As consumers, we don’t actually know what things should cost. You might purchase a jar of discounted marinara sauce at an organic grocery store for $7.99, only to find that the regular shelf price of the jar is $5.99 elsewhere.
Pricing can be used as a marketing strategy or as a way to increase perceptions of the quality of your brand’s goods or services. Sometimes a pricing strategy is even baked directly into a brand’s ethos. However you approach it, pricing is so much more than a simple calculation—it can have a real impact on the purchasing decisions of your customers. That’s especially true when it comes to the practice of what’s called “psychological pricing.”
We’ll explore what psychological pricing is, how it functions as a marketing strategy, and ways you can implement pricing strategies into your business.
What is psychological pricing?
Psychological pricing is a marketing strategy that leverages consumer psychology to influence purchasing decisions by setting prices that appear more attractive. For example, using charm pricing (like $9.99 instead of $10) or bundle pricing (offering multiple items at a lower combined price) can effectively encourage customers to buy more and perceive greater value.
Why psychological pricing is effective
In his book Priceless: The Myth of Fair Value, William Poundstone writes, “Marketers had long been doing experiments in the psychology of prices. In the heyday of mail order, it was common to print up multiple versions of a catalog or flyer in order to test the effect of psychological pricing strategies. These findings must have dispelled any illusions about the fixity of prices. Marketers and salespeople knew too well that what a customer was willing to pay was changeable and that there was money to be made from that fact.”
Here are a handful of reasons why psychological pricing strategies work so well.
It takes advantage of our fuzzy pricing knowledge
Psychological pricing plays on the fact that consumers rarely know what something should cost. Most often the way we’re able to determine if something is a good deal is by getting it cheaper than normally listed or by comparing it to similar products in the same category.
It makes comparing products easier
When prices are set in a certain way, it’s simpler for us to compare different options. We can quickly glance at prices and get a sense of which one seems like a better value, without having to do much math in our heads.
It’s flexible and can be adjusted
Sellers aren’t stuck with one price forever. They can play around with different psychological pricing tactics to see what works best for their customers and their bottom line. What people are willing to pay can change, so prices can too.
It uses simple tricks that fool our brains
Our brains can be easily tricked by small changes in price. For example, seeing something priced at $9.99 instead of $10 makes us think it’s a lot cheaper. Our minds tend to focus on that first number, even though the difference is just a penny.
It makes us feel smart and successful
We all like to think we’re getting a good deal. It makes us feel smart and successful, like we’ve outsmarted the system somehow. Psychological pricing strategies play into this desire to make smart choices and come out on top.
It can signal quality or value
Sometimes, the price of something can give us hints about how good it is. A higher price might make us think a product is better quality, while a lower price might make us feel like we’re getting great value. Either way, it helps us feel like we’re getting the best option.
It’s been tested and proven to work
Marketers have been using these pricing tricks for a long time, and they wouldn’t keep doing it if it didn’t work. They’ve tested these psychological pricing methods over and over, and they keep using them because they’re effective at influencing what we buy and how much we’re willing to pay.
8 types of psychological pricing
If using a .99 in the list price of the items in your store doesn’t feel like the right move for your brand, there are several other strategies you can use. The different types of psychological pricing include:
- Charm pricing and odd-even pricing
- Slashing the MSRP
- Artificial time constraints
- Innumeracy
- Price appearance
- Flat-rate bias
- Bundle pricing
- Freemium pricing
1. Charm pricing and odd-even pricing
Charm pricing, the most heavily taught psychological pricing strategy, removes one cent from the rounded dollar price of an item to trick the brain into thinking it costs less. So $4 becomes $3.99, and the customer sees and remembers the 3, not the 4.
A similar practice is odd-even pricing. Studies have shown that customers purchase items that end in an odd number more often than they purchase items with an even number. Interestingly, a study on psychological pricing in online food retail found 70% of the prices on Amazon Fresh end in the number 9. And treats or special buys were more likely to be priced ending in 9 than necessary grocery staples like fruits or veggies.
The trend holds in other areas of ecommerce too. For example, Ruggable uses charm pricing—all of its product prices end in a 9.
2. Slashing the MSRP
Manufacturers usually set a manufacturer’s suggested retail price (MSRP) for items that will be sold across many different ecommerce or retail stores. This is the price you’ll often see on a standard price tag for, say, a book or a car.
Some businesses may choose to sell right at the MSRP, but others show the MSRP next to the lower price they’re selling the item for. This is a psychological pricing tactic commonly used in outlet stores. A shop might run a 40%-off the MSRP sale and offer an extra 30% off certain items, so a purse listed at $298 MSRP ends up costing $54 instead.
