Psychological Pricing Advantages & Disadvantages

Posted by Philip Huthwaite on July 3, 2023
Philip Huthwaite
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Nobody needs to remind you that making an impact in the fast-growing eCommerce space is challenging. Not only are you constantly adapting to consumer sentiment changes, but you must also be aware of market trends and competitors’ pricing strategies.

Psychological pricing may just be the secret weapon to help your business stand out from the crowd and boost sales; however, it comes with advantages and disadvantages that must be considered before taking action.
Psychological pricing is a strategy businesses use to influence customers’ buying decisions through pricing tactics that explore the buyer's psychology.

it’s based on the notion that specific prices evoke different emotions in consumers, with some being more attractive than others.

And for eCommerce sales, the advantages of psychological pricing are clear. But how can you effectively implement this strategy? What are the benefits and drawbacks? Let’s explore the realities of psychological pricing and how it can be used to maximize sales.


What Is Psychological Pricing?

Psychological pricing is a marketing strategy that uses specific price points to influence a customer's behaviour or perceptions. The basic idea is to play off the consumer's emotional response to certain price points, making a product or service seem more attractive.


You've likely encountered some form of psychological pricing before. For example, think of how often you see a product or service advertised at £49.99 or £499.99 instead of £50 or £500. This is a common tactic to influence customers into thinking they are getting a better deal than the actual price.


Why Is Psychological Pricing Important for a Business?

Attempting to convince customers to make a purchase decision with psychological pricing is one of the oldest marketing strategies in the book. And even if the style of sales and marketing has changed, the psychology behind pricing remains relatively unchanged.

As a business, you are constantly working to adapt to the ever-changing landscape of consumer behaviour. Psychological pricing can be used to your advantage in understanding how customers think and react to certain price points.

Rather than relying on expensive advertising campaigns or discounts, psychological pricing can influence customers while requiring minimal effort from the business.


Advantages of Psychological Pricing

Offers a Higher Return on Investments

One of the critical advantages of psychological pricing is its ability to offer a higher return on investments. Since these strategies require minimal effort, they often have a much higher success rate than more traditional forms of marketing.

There are two primary ways that psychological pricing offers a higher return on investments:

  1. Increased Sales Volume: Certain psychological pricing strategies, such as charm pricing, are designed to encourage more purchases by making prices seem lower than they actually are. Even a tiny increase in sales volume can substantially increase total revenue, boosting the ROI.
  2. Boosted Perceived Value: Strategies like price anchoring can make customers feel they're getting a great deal, improving their perception of the product's value. If customers believe they're getting high value for their money, they may be more likely to purchase, boosting sales and ROI.


Makes It Easier for Consumers to Make a Decision

Selling is all about simplicity and reducing friction. Certain strategies, such as bundle pricing or offering free shipping after a certain spending threshold, can make customers less sensitive to the actual price of individual items. By reducing customers' price sensitivity, psychological pricing makes it easier for them to make a buying decision.


It Brings Attention to Products Through Charm Pricing

One of the key elements of psychological pricing is charm pricing, which involves setting prices slightly below a round number.

This approach makes an item or service seem like a great deal to customers and can draw more attention. In the same way that a "charm discount" would draw attention, charm pricing can help to make products more visible and encourage additional sales.


Captures a New Pool of Buyers

An underestimated benefit of psychological pricing is its ability to capture new buyers. Depending on the pricing strategy used, customers who may not have considered purchasing an item at a different price point may be more likely to purchase it based on its price.

This widens the pool of potential buyers and can lead to increased sales - a vital goal of any business as the number of competitors grows.


Disadvantages of Psychological Pricing

The advantages of psychological pricing make it an attractive option for businesses. However, some potential drawbacks should be considered before implementing this strategy.


Demand Levels Need to Be Consistent

As you implement a psychological pricing strategy, you must ensure that demand levels remain consistent. 
For example, if you're offering a product at a lower price than usual, it's essential to ensure that customers return for more once they've purchased the item. If they begin to perceive that the product's value decreases over time, they may be less likely to purchase it in the future - and your psychological pricing strategy won't be as effective.


May Lead to Long-Term Pricing Expectations

Similar to demand, the expectations of your clients must also be managed. If customers get used to purchasing goods or services at a certain price, it may be difficult for you to raise the prices later on. This can lead to lower profits over time and ultimately hinder your business's growth. This makes a psychological pricing strategy a short-term tactic rather than a long-term strategy.


May Lead to Your Reputation Being Hurt

You can become a notorious psychological pricing company if you're not careful. Remember that consumers aren't ignorant to ploys - they can spot an artificial or manipulated price from a mile away.

If they perceive that you're trying to take advantage of them, your reputation can be hurt - and customers may start avoiding your business in the future.


It Does Not Offer a Guarantee of Success

Psychological pricing isn't a one-shot solution to increase sales or profits. This strategy requires time and dedication for it to work effectively. Once you've implemented the tactic, monitoring its progress and adjusting your approach, if necessary, is essential.

