The Psychology Of Pricing
Posted on October 11, 2016 by Lioness Staff
Have you ever wondered why whenever you buy something at the store, every store, the price is always something like $6.99 or $7,4.95 and never $7.00 or $75.00? Maybe you guessed it’s because of some psychological theory and if that’s what you thought, you were right. Pricing strategy is influenced by much more than the cost to produce the item or provide the service. Those who determine prices, whether self-employed Solopreneurs or corporate marketers, are advised to be attuned to the prevailing psychological inclinations of their prospective customers when considering how to price products and services.
There is a compelling reason that in every retail outlet, the prices nearly always end in .99, .98, or 95 and almost never end in .00. The reason for this unusual practice is based on the discipline called number psychology. Research in this area has persuasively shown that buyers—that is, your customers—do not like zeros. As a result, the vast majority of retail stores will not sell items for $100.00, they instead sell them for $99.95. Why? Because number psychology studies have shown that customers associate zeros with premium prices that they’d rather not pay.
At work here is an intriguing phenomenon known as the left digit effect. The effect causes our brains to (mis)interpret that $99.95 price tag as having a value closer to $99.00, instead of $100.00. Lindsay van Thoen, columnist for The Freelancer’s Union, says that our clients are like any other consumers and that when pricing contract proposals, Solopreneur consultants should keep the left digit effect in mind, follow the lead of retailers and banish zeros from our proposals, to make it easier for clients to agree to our prices.
When we are invited to submit a proposal, it is a good day. Here comes money! The last thing we want to do is to wind up in a wrestling match with a client who wants to nickel and dime us over the price. Unfortunately, clients sometimes feel that Solopreneurs inflate price quotes, even when an itemized accounting is provided. A figure that does not appear to be rounded-off, but rather seems to be specifically customized to the services requested, and contains few zeros, is said by number psychology experts to counteract the feeling that a project fee has been “rounded-up.” A price quote that contains whole numbers is more trust-inspiring and believable to certain clients.
In other words, avoid pricing a project at $5,000.00, because there are too many zeros involved. Number psychology research indicates that we’re better off pricing at $4,825.00 or even $5,175.00.
Pricing pundit Rafi Mohammed, founder and CEO of the consulting firm Pricing for Profit in Cambridge, MA, offers two more pieces of advice to keep in mind about pricing. First, our prices must reflect the value that clients place on the requested service and second, different clients place different value on given services. Other ways to make it more palatable for clients to accept our proposals are:
1) Ask the client to specify the project budget and work with him/her to provide services that you can afford to provide within that amount.
2) Provide three levels of service: good, better and best, so that clients can choose services according to their needs and budget and in a way that reflects the value placed.
A good pricing strategy is an important part of the marketing plan. It sets the stage for building a profitable enterprise. It is imperative to set prices that reflect the client’s value of what we sell and, equally important, to help clients agree that you and your prices are trustworthy.
Thanks for reading,
Kim L. Clark is an external consultant who provides strategy and marketing solutions to for-profit and not-for-profit organizations. Kim is the founder and principal of Polished Professionals Boston and she teaches business plan writing to aspiring entrepreneurs. Visit polishedprofessionalsboston.comfor more information.