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.