These businesses use the MSRP psychological pricing strategy as an anchor to make customers feel like they’ve actually saved money on an item—even if the reality is a little more complex than that. For ecommerce shops, the MSRP might be crossed out with the new price next to it, a similar signal of savings.
Learn more: Competitive Pricing 101: Avoid Price Wars, Save Profit Margins
3. Artificial time constraints
One day only! Only a few hours left! Early bird sale! It’s common for businesses to use artificial time constraints to create a sense of urgency. Single-day events or sales that end within a few hours encourage customers to make purchases quickly—before the sale ends or before their favorites sell out.
While the messaging on a business’s website might say that the sale is ending, the truth often is that it’ll reset in a few hours and keep running. The trick with this psychological pricing strategy is to make customers believe the ending is impending so they make a purchase.
4. Innumeracy
If you know the old saying “six of one, half a dozen of the other,” innumeracy is similar. Innumeracy strategies take simple math and choose the option that’s more appealing to a customer. For example, a box of penne pasta might be on sale for 50% off if you buy two. Next to it, a different brand’s box of penne could be buy one, get one free.
The buy one, get one free option actually sells better. Even though the math is exactly the same, customers feel like it’s a better deal.
5. Price appearance
Did you know that the way a price appears can influence the way your customers feel about it? Ditching the cents—even if it’s zero cents—makes people feel like they’re spending less money. Indeed, $12 feels cheaper than $12.00 because the number itself isn’t as long.
6. Flat-rate bias
Flat rates make things easier in a lot of situations. For example, when planning a vacation, you might consider staying at an all-inclusive resort versus one that doesn’t offer a package.
Piecing together the vacation may be cheaper in the long run, but the flat rate is easier to predict and feels more stable than an a la carte option, even if it’s more expensive. Studies cited in William Poundstone’s Priceless found this to be true: “Consumers like flat rates, even when they cost more.”
7. Bundle pricing
Bundle pricing offers a group of products or services at a lower price than if you bought each item separately. This strategy works because it makes customers feel like they’re getting a better deal.
For example, a fast-food restaurant might offer a meal deal that includes a burger, fries, and a drink for a set price, which is cheaper than buying each item individually. This not only encourages customers to buy more but also makes them feel like they’re saving money.
So, why does bundle pricing work so well? First, it simplifies decision-making for customers. Instead of choosing each item separately, they can quickly see the value of the bundle and feel confident in their choice. But it also taps into our desire to get more for less, making us feel like we’re making a smart purchase. This positive feeling can lead to more sales and better customer satisfaction levels, as people enjoy the experience of getting a good deal.
8. Freemium pricing
Freemium pricing offers a basic version of a product or service for free while charging for more advanced features or a premium experience—a bit like getting a free sample at the grocery store, but for digital products.
The idea is to hook users with the free version and then convince them to upgrade later. For example, Spotify lets you listen to music for free with ads, but if you want to skip songs unlimited times or download music for offline listening, you need to pay for the premium version.
This approach works because it plays on our natural curiosity and our love for free stuff. We’re more likely to try something if it doesn’t cost us anything upfront. Once we start using the free version, we might realize how useful it is and want more features.
The freemium pricing model is also a great way for companies to build trust with customers. By letting people use the basic version for free, they’re showing confidence in their product. Plus, it fosters a sense of reciprocity—we’ve got something for free, so we might feel more inclined to pay for the premium version later.
How to infuse psychological pricing principles into your marketing strategy
While psychological pricing can be a lucrative way to determine how much the items you sell should cost, it can also be part of your brand’s wider marketing strategy.
Use higher price points as quality signals
The way a business prices its products can significantly impact a customer’s perception of quality.
Higher prices (also known as prestige pricing) give the impression that an item is worth more, even if it’s made by the same manufacturer or with the same materials.
Take this example: In an episode of the early 2000s Disney Channel television show Kim Possible, Kim falls for a pair of boots significantly more expensive than the same pair at another shop. Club Banana, a shop owned by the same proprietor as the other shop, Smarty Mart, marked up and renamed Smarty Mart’s black pair of boots as onyx to better fit in with other designer items at a similar price point.
This is a popular pricing strategy that businesses use to signal that its items are luxury or designer pieces. Customers see an expensive price tag and assume the items are of the highest quality possible. Even if that is true, it doesn’t mean that the cost reflects what the items are actually worth.
