$1000 is better than $1300

understand the psychology of pricing

Recent research found that 60% of retailers view higher margins as a top priority. This may not be surprising for retailers, or perhaps any business, given how tight margins are in 2018 and the direct relationship between margins and profitability. The question remains, however, how do businesses increase their margins? One option is to cut costs and another is to increase prices. This is the fourth of five thoughts addressing the latter.I would argue that $1000 seems a lot to pay for an iPhone, especially when the Samsung product can be $200 cheaper. But when the $1000 option is the cheapest iPhone option, with the others being $1200 and $1300, the $1000 does not seem so expensive.

The higher priced alternatives help to frame the cheaper products and, as sales suggest, actually drives the sales of the mid-priced option, which is seen as the ‘Goldilocks option’ not too cheap and not too expensive.

As discussed in a blog earlier in this series, a study completed by researcher William Poundstone found that when subjects were asked to choose between a premium beer for $2.50 and a bargain beer for $1.80, some 80% selected the premium product. When a third option was offered for $1.60 – 80% of those surveyed selected the beer priced at $1.80.

Rather than attracting the majority of consumers, the cheapest product framed the previously less popular $1.80 option, making it appear to be of better quality. That is, more customers were attracted to the Goldilocks option.

Framing is one of a number of tools that impact on the consumer’s perception of cost. Framing is essentially – ‘cognitive bias’, in which people react to a particular choice in different ways depending on how it is presented.

Other, related, psychological tools include:

  • Anchoring – the tendency to rely heavily on the first piece of information offered when making decisions.
  • Decoy pricing – a pricing method that focuses customer choice. When customers make a purchase, they must often choose between products with different prices and attributes
  • Contextual pricing – the seller raises or lowers prices based on specific variables and sometimes even for specific consumers.

These methods and the associated research highlight the fact that consumer perception of price can be influenced and, ultimately, managed.

It can, in the right circumstance be relatively easy to implement a strategy that ensures that consumers view a high price as good value. The fact is, no price is ever considered in isolation and there is a range of elements than can be brought to bear to influence responses to a price point.

In 2018 – understand the psychology of pricing

Every year – put the facts ahead of intuition and guesswork.

Sources of core statisticsAttitude Advisory, Wiser, MYOB, Entrepreneur, Huffpost, Help Scout, INC, Marketing Week, Insight Squared, CXL, WM, Psychology Today, Linked IN, MBA

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