If price alone determined purchasing decisions, all offers for a given product, for example on Ebay, would have the same price. This is not the case, however, because the human mind works in a certain way. People often take mental shortcuts, which means that they don’t think about price in terms of “cheap = good”.
As research shows, the moment of payment evokes a reaction similar to physical pain in the minds of customers. That’s the effect of parting with your hard-earned money. That’s why - if possible - we should try to present prices using the ‘package’ approach. For example, if we sell cars and want to offer additional equipment, instead of presenting the price for airbags, special spherical mirrors, and a parking system separately (triple emotional pain for the customer), we present only one price for the ‘safety package’ (pain induced only once), increasing the probability that the customer will decide to purchase additional equipment.
This technique is often used on restaurant menus. If food items are priced in whole dollar amounts - for example, $15 instead of $15.50, customers are more likely to order them. In addition, prices without a currency symbol, such as a dollar ($) or pound (£) sign, are better perceived. The point is that people are most likely to pay attention to simple solutions, so they feel a natural attraction to prices that free them from too much thinking and analysis - at least when it comes to food. In addition, comparing relatively complicated prices in any offer may discourage the customer from buying.
A very interesting study was conducted regarding the manner in which prices are presented. Customers chose from three magazine subscription options:
- Option 1: Annual online subscription - $59
- Option 2: Annual paper subscription - $125
- Option 3: Annual paper and online subscription - $125
Customers chose the following:
- Option 1: 16%
- Option 2: 0%
- Option 3: 84%
When option 2 was removed, customers chose as follows:
- Option 1: 68%
- Option 3: 32%
Removal of the paper only offer changed the context in which customers perceive the price. The package offer ceased to be an attractive offer for them, and they turned their attention to the much cheaper option, option1.
The price should give the impression that the salesperson calculated it based on real information. If, for example, we sell an insurance policy for exactly $10,000, the client may be suspicious. Such a price seems to have been pulled out of thin air, and doesn’t seem to reflect the value of the product. If the price of the policy were $9748, then the client wouldn’t feel that someone is trying to stretch it, would understand the proposed amount as the result of a reliable calculation.
Form of payment and price awareness
Among clients paying in cash, as many as 66% remember exactly what the price of the product was, whereas only 35% of customers paying by card remember the same information. The rest of those surveyed either recall a lower price or forget entirely.
The ‘Funny Money’ effect
The human mind very often does not register small, recurring expenses at all, and certainly does not pay much attention to paying relatively small amounts. For example, if we sell annual subscriptions for certain services, it’s much better to present the price as ‘less than a dollar a day’ (at $ 0.99/day) than ‘$361.35 per year.’ You can buy quite a lot for $361, so the client will have a lot more to think about when deciding on such an expense. However, you can’t buy much for ‘less than a dollar,’ so you won’t find much resistance to making such a transaction. We can use the ‘Funny Money’ technique even when selling products one at a time. Mobile phones are a good example of this. We can tell a client who intends to buy a $200 phone that if they use it for two and a half years, this phone will cost them only about 50 cents a day. Any reasonable person would have to admit that that’s ‘almost nothing’ - especially when we consider, for example, that one cigarette a day costs as much as a phone.
Magic number 9
When the price ends in a 9, customers find it more attractive. First of all, you can set the price such that it is associated with ‘spending change’, i.e. $9.99. In customer’s minds, only notes are real money, not coins (the ‘Funny Money’ effect). Secondly, prices ending in the digit 9 are ‘bargain’ prices, as they are associated with sales (which results from our usual mental patterns). Some experts say that lowering a price from $10 to $9.99 results in a 15% increase in sales simply due to the appearance of the digit 9 at the end of the price.
The context in which the product price is presented plays a very important role. Customers are willing to pay an average of twice as much for a drink bought in an elegant restaurant as for the same drink bought in a regular store located next to the restaurant. Studies on the effectiveness of analgesics have shown that drugs sold at a discount price were considered less effective than those sold at a normal price2. If customers don’t have information on actual product quality, then price is the only determinant of how quality is perceived. In such situations, the higher the price, the better the customer evaluates the product, both in terms of quality and in terms of its image. Indeed, some people like to surround themselves with exclusive, expensive products which they can’t actually afford.
Give your price first
The first number that the client encounters during negotiations will serve as a sort of mental anchor. That’s why you should give your price before the client gives theirs. Then, they will create their own arguments on behalf of our position (something like ‘well, the price is high, but there has to be some justification’). Even if it comes down to negotiating the price, the mental anchor still works to the advantage of a higher amount, so the result is better for us than if we let the customer give their expected price first.
Anchoring is a psychological phenomenon that involves the use of multiple exposures to a stimulus associated with a specific category in order to increase the chances of using said category in the thought process of the person exposed to the stimulus. How can we use it when building customer price perceptions? If, before learning the price, the client is exposed to a number of stimuli associated with the large numbers, then the chances that they will accept the high price of a product or service are increased.
When the customer enters a store, they see a large board which displays the number of fans the store has on Facebook (let’s say that the store has 235,000 fans). Then, the fist products they see have very high prices, and large numbers themselves constitute an element of the interior design of the store. In this way, the customer is exposed to a series of stimuli which all include large numbers. Such a customer will be less critical about the price of the product that we want to offer them, assuming that the price of the product is also relatively high.
This technique is based on presenting a high price alongside an even higher price, making the former seem reasonable.
In this method, the price is left unchanged while, for example, the amount of product in each package is reduced. This method can also be used in the case of services, for example by offering a smaller range of services at an unchanged price, or vice versa. This makes it easy to show the customer that they’re getting more for the same amount, so all in all the service is cheaper than the competition (in that case, we’re talking about the phenomenon of upsizing).
A variation of downsizing is offering products whose prices can not be easily compared with the competition. One famous example is the 200 ml cans of Coca-Cola sold in discount stores (whereas other stores sell 330 ml cans). The price of a 200 ml can is not easily compared with that of a 330 ml can, so even though the customer thinks the 200 ml can is very cheap, it may not be.
Big doesn’t always mean cheap
Most people think that buying a product in a larger package is always less expensive (per unit) than buying the product in a smaller package. This pattern is based on the belief that the wholesale price is always lower than the retail price. A visit to the nearest supermarket can verify such beliefs - for example, a medium pack of diapers is usually cheaper than a large pack, and a large package of baby formula is most often more expensive than a smaller one.
The solution to the puzzle lies in the conversion of the price per unit of the product - for example, the price for 1 diaper or 1 kg of milk. Most people don’t do this, and when faced with a choice between 350 g for $18.50 and 800 g for $46.40, they choose the ‘wholesale’ product, thinking that they’re paying less. Meanwhile, the price of a product in the larger package is higher in this case when converted into kilograms.
- analgesic - a type of medication that stops you from feeling pain
- cease – to stop something
- pull something out of thin air - to produce something seemingly out of nowhere, as if by magic
- recurring – happening many times, repeatedly
- retail price - the price that customers pay for goods in stores
- shortcut – a shorter or quicker than usual way of doing something
- stimulus – something that causes a reaction
- wholesale price - the price that a store or business pays for goods that it then sells to the client
Footnotes / Bibliography / Legal basis
- Source: Dan Ariely, The Power of Irrationality. Wydawnictwo Dolnośląskie, Wrocław, 2009.
- Enrico Trevisan, Wojciech Gorzeń, Richard Zinoecker, Jak zrozumieć klienta i na tym zarobić. ICAN Institute, Warsaw, Poland, 2013.