Want to Implement Smarter Pricing? Here are 5 Strategies You Can Use Right Now

By Philip Huthwaite on October 27, 2016


Pricing has moved with the times. Pricing professionals now have to dig deeper into buyers' thought processes to understand what will persuade them to make a purchase.

We all continue to enjoy acquiring new stuff but we've become much more canny about when and where we spend our hard-earned cash. Your potential customers now need to believe they're getting a good deal by buying your product.

That "deal" might be buying at a discount or based on the prestige associated with the purchase – or a fear of missing out (FOMO) on the latest "must have". It might be a combination of all three.

You also need to decide just where you "sit" in your market – and stick to the appropriate pricing level.

So, how do you get smarter at pricing? Well, it's all to do with psychology and the importance of putting yourself in your customers' shoes. Remember, if you don't get your prices right it can mean the difference between a sale or a missed opportunity – and your bottom line will suffer as a consequence. It's that important.

Pricing software is now widely used to test the impact of minute price variations on consumer demand and conversions. Analysing how users respond to various elements of a pricing strategy helps brands hone in on the best combination that works for them and their customers.


You could also try the following strategies to implement smarter pricing:

1. Price Anchoring

Anchoring refers to the human tendency to rely heavily on the first piece of information offered when making decisions. Does this come as a surprise to you? Basically, not all the decisions we make are rational!

Price Anchoring is therefore about giving your customers a frame of reference for valuing your product – you guide those customers to choose the exact product you want them to choose at the exact price you want them to buy.

A price anchor strategy could be indicating "before" and "after" prices, or placing an overly expensive item next to the item you want to sell to make the latter seem attractive. The best way to sell a £2,000 watch is to place it right next to a £10,000 watch!

In a study evaluating the effects of price anchors, researchers asked subjects to estimate the worth of a sample home. They provided pamphlets that included information about the surrounding houses; some had normal prices and others had artificially inflated prices. Both a group of undergraduate students and a selection of real-estate experts were influenced by the pamphlets with the higher prices. So, anchoring even swayed the professionals!

Placing premium products and services near standard options may help create a clearer sense of value for potential customers, who will view the less expensive options as a bargain in comparison.


2. Reduce Pain Points

According to the field of neuroeconomics, the human brain is wired to “spend ’til it hurts." The limit is reached when perceived pain is greater than perceived gain. Research from Carnegie Mellon University analysed a number of ways to reduce these pain points and, in turn, increase post-purchase satisfaction and retention.

If you want to implement smarter pricing, here are some ways to take away the "pain" of parting with cash:

  • Reframe the product’s value

It’s easier to evaluate how much you’re getting out of an £89.00 a month subscription than a £1,000 a year subscription, even though they average out to around the same amount.

  • Bundle items purchased in tandem

The luxury version of car "packages" is a good example of successful bundling. It’s easier to justify a single upgrade than it is to consider purchasing the heated leather seats, navigation, and roadside assistance individually.

  • Appeal to either utility or pleasure

For conservative spenders, a message focusing on utility is more effective: "This back massager can ease back pain." More liberal spenders were persuaded by a focus on pleasure: "This back massager will help you relax."

  • Amend your wording

In another CMU study, trial rates for a DVD subscription increased by 20% when the messaging was changed from “a $5 fee” to “a small $5 fee,” revealing that the devil sometimes is in the copy details.


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3. Keep Prices Simple

In a paper published in the Journal of Consumer Psychology, researchers found that prices that contained more syllables seemed drastically higher to consumers. Sceptical? Here are the pricing structures that were tested:

  • $1,499.00
  • $1,499
  • $1499

The top two prices seemed far higher than the third price. This effect occurs because of the way one would say the numbers out loud: “One thousand four hundred and ninety-nine,” versus “fourteen ninety-nine.” This effect even occurs when the number is evaluated internally, or not spoken aloud. The message here is to avoid all unnecessary additions, and use the simplest style possible.


4. Lock into your customers' Fear of Missing Out (FOMO)

FOMO is one of the latest catchwords among young millennials. It refers to impulsive decisions made out of a fear of not being part of something fun, interesting, or valuable.

Apple builds up mass curiosity nearing hysteria around each new product launch and plays on users' fear of missing out to build up unbelievable sales figures. When Apple releases its latest i-phone, long queues of people camp outside their stores to avoid the disappointment of not getting their hands on the latest "must-have".

On Black Friday, sales can go through the roof because of FOMO.

Use FOMO to your advantage by creating pricing signs that give a sense of urgency. Messaging such as "Last 10 items," "24 hours to go," and "Only for the first 50 customers" brings customers' fear psychology into play, resulting in highly profitable impulse purchases.


5. Choose where you stand on price – and stick to it

You’ll struggle to effectively price your offerings if you don’t settle on where you stand on price. Straddling price brackets doesn't work.

  • To be the least expensive provider (think New Look and Primark) you must make choices supporting that decision so you can always compete and win on price. This choice makes selling easy but tends to be the most difficult strategy to operate. You can’t try to price to capture more margin without damaging your overall strategy. You have to be willing to abandon customers who want more and are willing to pay for it.

  • If you want to be the best (think Mercedes-Benz and Four Seasons hotels) and sell at the top end, you must price your product, service or solution to support the enormous investment required by you to continually improve and keep ahead of your competitors. You have to be willing to lose the segment of the market that will never value what you do enough to pay for it.

  • The best total solution (think Ibis Hotels and Travelodge) is the strategy of most service-based companies. To compete here, you have to clearly define the ways you are different and how those differences help your customers get exactly what they need by buying from you. You probably won’t have the lowest or highest price and your challenge will be acquiring customers and spending time to develop the offering that best meets their individual needs. Your price has to support these development activities, which is why you won’t compete for the very lowest price.

Make your choice and make it carefully. Your ability to price your offering appropriately depends on the strategy you select.


Think Like A Buyer

Pricing is a lot more than cost plus margin or matching competitors' prices by lowering yours just a little. Smarter Pricing involves thinking like a buyer instead of a seller, meaning you can hone in on interesting and profitable strategies tailor-made for your business that have the added benefit of setting you apart from the competition.

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You Can't Compete Without Smart Pricing


Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability by Jagmohan Raju and Z. John Zhang, 2010

Smarter Pricing: How to capture more value in your market by Tony Cramm, 2005






The Strategy and Tactics of Pricing, Tom Nagle and John Hogan, 2016

Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014

Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill, 2013

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