Last Updated on April 8, 2016

A common dilemma for producing a product is PRICING. It’s often difficult to decide the price range of a product. The optimal outcome needs to be achieved – consumers will not think of it as overpriced nor as too cheap.

To achieve this, many factors must be considered such as production cost, intended profit, target consumer financial capability, competitor pricing, and many more. Today we will take a look at pricing strategies that will help you price your products competitively.

The Classic Strategy

Ending prices with a ‘9’ is the oldest pricing trick in the book. But does it really work? The answer would be a resounding YES! That’s the main reason why it’s still used today, because it really works.

In the Quantitative Marketing and Economics Journal, it shows that prices ending with a ‘9’ outperform the ones with a ‘5’ or ‘0’ by more than 24%, even if it ‘s the same product with a lower price.

Example: $35-$39 / Was $50 now $35 / Was $50 now $39

The first price from the above example is defeated by the second, the second is outperformed by the third, and the forth tops them all.

Keep the Price Simple

A study (Journal of Consumer Psychology) showed that there is a tendency for people to perceive a price tag that has two decimals being higher than the one that doesn’t, even if in comparison the one with no decimal is 75 cents more expensive. Additionally, that same study showed that prices with many syllables seemed very high to consumers.

As for example: 1,299.00 / 1,299 / 1299

It showed that customers think that the first two prices from the above example are much higher than the last one, even if they are practically the same. This same effect also occurs with saying one thousand two hundred ninety-nine and twelve ninety-nine. The one that is longer and has more words is perceived as more expensive.

Use of Different Pricing Levels

A study from a reality TV program on the National Geographic Channel, Brain Games, shows the effects of different pricing levels on people. One of the tests on the TV show was similar to this:

A movie theatre sold a small size popcorn for $1 and a large one for $4. The sales result was that very few bought the large size popcorn. But when the theatre added medium-sized popcorn priced at $3.5, more people started to purchase the large because they realized that adding 50 cents is just a small price for getting the large size popcorn over the medium one.

So basically, the test from the TV program tells us that people have automatic or involuntary decision-making. It also shows that having different pricing levels has a good effect on sales. But of course the result from the above study is not applicable to every situation, so it’s best to test different pricing levels to assess the response of customers toward them.

Avoid Pain Points in Pricing

The pain point in pricing is the point where people get discouraged from buying or saying “that’s too much.” It’s in your best interest to avoid these points.

You may ask: How can I identify a pain point? And how can I avoid them? To answer that, below are the common pain points that are continually used today and the ways to address them.

Use of yearly value of a product – It’s a common practice to have a yearly subscription cost. Many businesses tend to use a similar pricing ($1000/year) but this is an obvious pain point. The fact is, people get slapped with how much they are or will be paying yearly, and they tend to think that the subscription is way too expensive. To address this, it is best for you to use a reframed cost like $84/month. This would drastically change a customer’s perception of the price because it’s very far from the $1000/year cost, thus it appears to be cheaper even if the average cost is just the same. Being direct with pricing – The use of words in product pricing is very important. They play an indispensable role. Take for example the use of ‘a $5 fee’ instead of ‘a small $5 fee’. The first phrase without the word ‘small’ is being direct and can be a pain point for many people. So it would be better to emphasize that the ‘$5 fee’ is just a small price and not a burden. This, in effect, would give customers the perception that the fee is indeed cheap. Putting a price on everything – It’s a common mistake for product makers to put a price on every piece of product they sell. But the fact is, adding something for free to a product gives it a very enticing feel. Chances are people buy your product instead of your competitor’s because of the FREE stuff that comes with it. Like what is presented in the book Predictably Irrational, the word ‘free’ is very powerful. It is, for the most part, the deciding factor for people to buy or ignore a product.

In addition, the power of context can be used to avoid the ‘pain points’. It means that you leverage yourself from information about your product. For example, you use the fact that your generic and low cost product is made using premium equipment. The tendency is people are willing to pay more for a beer, say a Budweiser, in a high-class hotel than from a convenience store.

Price Anchoring

Basically, this price strategy is a way to leverage a product by using other products in comparison. It’s a cognitive tendency of humans to rely purely on the first piece of information. For example: To sell a $2000 watch, it should be sold next to one that costs $10000. By doing that, the $2000 watch becomes cheaper in comparison to the other one. It would seem like buying the cheaper watch is a huge bargain next to an expensive one. It’s because people get a clear sense of the value of the product by comparing it, and thus they view the less expensive option as a bargain.

In contrast, this anchoring strategy can be used to achieve the exact opposite –making a product look first-class. It can be done by placing a very cheap decoy with one that’s not to make it seem premium and high-end. For example – it would feel like a premium purchase when buying the same $2000 watch next to one that costs $49.

The effectiveness of this scheme is attested by a study where subjects were asked to estimate a value of a house with information about surrounding homes. The results show that the subjects tend to estimate the value of the house as being high because they are swayed by the information about the high prices of the surrounding homes.

The same tactic is commonly used in restaurants. These businesses place expensive items on the fringe of their menu to make all other items seem cheaper in comparison.

Price Options

It is an undeniable fact that humans prefer having more options. As it turns out, having these options make the brain more prone to “action paralysis.” Humans tend to get confused with what to choose from all the options. It can also make them less likely to buy when faced with so many selections.

In product pricing, it becomes very confusing to a buyer when he is faced with many products of the same price. This was proven by a recent study from Yale. The study showed that customers are less likely to buy from a selection of products with the same price than if these items are priced differently.

From the same study, the result of one experiment showed that having the same priced product (gum) produced a purchase rate of 46% while having it priced differently produced a rate of 77% – a difference of 31% of purchase rate.

To make use of this strategy, it would be ideal to change prices in order to test the sales when having different prices for similar products or services. The test results of the price change would be the basis of the extent of the price difference that you should opt for.

Weber’s Law

According to this law, the change in something is somewhat affected by its previous size. This same law is applied in marketing and pricing specifically to price increases or price hikes. When it comes to these price changes, the optimal number is often around 10%, because the difference is not usually noticed by consumers and not likely to induce complaints about the pricing.

In contrast, it is very important to keep in mind that there are many variables that affect pricing. These variables could include demand and supply, goodwill, reputation, business authority, and many others. So, it is ideal not to jump right in to an additional 10% price change. Rather, it should be used as a benchmark or serve as an underlying figure to begin testing.