The Psychology of Pricing

 

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In addition to economic data and research, marketers use psychological pricing strategies to influence our purchasing behaviour.  As a consumer, it is interesting to see the extent to which external factors, such as pricing and placement, can affect our decisions.  This blog discuss three psychological pricing strategies.

The number 9

 Ever wonder why prices follow the formula $XX.99?  Approximately 60% of all prices end with the number 9 (Holdershaw, Gendall & Garland 1997) but does the extra cent really influence our purchasing behaviour?

As consumers, we often make subconscious distinctions between the left and right side of the pricing equation.  As we read from left to right, we process and internalise the first digit/s before the latter.   For example, we will process “4” before we process “.99”.  In turn, we rationalises the $4.99 option more favourably than the $5.00 option (Iacobucci 2013).

A study by Anderson and Simester (2003) focuses on the use of prices that end with $9 in the retail market.  They conducted an experiment on women’s clothing prices whereby three identical dresses were priced at $34, $39 and $44.  Surprisingly, the study found that the $39 dress was the preferred option over the cheaper price of $34.

How “useless” prices can affect our behaviour

Behaviour Economist, Dan Ariely, discusses an advertisement in The Economist whereby customers were given the following subscription options:

  1. One year online subscription – $59.00
  2. One year print subscription – $125.00
  3. One year online and print subscription – $125.00

Using this example he conducted a study on 100 of his students.  The results found that option 3 was the most favourable; followed by option 1.  The students identified option 2 as essentially useless in terms of value but as Ariely contends, not useless in terms of assisting the consumer decide what they want (Ariely 2009).

He conducted the study again without option 2 and obtained a surprisingly different result.  Watch an extract of Dan’s lecture below.

The lesson here is that if we don’t know what our preferences are to begin with, we are more susceptible to the influences of external forces (Ariely 2009).

The Compromise Effect

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The compromise effect denotes the psychological theory whereby people are more likely to choose a middle option when they are presented with multiple choices.  As consumers, we often rationalise the middle option as an attractive compromise between two extremes (Iacobucci 2013).

The above image illustrates how Starbucks uses the compromise effect.   By introducing a third, more expensive option to the existing coffee cup sizes (one cheaper, one more expensive), the consumer is more likely adjust their preferences and the product that was initially more expensive becomes the compromise (Simonson & Rosen 2014).

 

Marketers will no doubt continue to take advantage of psychological factors when formulating pricing strategies.  It is important for the consumer to recognise the presence of these psychological tools and the potential they have to manipulate our behaviour.

A Fettes (216048396)

References:

Anderson, E & Simester D (2003) ‘ Effects of $9 Price Endings on Retail Sale: Evidence from Field Experiments’ Quantative Marketing and Economics, 1 , pp. 93-110

Ariely, D (2009) ‘Are we in control of our own decision’, transcript, TED, viewed 1 May 2016  https://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions/transcript?language=en

Holdershaw, J, Gendall, P & Garland, R ‘The Widespread Use of Odd Pricing in the Retail Sector’, Marketing Bulletin, 8

Iacobucci, D. (2014) Marketing Management (MM), 4th Edition, South-Western, Cenage Learning, Mason pp 116-117

Simonson, I & Rosen, E (2014) ‘What Marketers Misunderstand About Online Reviews’, Harvard Business Review, Vol 92, Issue1/2, p23-25

Photo sources:

Photo 1: https://www.linkedin.com/pulse/power-psychological-pricing-rodger-buyvoets

Photo 2: https://brainandthewind.com/2014/09/12/a-grande-coffee-please/

 

 

 

 

 

 

 

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