For example, CO Collections offers beautiful clothes and accessories at luxury prices. Featuring cashmere coats and sweaters, bags made of Italian lambskin leather, and linen jumpsuits, the brand’s main line is “an exploration of dramatic proportion and rich textures with a focus on emotion and seasonality.” While the $1,095 price of a cable knit cashmere sweater might discourage some buyers, CO uses price as a strategy to attract those looking for clothes focused on luxury and great design.
Conversely, cheaper items signal that they’re lower in quality—even if they’re not. In Priceless, Poundstone mentions that the Hollywood Bowl concert venue in Los Angeles sells tickets to its summer concerts for a dollar. Even though the seats come with a better view of the city, prime sunset viewing, and acoustics the same as more expensive seats below, they’re often empty because the low price tag makes people believe the seats are terrible.
💡 Tip: Whether you opt for higher prices or want to go the affordable route, it’s important to remember that your prices impact the way your customers perceive the quality of your products, even if you mark them up with a traditional pricing formula.
Be transparent to build trust
Being open about your pricing can be a smart move because it shows your cards to customers and lets them see exactly what goes into the cost of your product. Consumers typically respect that kind of transparency. So break it down for them: how much you spend on materials, what you pay your workers, and even how much it costs to ship the stuff.
This approach works really well if you’re selling fancy stuff for less than the big designer brands. You’re basically saying, “Hey, look, we’re giving you the same quality as those expensive guys, but we’re not charging you an arm and a leg for it.” People appreciate this honesty. It makes them feel like they’re getting a good deal.
Being transparent about your pricing can fit into your bigger marketing picture in a few ways. First, it helps build trust with your customers. When people feel like you’re being straight with them, they’re more likely to become loyal fans of your brand. This strategy also sets you apart from competitors who might be keeping their pricing strategies hush-hush. Plus, it can spark conversations about your brand—people might share your pricing breakdown with friends, giving you free word-of-mouth marketing.
But remember: This strategy isn’t for everyone. It works best if you’ve got a good story to tell about your pricing, like how it vibes with your brand values. Maybe you’ve found a way to cut costs without sacrificing quality, or you’re passionate about fair wages for workers. Whatever it is, make sure your transparency aligns with your overall brand messaging.
Offer pay-over-time options to ease sticker shock
Let’s face it, big price tags can scare people off. But there’s a clever way to make those pricey items seem more affordable: offering pay-over-time options. This is where you team up with partners like Shop Pay to let customers spread out their payments into multiple installments over the course of weeks or months.
Instead of paying $1,000 all at once, a customer might pay $250 every two weeks. Suddenly, that expensive thing doesn’t seem so out of reach. The price hasn’t changed, but it feels way more doable.
This method works well for a number of reasons:
- It makes your products more accessible. You’re not just selling to people with deep pockets anymore. Now, folks on tighter budgets can afford your stuff too.
- It can boost your sales. When people see they can pay bit by bit, they’re more likely to hit that Buy button. They might even buy more expensive items than they originally planned.
- It’s a great selling point. You can advertise that you offer this option, which shows you understand the current financial struggles many consumers face.
- It can set you apart from competitors. If other businesses in your field aren’t offering this, it gives customers a reason to choose you instead.
- It can help build customer loyalty. People appreciate flexibility when it comes to paying. If you make it easier for them to buy from you, they’re more likely to come back.
It’s important to be clear about how pay-over-time options work. Make sure customers understand the terms—you don’t want anyone feeling tricked or confused.
Ethical considerations in psychological pricing
On one hand, these pricing tricks can help businesses make more money, which isn’t necessarily bad. They need to stay afloat and pay their workers, after all. Plus, if customers feel like they’re getting a good deal, everyone wins, right?
But on the flip side, some people argue that it’s not cool to take advantage of how our brains work in the name of sales. Here are some questions to ask yourself before you implement any of these psychological triggers.
Are you being transparent?
One big ethical concern is whether businesses are being honest with their customers. If you’re using psychological pricing, should you tell people about it? Some say yes, that being upfront about your pricing strategies is the right thing to do. Others argue that it defeats the purpose if you explain the trick.
Are you testing customer trust?
At the end of the day, it all comes down to trust. If customers feel like you’re always trying to pull a fast one on them, they might not want to buy from you anymore. But if they feel like you’re giving them a fair shake, they’re more likely to keep coming back.
Are you considering vulnerable customers?
