A story of Goldilocks, Drug Dealers and Salamis
There is much to be learnt from how we part with our money...
As product managers we can learn from these psychological pricing levers to help us in our pricing decisions.
Here is a selection of seven very common pricing techniques. Some of which are also often combined:
1. Anchoring and compromise
Upon entering a store, opening a restaurant menu or visiting a website, oftentimes we are presented with the most expensive products first. For example the new flagship smartphone or high powered sports car.
As consumers we naturally accept the approximate price range we’re about to face. This decreases our price sensitivity. After being anchored with a high price, common practice is to present several packages or options (typically a number between 3 and 4).
Psychological Effect: Between these forced choices, a customer tends to compromise like Goldilocks: “One is too dear, the other too cheap but the third one is exactly right”. In the end, the compromise tends to be higher than what a customer initially expected to spend. And more profitable for the company.
2. Non-linear pricing (in luxury and economy)
“Price Skimming”: Customers for high end products have a higher price elasticity (they accept only the best). This is something we commonly see i.e. in sports goods, cars, electronics. The price comes with maximum performance, best materials, better image… So for a slightly better performance on the upper end of the spectrum the marginal price is over-proportional. (i.e. limited edition or super sport editions of cars)
“Value Shopper Pricing”: A bundle containing a higher quantity or volume is priced absolutely higher than the other bundles but boils down to a lower cost per unit. This calculation incentivizes customers to go for the bulk deal and higher absolute spending.
Psychological Effect: By comparing the satisfaction of needs to the cost, consumers tend to choose the absolutely more expensive option.
3. Profit through extras (“Salami” technique)
The base price is very competitive but each small extra has a relatively high but absolutely low price:
Also, by offering bundles with accessories (like camera filters with a camera body) the need for extras is created which the customer might not have had before.
Psychological Effect: After selecting the base product, the customer is faced with many small decisions. They allow him to individualize his product by making many relatively small investments with a high perceived value on the product/bundle.
4. Social proof
One of the main sales drivers in B2C are seller ratings and references. They provide us with social proof and serve as decision making catalyst. But also in B2B the power of references is immense: “Nobody ever got fired for choosing IBM”.
Psychological Effect: Social proof lulls us in a sense of security by ensuring us that other made the right decision and it is safe to follow them.
5. Visual priming
Makes use of the effect that we are not sure which option to choose when we are presented with several ones. Typically in software pricing you’ll encounter a few options (again, typically 3) where one is marked as “most popular offer”.
This fits right in with the Goldilocks technique (one too cheap, one too dear, one exactly right) and gives us a false sense of social proof.
Psychological Effect: This gives us the comfort of not having to make a choice - Which our brain prefers (See: “Thinking fast and slow”).
6. Hooking by trial
Common practice in Software sales and on the cheese counter in the supermarket is the tactic of offering a free taste of the “real” product.
Psychological Effect: The classic drug dealer technique - By offering a free taste, as a customer you subconsciously feel an obligation to reciprocate. This is why there really is “no free lunch”.
7. Urgency (“The once in a lifetime deal”)
Strikethrough of initial price with a lower price next to it primes us in the perceived value of the product. Also, it implies that the price reduction is a limited time offer — so the false sense of urgency ushers our subconsciousness to make a quick purchase decision. Oftentimes, this is combined with the salami technique, selling essential accessories which has the customer spending an amount he initially considered as too high.
Psychological Effect: After being primed with the high price, what stays is the feeling that you saved money and made a great deal.
Daniel Sontag connects the bots:
As Industry 4.0 lead and manager for connected products, he does what he loves — tying business to tech, and theory to practice.
Hi, great you enjoyed the article! Feel free to like or leave a short response below, thanks.
Stay tuned: On Jumpstart-PM, The Industry 4.0 Blog and on LinkedIn