This is because customers mostly pay a round sum for an odd priced product and expect to get the change back from the cashiers.

Marketing experts around the world have voted this pricing strategy to be one of the most successful ones. The advantage of using it, is that it does not require any kind of monetary expenditure from the manufacturer’s side. There are plenty of industries or organizations around the world that have adopted this strategy for years together albeit with a slight variation to suit their individual requirements.

Penetration Pricing Strategy

The mention of penetration pricing strategy always manages to raise eyebrows. Admirable in some cases; cheeky and underhand, otherwise. The intent of penetration pricing is honorable, of course. It simply aims at boosting the market share of an established product or capturing customers in case of a new launch by underpricing it. Implementing this strategy is akin to playing with fire, as a few dubious qualities associated with it can create unnecessary problems for any company.

Advantages of Penetration Pricing

Does penetration pricing work? It definitely does, and it succeeds in taking your rivals completely by surprise, giving them no time to recover from your onslaught. If your sales pick up, thanks to word-of-mouth publicity, nothing else could be better.

1. Penetration price strategy is implemented with the sole intention of spreading your presence in the market. It is an appropriate marketing tool which creates a loyalty base for your product.
2. Deliberate underpricing is suitable for average quality products and new products under automobiles, computer accessories or cosmetics. It also works well for commodities with a shorter shelf life, such as consumable items. The distributors and retailers have reasons to cheer as penetration pricing effectively accelerates the turnover.
3. The low cost manages to generate an interest, especially among those looking to snag a bargain. After this, it is up to the product to impress the consumer. If it gets an approval from the consumer, the company can think of gradually increasing the cost and rake in actual profits.
4. It results in startling your competitors, more so if the product segment is overflowing with options for the consumer. If a rival product is looking to enter the market, your penetration pricing strategy will arrest it by grabbing a lion’s share in consumer preference. It puts your product in a vantage position to establish a firm hold in its arena.
5. There are also instances where companies have managed to pocket some profit despite using this strategy. The trick used here works on products that need add-ons to function. Cheap razors that need expensive cartridges or low cost printers, which function on outrageous refills illustrate this point.
6. When a product is placed in the market at an attractive “introductory price”, consumers expect a price rise in the near future, and sometimes decide to stock up on it, thus fulfilling the purpose of penetrative pricing. Mind you, this is only possible in cases of products launched by recognized brands.

Examples: Automobiles, computer accessories, food supplies, cosmetics, etc.

Disadvantages of Penetration Pricing

The catch here is that penetrative pricing works best with products that are in demand. Just think – would consumers care any less if a new, low-priced doorknob was launched in the market? Certainly not, thus rendering it incompatible with several products.

1. A company has to forgo all hopes about making any profit in the short term. The low entry price puts to rest all chances of earning revenues. Further, if the consumer parameters are not fulfilled, the company may have to kiss the product goodbye.
2. Having thrust your product into the market with an obscenely low price, expect several hurdles when you eventually decide to hike the cost. While a price increase is inevitable, doing so may result in the consumers turning their backs to your product.
3. Consumers looking for a cheap deal often fall prey to penetration pricing. You could be missing out on your target consumers, which is not a good sign for any product looking to establish itself in the market.
4. The price is not the only factor that a consumer has in mind while buying a new product. In fact, a whole breed of consumers equate premium quality with high prices. It would be inappropriate to implement this strategy on products in the niche segment.
5. This strategy can horribly backfire if your rivals decide to join the bandwagon and lower their product prices further, triggering a price war. This can have a disastrous end, with all offenders involved having to do some serious damage control.
6. Predatory pricing is a cruel variant of penetration pricing. This is when a company prices its product abysmally low, demolishes all traces of competition, and finally creates a monopoly. Reason enough for some countries to deem this practice illegal.

Examples: Luxury products, high-end automobiles and gadgets, limited-edition products, etc.

It is impossible to remove the crookedness out of penetration pricing. This strategy stands on the premise of elbowing out competition, straying on to unethical territories at times. However, there is no doubt about its success rate and its practicality, more so in the consumer packaged goods market.