Pricing Psychology
What is Pricing Psychology?
Pricing psychology studies how consumers perceive prices and how these perceptions influence their purchasing decisions. It’s equally a way that businesses use various strategies, such as pricing tiers, discounts, and price anchoring, designed to enhance perceived value and drive sales. By understanding the psychological triggers that affect consumer behavior, businesses can optimize their pricing strategies to attract customers, increase conversion rates, and improve overall profitability.
The Basic Idea
Imagine you walk into a Best Buy to purchase a new laptop. Maybe you come across a laptop that suits your needs with a price tag of $1,799. Although you like the brand and model, the price is a bit steep for you. As you’re about to walk away, a salesman approaches you and informs you that the laptop is on sale today for only $1599. This sways you a bit, but you had only intended to spend $1,400. The salesman sees you’re not yet convinced and lets you know that with the laptop, you can also snag a pair of AirPods for only $99 when the regular price is $199, now that’s a lot more convincing.
Although you only intended to spend $1,400, you left feeling satisfied that you snagged such a great deal. You are likely to walk away feeling happier than if you had picked up a laptop for $1,400 like you originally intended. It might be hard to believe, but that’s the power of pricing psychology.
In this instance, the following pricing psychology tactics were used to influence your decision:
- Charm Pricing (a form of Price Framing) — by setting the price at $1,799, you subconsciously perceive it as cheaper than $1,800, even though you know there is only a one-dollar difference.
- The anchoring bias — because you anchor to the initial price of $1,799, $1,599 seems like a much more attractive deal.
- Product bundling — when the laptop is bundled with the AirPods, the overall perceived value of the purchase is increased.1
Pricing psychology tactics like these are leveraged by businesses to influence how customers perceive the value of a product to make it more appealing. It is informed by behavioral economics, which shows that psychological, social, cognitive and emotional factors all play a role in our economic decisions. Businesses use this knowledge to increase sales while also maintaining customer satisfaction.1
“The single most important decision in evaluating a business is pricing power.”
- Warren Buffet, one of the most successful investors ever.2
About the Author
Emilie Rose Jones
Emilie currently works in Marketing & Communications for a non-profit organization based in Toronto, Ontario. She completed her Masters of English Literature at UBC in 2021, where she focused on Indigenous and Canadian Literature. Emilie has a passion for writing and behavioural psychology and is always looking for opportunities to make knowledge more accessible.
