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December 22, 2009

The Psychology of Pricing For Success

I started thinking recently about how our custoemrs respond to the prices we set for our products and how they put a value on that.

Price is not the major factor in selling, but what I am talking about is how you describe your pricing structure to your customers. You may not know it, but we all have an internal ‘measuring stick’ for how we interact with each other when buying and selling.

A great example of this is in the Alfred Hitchcock movie North by Northwest. Cary Grant plays Roger Thornhill who is mistaken for a CIA agent and at one point in the film he is in an auction house surrounded by the ‘bad guys’ who are waiting to grab him.

To avoid capture Thornhill draws attention to himself by bidding in the auction, but with a difference. When the bidding on one item reaches $2250 Thornhill counters with $1500 and when the auctioneer reprimands him then changes his bid and shouts out $1200!

The auction crowd, not used to such unruly behaviour, are clearly agitated and Thornhill gets what he was after when the auctioneer summons the police who escort him off the premises right past the waiting bad guys to safety!

A clever move and funny in the film as Thornhill breaks every psychological rule about how we negotiate price and value with each other. Unlike Thornhill most of us are looking for, and are motivated to find, a good deal when buying.

To do that we engage the brain in some fairly sophisticated cognitive decision making when looking at offers and prices but what does that mean to us as marketers when setting the price for our products?

An experiment run by Professors of Marketing looked at how people respond to price and whether the actual amount had an effect on what they saw as the products value. They wanted to know whether we really are fooled when business owners price goods at $97 instead of $100.

They asked three groups of test subjects to imagine that they were buying a high end Plasma TV from a retailer that had a reputation for pricing goods competitively and they were asked to estimate the trade cost of the TV.

Each group was given a different retail price as a starting point of $5000, $4988 and $5012 and when they were asked to estimate the trade price the group starting at $5000 guessed much lower than the other two groups.

Plus they also found that groups given a round number as their anchor number were also more likely to give their guess number in round figures. The experiment was run dozens and dozens of times and always with the same results.

Why would this happen? The scientists thought that people create ‘mental measuring sticks’ that run in increments away from the opening bid or initial price and the size of those increments depends on that initial price or bid. So, if we see a price at $100 we may think is it worth $95, $92 or $90 whereas mentally when we see $97 or $99.95 we think £99.50 or $95.50.

To try and correlate these findings in the ‘outside’ world the scientists looked at house prices and found that those houses with exact listings such as $495,450 took less time to sell than those that priced in round numbers like $500,000.

So, as marketers we may not understand the science or psychology behind it but in a buyers’ market we should be listing in exact figures such as $47.97 and not rounded up to $48.

As an experiment, have a trial run at pricing your products in this way and see what response it brings.

Neil Stafford is Editor and Publisher of the Internet Marketing Review the UK’s longest running PRINTED Internet Marketing Newsletter. ‘Test drive’ the Newsletter for FREE – Visit this special web page for more information: Internet Marketing Review Newsletter