You may find that a psychological pricing strategy works wonders for a specific product but not for another. The success of this approach can vary depending on the product or service you're selling and your customers' expectations.

Additionally, this type of pricing may not be effective for all businesses - depending on the industry and target audience. Before implementing this pricing approach, you must understand your customer base, as you can quickly alienate potential customers if done haphazardly.


Examples of Psychological Pricing Strategies:

There are plenty of examples of psychological pricing tactics that you can use to your advantage - some of which can be adapted to meet the unique needs of your business as necessary:


Odd-Even Pricing

This strategy involves setting prices that end in odd numbers, such as £9.99 or £19.95, instead of round numbers, like £10 or £20.

The idea is that consumers perceive these prices as being significantly lower. It's called "charm pricing" because the lower digit 'charms' the price down in the consumer's mind.


Price Lining

This strategy involves setting a limited number of price points for a range of products. For instance, a clothing retailer might price all their shirts at £30, £50, or £70. Consumers can then more easily decide if they want to buy the low-, middle-, or high-priced option. It simplifies buying decisions and allows retailers to group products by perceived quality or value.


Unusual Psychological Pricing

In this approach, the business uses unique price points that stand out and are memorable. 
For example, a brand might price an item at £14.37 instead of the more common £14.99. This can catch a customer's attention and make them more likely to remember the product and its price.


Decoy Pricing

This strategy involves offering a third, higher-priced option to make the other two prices seem more attractive. For example, if a company sells two products for £100 and £200, they might introduce a third option for £300 that has fewer features than the £200 product. This makes the £200 product seem like a great deal.


Premium Pricing

This is the strategy of setting a price higher than competitors to portray the product or service as high-quality or luxurious. It banks on the consumer psychology that perceives more expensive items as inherently better or more valuable.


Anchor Pricing

This is when a retailer lists the original price next to the sale price to demonstrate the discount's value. The higher original price serves as an anchor, making the discounted price appear like a bargain.


Bundle Pricing

This strategy involves selling multiple products together for a lower price than if they were purchased individually. It can encourage customers to spend more money overall by focusing on the total value of the bundle instead of individual product prices.


Multiple Unit Pricing

In this approach, products are priced in a way that encourages bulk purchases. For instance, "3 for £10" seems like a better deal than "1 for £3.33", even though the price per unit is essentially the same.


Price Ending

The last digit of a price can also influence consumer perception. For example, prices ending in 9 (£3.99) can indicate a bargain, while prices ending in 0 (£4.00) can imply quality.


Free Shipping Thresholds

By offering free shipping for orders above a certain amount, businesses can encourage customers to add more items to their carts to reach the free shipping threshold. This strategy can significantly increase the average order value.


Putting Psychological Pricing To Work For You

Key Takeaways

Psychological pricing is a strategic approach to setting prices that affect a customer's emotional responses and perception of value. it's extensively used in marketing to influence customers' purchasing behaviours.

This pricing strategy is crucial as it aids businesses in selling more products by making prices appear more attractive. It leverages consumer psychology to influence their perception of price and value.


Advantages of Psychological Pricing

  • It can help increase sales volume by making prices seem more attractive.
  • It enhances customer perceptions of value and deal attractiveness.
  • It can foster customer loyalty and repeat purchases by creating the perception of constant deals and savings.


Disadvantages of Psychological Pricing

  • Over-reliance on psychological pricing might risk devaluing the product or the brand in the long term.
  • Not all customers respond the same way to psychological pricing strategies; some might even view such strategies with skepticism.
  • The success of psychological pricing strategies depends heavily on a deep understanding of the target market and customer behaviour.


Psychological pricing is a powerful tool in a marketer's arsenal, but it should be used judiciously and in line with the brand's image, the nature of the product, and the behaviour and preferences of the target customers.
Don't forget to use dynamic pricing, too – which can automated the implementation of your psychological pricing strategy. Want to learn more about how psychological pricing can benefit your business? At BlackCurve, our team works hard to provide eCommerce and online retailers with robust price monitoring and optimisation solutions that ensure maximum profitability. We understand the importance of psychological pricing and are dedicated to helping businesses make the most of every sale.



What Is the Impact of Psychological Pricing on Consumer Behaviour?

There are many ways in which psychological pricing can impact consumer behaviour, including by anchoring customers to higher prices, encouraging bulk purchases, and influencing perceptions of quality. Strategies like free shipping thresholds can also lead to higher average order values.


Why Is Psychological Pricing Better Than Competitive Pricing?

While competitive pricing can be effective, psychological pricing is often better for increasing sales and profits while giving customers the perception of a good deal.

It also gives businesses more control over pricing than relying on competitor prices. This gives businesses the opportunity to differentiate themselves and stand out in the market.


What Is Psychological Pricing Based On?

The concept of psychological pricing is based on the idea that people are more likely to react emotionally to price points than logically.

While many consumers are price-sensitive, they may be more likely to purchase if the perceived value exceeds the cost. This means businesses need to consider how customers perceive prices to maximize the value of psychological pricing.

Topics: Psychological Pricing

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