The way you choose to price your goods and services can make or break your business before you even open your doors to your first customer. However, what many fail to realize is that the way that pricing affects your customers’ buying decisions goes well beyond the amount itself. A lot of professional research (and lay observation) has gone into investigating how prices affect consumer decisions.

Odd pricing

This is arguably the tactic that is most used by sellers who want to use a little bit of psychology to their benefit. Most people are familiar with the prices that have the digit nine somewhere at the end e.g. $1.99, $5.96, $999. This is sometimes called charm pricing and is usually the first entry in any discussion about psychological pricing (and I have faithfully upheld this tradition). So how is it supposed to work?

People are not calculators so when they encounter somewhat complicated numbers, such as those containing decimals, they do some rounding to make life easier for themselves. Unfortunately, instead of proper rounding, most of us tend to subconsciously round off a figure like $1.99 to $1.00 rather than the correct $2.00. So to our brains, a figure like $1.99 is closer to a dollar than to two dollars. That is how by reducing your price by even an inconsequential single cent, you can cause your customers to unconsciously underestimate how expensive your product is.

This practice is far from limited to single-digit prices. In countries with weaker currencies (such as ours) changing $1 000 to $999 can do wonders—in this case, we just changed a four-digit price to a three-digit one. Odd pricing is all about reducing the leftmost digit in a price figure. As in the thousand dollar example given here, this can involve eliminating it.

Use pricing to reinforce a perception of quality

Human beings are pattern-seeking creatures. Over time we have discovered that more expensive products tend to be of a higher quality than their cheaper counterparts. This means that depending on your market—average incomes and nature of your product—low prices can sometimes lose your market share instead of gaining it. Many businesses have taken advantage of this price as an indicator of quality mentality. They often intentionally inflate their prices to make their products appear to be of higher quality and their services to be more professional.

Note that this is not a foolproof strategy. Price sensitivity on your potential customers’ parts can trump any concerns about quality. This is especially true for cheaper products. That is why offering your products or services for free can sometimes damage your brand. Companies which offer their services for cheaper prices often receive more presale scrutiny than their much more expensive counterparts. That is also the reason why a fully qualified expert can receive far less attention than a motivational speaker. The latter—no offence intended—charges people to listen or read what are essentially glorified personal opinions, which nevertheless get more respect. That is also the reason why knowledgeable should offer less unsolicited advice.

This mentality is so strong that you can practically sell anything if it is priced high enough. Another unfortunate side effect that I have discovered in my own experience is that clients tend to complain more and are more likely to default if you charge them less. This means that some of the time charging less is doing a disservice to both yourself and your customers.

Some of the most prominent examples of this effect are the extremely expensive corporate logo designs/redesigns which often tend to underwhelm.

Premium pricing

Premium pricing exploits the above-stated mentality to its furthest extreme. However, high prices tend to end up being justified since there is a limit to how much you can fool your customers. Such products indeed end up requiring more expensive manufacturing materials and advertising.

Perhaps an even greater cause for the allure of these products is the need for exclusivity, self-worth and status which these products give to the buyer. If something e.g. an item of clothing is expensive enough, you are less likely to run into someone donning the same thing—not an enjoyable experience, trust me.

Decoy pricing

Decoy pricing forces customers to compare prices. Researchers observed that customers were substantially less price-sensitive when exposed to high prices. Using an example: suppose you have a shop that sells cell phones which happens to have two neighbours. One is a sweet shop and the other is a car dealership. Now suppose that two sets of customers come into your shop, one from the car dealer and the other from the sweet shop. Here is what happens when they see the prices of your mobile phones—the group which has been recently exposed to car prices will perceive your prices as cheaper and are more likely to buy from you than the one consisting of people with sweet teeth.

So must businesses find a way to sandwich their premises between a Toyota dealer and a sweet seller? Not necessarily, you can achieve the same results entirely within your shop. Some businesses often make the prices of the products which they want to sell more appear reasonable by placing them next to more expensive ones. In some cases, the more expensive product is usually of an equal or worse quality than the product you want to sell. This kind of framing allows your prices to appear more reasonable than they would on their own. Some go as far as perpetually advertising items as discounted from an original price that they never sold for.

Font size

Another technique which businesses can use is the writing of the price in a small font to nudge your customer into perceiving the price as cheaper than they otherwise would have. Incidentally, this means that bigger fonts must be used to state discounts. This technique can be combined with that of odd pricing—the result is the writing of digits on the right of the price figure in smaller font. This is done to draw away attention from them. For example, suppose we are selling something for $1 857, the price can then be written with the 1 in normal-sized font while the 857 is reduced in font size.

There are countless more proven techniques out there that can be used to improve your company’s bottom line and more are being discovered each day. If the idea of riffling through research papers appears intimidating to you can find friendlier books on consumer psychology such as those written by Robert Cialdini.