Posted on 1 June, 2018 | 5 mins
Setting prices can feel like a gamble. You want to entice your customers with the illusion of a deal but also meet your margins and grow your business. How should a small business move forward? Why not take a cue from our friends Ben and Sigmund…..
Benjamin Franklin is credited with the saying “a penny saved is a penny earned”. But how much do we really value a single penny or a solitary cent?
Not a lot. In fact, there are countries that don’t even use pennies anymore, including our homeland, New Zealand. If you pay for a product priced $4.99 with a $5 bill in the Land of the Long White Cloud, you won’t be taking home any spare change. And yet products are still priced at 99 cents… not because it offers you a bargain, but because you perceive a bargain.
The “99 cent rule” is perhaps the most well-known example of psychological pricing—the theory that pricing has a psychological impact that leads to more sales conversions.
You don’t need to have studied Freud’s Interpretation of Dreams or taken a crash course in psychology to make the most of it as a small-business owner. Here are a few examples of pricing psychology to help SMEs improve their sales management.
Nine is the magic number… kind of
It’s not only the “99 cent/pence rule” that’s used as a pricing strategy. Studies show that items tend to attract more sales when they end in £9. In fact, one study shows an item priced at £49 can outsell the same item priced at £44.¹
But don’t go pricing all your items to the nearest nine just yet. There’s a reason not every product you see is priced this way. There are a few exceptions to the rule.
The same study suggests that demand for items priced to the “9” drops when the goods are used, or when accompanied by a solitary “sale” cue.
Interestingly, when that “sale” cue includes the previous price (like an RRP), sales increase more than they do when items are priced to the number nine—so there are additional options.
9 Spokes top tip: If you’re considering playing with your price points to see how you could improve sales, your sales apps and data dashboard can help. Sales software have plenty of granular information on sales performance, while you can quickly see metrics like your best-selling product and gross profit on your business dashboard.
Price comparisons are good… even useless ones
When most people see a piece of pricing psychology in play, they don’t register it consciously. Instead, it’s a subconscious reaction that makes them attracted or put off by what they’re seeing.
That’s absolutely not true for Dan Ariely, Professor of Psychology and Behavioural Economics, who saw the following three subscription options in an advertisement for The Economist and decided to ask the magazine why the second price was so seemingly useless:
- Online-only subscription: $59
- Print-only subscription: $125
- Print and web subscription: $125
The Economist had presumably stumbled upon an interesting piece of pricing psychology, because they soon deleted the ad. However, Mr Ariely decided to conduct an experiment of his own, asking 100 students which option they would choose.
- 16% chose online-only
- 0% chose print only
- 84% chose the print and online option
So far, so unsurprising. But Dan kept pushing, eliminating the middle “useless” option and asking another 100 students which they would opt to buy. This time:
- 68% chose the online only
- 32% chose print and web subscriptions²
So what was previously the most popular option became the least and vice versa. Mr Ariely explains best why that is.
“What was happening is the option that was ‘useless’ in the middle was useless in the sense that nobody wanted it—but it wasn’t useless in the sense that it helped people figure out what they wanted.”
People saw value in the first instance, but that disappeared when the “useless” comparison was removed in the second, when they presumably only saw the price.
Sell the value of time
Why is it that drivers universally get annoyed when the car in front is going slowly? It’s not the infinitesimal amount of extra fuel drivers are burning—it’s time. A similar sentiment is shown in pricing psychology when marketers sell the value of time.
As the Stanford Graduate School of Business explains: “Our relationship with time is much more personal than our relationship with money.
"Because a person's experience with a product tends to foster feelings of personal connection with it, referring to time typically leads to more favourable attitudes—and to more purchases.”
Businesses use this in their marketing efforts, focussing on time, because it impacts the amount people are willing to pay. To show what we mean, the same Stanford researchers looked into the effects of three distinct slogans:
- “Spend a little time and enjoy C&D’s lemonade”
- “Spend a little money and enjoy C&D’s lemonade”
- “Enjoy C&D’s lemonade” (a neutral option)
For each slogan, they asked people how much they were willing to pay for their lemonade, between $1 and $3. The first option, selling the promise of time given back, attracted twice as many people as the money slogan—and each customer paid twice as much for the same product.³
So try selling the concept of time. After all, would Kit Kat have been as popular if their famous slogan “have a break, have a Kit Kat” was replaced with “have a piece of wafer and chocolate, have a Kit Kat”? We doubt it.
9 Spokes top tip: Managing the various effects of different marketing messages isn’t as difficult as it once was. Today’s businesses have the help of some fantastic marketing apps. Whether you’re trialling new “time saving” slogans on social media or A/B testing your email campaign performance, there’s a lot to learn from the business data these apps collect for you. They also save you time… see what we did there?