The term psychological pricing refers to the use of an understanding of consumer thought processes to determine appropriate prices for products. How do psychological pricing strategies work – and what is the role of consumer perception in pricing decisions?
Role of Consumer Perception in Psychological Pricing
The main contribution of psychology in pricing decisions is the role of perception. People tend to perceive a total product, and compare the price against this product. The total product is perceived as the whole package of benefits the product offers, through its product attributes, support services and so on. Since many of these product attributes remain unknown until after purchase, price is often used as a surrogate for determining quality. That is, consumer perception is built to great extents on the price. That makes it necessary to understand the importance of setting the right price to guide consumer perception in the right direction.
Psychological Pricing Strategies
Psychological pricing strategies rely on emotional responses from the consumer rather than on considered calculation. There are particular relationships between different price levels and consumer perception.
As you may imagine, higher prices are often assumed by consumers to indicate higher quality, so some firms will use prestige pricing. In prestige pricing, the prestigious nature of the product is matched by an equally prestigious price. This is typical of many service industries, because service quality cannot easily be judged until after purchase. For that reason, the consumer is taking a risk: a service that does meet expectations of quality cannot be exchanged afterwards. Also consumers’ expectations of high-priced restaurants and hairdressers are clearly higher in terms of the quality of service provision. For this reason, cutting prices in service industries does not necessarily lead to an increase in business, since potential customers may well assume that the lower prices reflect a poorer service.
Odd-even pricing is a further example of psychological pricing. It is common for retailers to end prices with an odd number, for example $6.99 or $3.95 rather than $7 or $4. The assumption is that consumers categorize these prices as ‘$6 and a bit’ or ‘$3 and change’ and thus perceive the price as being lower. The effect may also be due to an association with discounted or sale prices. Research has shown that ‘99’ endings on prices increase sales by around 8% (Schindler and Kirby, 1997).
Odd-even pricing also has effects on perceptions of discounts during sales. There is research evidence that rounding the price to $5 from $4.99 leads people to overvalue the size of the discount, which increases the perception of value for money (Gueguen and Legoherel, 2004). Thus, the positive effect on sales of using a 99-ending can be negated by the effect when the product is on offer in a sale.
However, cultural differences may make psychological pricing more complicated. For instance, odd-even pricing does not work in all cultures. Also, certain numbers may have special meanings in some countries. For instance, research suggests that in China prices ending in 8 are more effective than prices ending in 4, because 8 is a lucky number and 4 is unlucky (Simmons and Schindler, 2003).
Therefore, it is of critical importance to understand what role different price levels will have on consumer perceptions in that particular culture to successfully implement psychological pricing strategies.