Another ethical issue is how psychological pricing affects different groups of people. Some folks might be more easily swayed by these psychological pricing techniques than others. Think about elderly people, kids, or people who struggle with math. Is it fair to use pricing tricks that might confuse or mislead these groups? Consider the ethical ramifications of your pricing strategy on your particular target audience.
What are your long-term goals?
When thinking about the ethics of psychological pricing, it’s important to consider the long-term effects. Sure, you might make a quick buck today, but what about tomorrow? If customers feel tricked or taken advantage of, they might not come back. And they might tell their friends to stay away too.
What kind of reputation do you want to build?
In the end, businesses need to think about what kind of reputation they want to build. Do they want to be known as the company that always has the best deals? Or the one that’s always trying to squeeze every last penny out of its customers? The way they approach psychological pricing can play a big role in shaping that reputation.
Testing and iterating psychological pricing strategies
The amount that customers are willing to pay for different products is never set in stone. And your prices can’t be either. That’s why it’s important to keep trying out different prices over time. You might be surprised by what you discover.
For example, you might find that the time of year has a big impact on your store. Maybe people are more willing to spend money in the summer when they’re in a good mood but tighten their belts in the fall when they’re thinking about back-to-school expenses.
The key is to test, tweak, and iterate your strategies until you find the right fit.
Here are some practical ways to figure out the best prices for your products:
- Run pricing tests. Try out different prices for the same product and see how it affects your sales. Just be careful not to confuse or upset your customers by changing prices too often.
- Get customer feedback. Don’t be afraid to ask your customers what they think about your prices. You could send out surveys or even chat with them directly. People are often happy to share their opinions.
- Look at abandoned cart data. If lots of people are adding items to their cart but not buying, it might mean your prices are too high. Check out which products are often left behind and consider adjusting their prices.
- Examine your overall numbers. Keep a close eye on your sales figures. If you notice a sudden drop or increase in sales after a price change, that’s valuable information.
- Watch your competitors. Keep an eye on what similar businesses are charging. You don’t have to match their prices, but it’s good to know where you stand within the context of your market.
- Consider bundle deals. Sometimes, offering a discount when people buy multiple items can encourage bigger purchases.
- Try different pricing models. Maybe a subscription model would work better than one-time purchases for your business. Or perhaps offering a “pay what you want” option for certain products could produce results.
- Use pricing software. There are tools out there that can help you track and adjust your prices automatically based on different factors.
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Psychological pricing FAQ
What is a con of psychological pricing?
One con of psychological pricing is that some customers may perceive it as deceitful. When consumers realize they are being manipulated into thinking they are getting a better deal through tactics like odd-even pricing or artificial time constraints, they may feel mistrust toward the brand.
This perception of dishonesty can damage customer loyalty and harm the brand’s reputation in the long run. Additionally, if customers feel that the price does not reflect the true value of the product, it may lead to a misperception of quality, causing them to question the legitimacy of the brand altogether.
What are the different types of psychological pricing?
Common types of psychological pricing include:
- Charm pricing: Using prices that end in 9 or 99, like $9.99 instead of $10, to make the price seem lower.
- Odd-even pricing: Setting prices to odd numbers rather than even ones, as odd numbers are perceived as more attractive.
- Bundle pricing: Offering multiple products together at a discounted price to encourage larger purchases.
- Price appearance: Manipulating how the price looks visually, like making the font smaller for higher prices.
- Artificial time constraints: Creating a sense of urgency with limited-time offers or countdown timers.
- Comparative pricing: Displaying your price next to a competitor’s higher price to show value.
- Innumeracy pricing: Using complex numbers or fractions that are harder for customers to process quickly.
What is psychological pricing and give an example?
Psychological pricing is a pricing strategy that takes advantage of the way people perceive prices. One example of psychological pricing is charm pricing: setting prices just below a full dollar price point by ending the price with a 9. For example, $9.99 or $19.99 can make a product appear cheaper and more attractive to buyers than pricing the same product at $10 or $20.
Where is psychological pricing used?
Psychological pricing is used in a wide variety of industries, including retail, restaurants, travel, and entertainment. It is used to influence consumer behavior by creating perceived value or discounts. For example, a company may price a product at $9.99 instead of $10 in order to make it appear cheaper. Similarly, restaurants may offer a two-for-one deal to encourage customers to purchase more than one item.
Why is psychological pricing good?
Psychological pricing is a good strategy because it can help increase sales by appealing to customers’ emotions and making them more likely to purchase a product. It can also help to create a perception of value, as customers are more likely to view a product as a better deal when it’s cheaper. Finally, it can help to increase profits by allowing a business to charge more than the actual price of the product or service.
