How Psychological pricing works?

Why do we see prices with tags such as $99, $199,$49.99, etc? Why "$99" is being shown on the price tag even though it is not the price? Why? Let's see!

An experiment was conducted by IE business school, where customers were presented with two cups of coffee both with different price tags. Although both the cups contained the same quality of coffee, they were told that $1 coffee is the regular one while $5 is the premium one. When they were asked to taste and tell the difference, the result showed the people found the $5 one better. This experiment showed that price clearly has the power to influence our perception of the quality of a product or service.

These types of pricing are called psychological pricing where the strategy is based on the fact that certain prices have a psychological impact on consumers.

There are broadly 4 types of psychological pricing -

1. Charm pricing- It’s a strategy where the price tag ends with a digit 9 instead of  0. It is also called the left-digit effect. According to a study by

the University of Chicago when a customer sees any a price tag ending with 9, for example, $29 they actually round it off to $20 rather than $30. You could see such type of pricing in supermarkets, where the general idea is to make the customer spend more. But this strategy doesn’t work effectively for high-class products. In fact, the perception is products ending with a 0 are more high-quality products.

2. Time constraint pricing- you definitely have seen hoardings stating, “one day only”, “last two days remaining” etc. These are the time constraint

pricing types strategy. Although the secret is, the sale is ain't going anywhere, this strategy is just to create a sense of urgency in customer's heads. Customers feel the fear of missing out as peer pressure is being created around, where the flock is just rushing to buy their things.

3. Price framing- when you go to fancy restaurants, their menu cards just include price as “200” instead of “$200.00”. Some restaurants have a currency

symbol but the size may be small. This is because subconsciously it takes a longer time to read for long framing of price. Moreover, for our minds, a longer price appears more expensive than shorter ones.

4. Decoy pricing- let's understand it with an example. Netflix offers three plans basic, standard, and premium of 7.99$, 10.99$, and 13.99$ respectively. The premium plan is obviously not bought by many people. But it works as a decoy to the customer so that they buy the standard plan. If there wasn’t any premium plan, most customers will buy the 7.99$ plan. And that’s Decoy pricing for you. You might see it in many places. A $55 watch kept beside a $40 and $75 watch. This strategy is mostly used in malls where products are kept in such an arrangement, where customers are psychologically tricked with Decoy pricing.

Psychological pricing can also impact financial markets. It was found that there was excess buying at charm prices(Eg:- $49, $199.99) versus round numbers just above them($50,$200). This variance in buy-sell can significantly affect the market in just 24 hours.

Considering its effects on consumers, several regulatory commissions in Israel got together to ban Charm pricing. They claimed that this was an attempt to make prices look less expensive. Moreover, this decision was actually logical there because of their denominations.

Can you think of some other pricing strategy, which you might have observed somewhere? Comment down below.