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Posted by Sarah Brown on 02 Oct '18

Pricing strategies: art, science, or manipulation?

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How do you set your prices and encourage people to part with their money? Recently I have been reading a lot about the psychology of pricing and how we pay for things. There are some fascinating examples which can even raise some ethical issues. Many of the come from Richard Shotton’s book The Choice Factory but not all.

What makes us spend more and notice less?

Contactless payment has become the equivalent of Amazon One-click in the real world with people spending money without knowing how much. Shotton investigated this by questioning people leaving a coffee shop in Central London:

  • How much did you spend?
  • What means of payment did you use?
  • Please can we see your receipt?

The receipt allowed him to check the reality against what people thought they had paid. If people paid by cash they’d generally overestimate by 9%, whereas pay by contactless and they underestimate by 5% - that’s 14% difference. Interestingly credit card payments were generally spot on. Not only does this encourage thoughtless spending but also the perception of a store as cheap or expensive may be impacted. The less people use cash, the less aware they are aware of their spending.

Anything that reminds us we are spending money impacts our spending. Remarkably just taking away the £ sign on menus has been shown to increase sales by 8%, it seems amazing that just by making a price into just a number can make us spend more.

What makes something good value?

We know it’s a pricing strategy charging £3.99 rather than £4.00 but the research shows we buy more and think it is better value. Some people have suggested this is because we read from left to right so 3 is less than 4, but research shows that if you have dresses at £39 and £34 then the £39 price sold more even though it was more money. Possibly because we now believe anything with a 9 at the end if a bargain!

Shotton did research showing 500 consumers costs for a Mazda either paying daily, weekly, monthly or annually, all adding up to the same amount of £1,668 for the year but being £4.57 a day or £32 per week. 28% of people thought the daily deal was good value in comparison to the monthly deal, we think smaller amounts are better value.

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It’s all about the setting

 A TV show featured Wetherspoons and how it varies its pricing for the same product in different pubs. Most remarkable in Birmingham's Broad Street, The Figure of Eight pub sells two pints for £6.78;  300 metres away in the same street, The Soloman Cutler is £1 more expensive, as the same drinks will cost you £7.78.

It can depend on who people comparing your prices to. Nespresso sells its coffee in distinctive pods to make a cup of coffee. The comparison is with buying a coffee in a store  so  compared to £2.50 for an americano 30-37p for a nespresso pod is a bargain.

However, if nespresso sold their coffee and it was compared to ground coffee you can buy which is about £4.00 for a bag then it is doubtful anyone would pay the £34 pounds that their coffee equates to at 7p a gram.

Tell someone an expensive price first and then the second price will seem better value. PG Tips is considered good value by 65% of people when compared with more expensive Twinings, compare it with an own brand tea and only 31% think its good value.

Putting the price up to sell more and improve your perceived quality  

When I was at Dyno-rod overnight I increased prices by 66% and the number of sales went up. Why because the price didn’t fit with being market leader it was too cheap people generally believe they get what they pay for.

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Shotton did a small test with perfume, asking people whether they liked it and would buy it. When he doubled the price from £40 to £80 people were more than twice as likely to rate the perfume highly, 33% v 78% - price was equated to quality.

We even feel less pain if we pay more. When people were given two small electric shocks and offered painkillers one priced at $2.50 and the other at only 10c 61% of people  reported less pain with the cheap tablet v 85% with the expensive. In fact, both were placebos.

Conclusion

We are all very emotional about pricing though we don’t necessarily know it. So what is your price saying about you, your quality, your professionalism?

Want to know more you might like to read:

Pricing strategy

Marketing – is your mousetrap good enough?