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How to Tap Into the Psychology of Pricing — $0.99 Phenomenon

what is the psychology of pricing

A staggering number of businesses, big and small, mess up their pricing strategies. 

They slap on a price and hope it sticks. 

But in the chaotic world of commerce, hope isn’t a strategy. It’s more like a one-way ticket to bankruptcy.

But what if there was a better way? A method rooted not just in numbers, but in human psychology?

Enter the psychology of pricing. These are the hidden levers that, when pulled correctly, can transform the way customers see your value.

And it’s not magic. It’s understanding the human mind. 

By getting a grasp on these principles, you stand a better chance at boosting your ROI, without needing to reinvent the wheel.

A grasp on these principles is just the start. 

As we journey deeper into the psychology of pricing, you’ll discover secrets that some of the biggest players in the industry utilise to stay ahead. 

And today, I’m sharing one of those secrets with you. Ready? Let’s get started.

Secret #1: the Power of the Number ‘9’, ‘7’, ‘5’ and ‘3’

Meet ‘Charm Pricing’, the subtle art of ending your prices with specific numbers to influence buying behaviour.

You’ve seen it, even if you haven’t noticed it. 

That irresistible eBook priced at $9.99 instead of a straightforward $10. 

Or the course you’re eyeing that costs $197, not $200. 

It’s not random; it’s psychology.

When we see $9.99, our brain, always in a hurry, processes it as $9, not $10. 

It’s cheaper, more affordable, and suddenly, more attractive. 

The Number 9, in the world of pricing, is a charmer. But why?

Studies have indicated that when prices end in .99 or .95, they seem to signify a deal or discount. 

That subconsciously signals to the consumer that they’re getting value for their money. 

It’s not just perception; it’s price perception. A study from the Journal of Consumer Research found that prices ending in .99 had a much higher sales rate than those rounded up to the nearest dollar.

But what about those other numbers? 7, 5, and 3? They’re unique. 

Unique enough to stand out and not seem arbitrary. 

$47 or $37 feels carefully calculated, almost giving the impression of a special deal or a limited offer.

However, there’s a caveat. 

While charm pricing is brilliant for products aiming for a ‘bargain’ perception, luxury brands opt for rounded numbers. 

Why? Simple. 

Luxury is all about the experience, the exclusivity. And rounded numbers, say $200 instead of $199.99, exude simplicity, elegance, and no-nonsense clarity.

Think Apple with its $1,000 iPhone or Tiffany & Co. with its rounded thousand-dollar price tags. 

tiffany and co using pricing strategies.
Tiffany and co using pricing strategies.

They’re telling their customers: “This is the price. And it’s worth it.”

In a world where perception can drive purchase behaviour, understanding the power of numbers isn’t just advantageous; it’s essential. 

Whether you’re aiming to portray value or luxury, the numbers you choose can make all the difference.

Secret #2: the anchoring effect — why first impressions matter

You walk into a store and spot a sign: “Originally $500, Now $250!” 

Your eyes widen, your heart races a little faster. 

A 50% discount? Sounds like a steal, doesn’t it? 

This immediate reaction, whether you’ve noticed or not, is a classic example of the ‘Anchoring Effect‘ at play.

The anchoring effect refers to our human tendency to rely heavily on the first piece of information we receive (the “anchor”) when making decisions. 

And with pricing, this initial number sets the stage for all subsequent perceptions of value.

For instance, when you see a product originally priced at $500, that becomes your anchor, your point of reference. 

When a new price point, say $250, is introduced, it’s automatically perceived in relation to the anchor.

It feels like a better deal, even if the product might not have been worth $500 to begin with.

This is why those ‘original’ prices, MSRPs, and ‘before’ prices are so strategically plastered everywhere. 

They aren’t just random numbers; they shape our consumer expectations, setting the scene for perceived discounts, deals, and bargains.

Retailers and marketers are well aware of this psychological underpinning. 

When they set an initial high anchor, they’re not just informing you of a price. 

They’re carefully crafting the narrative of value, quality, and worthiness.

First impressions matter. 

In pricing, the initial figures we see often dictate our perception of subsequent ones. 

By understanding the anchoring effect, businesses can influence consumer perceptions, guiding them toward desired purchasing outcomes.

 It’s subtle, it’s powerful, and it’s all about setting the stage right from the get-go.

Secret #3: the paradox of choice and why fewer options can mean more sales

Ever found yourself standing in an aisle, overwhelmed by the sheer number of cereal options? 

  • Flakes
  • Pops
  • Granolas
  • Organic
  • Non-organic
  • and those with chocolate chips. 
paradox of choice when considering cereal options.
Paradox of choice when considering cereal options

The more you look, the more you’re unsure which one to choose. 

You might even leave without picking any. Welcome to the ‘Paradox of Choice‘.

The paradox of choice is an intriguing, counter-intuitive idea: the more options we have, the harder it becomes to make a choice. 

What seems like a buffet of freedom can often turn into a moment of indecision. 

It’s not just cereals; it’s products, services, and yes, pricing too.

When presented with a plethora of pricing options or tiers, customers can feel overwhelmed, anxious, and paralysed.

Instead of feeling empowered by choices, they feel trapped by the fear of making the wrong decision. 

And often, they’ll choose the easiest option – walking away without making a purchase.

This is where simplifying pricing comes into play. 

By streamlining choices, businesses can guide customers more efficiently to a purchasing decision. 

Think of it as curating an experience. 

Instead of bombarding them with every conceivable option, you present the most value-driven, carefully considered choices that cater to varied needs without overwhelming.

Apple, for example, doesn’t offer fifty versions of the iPhone (although some could argue it’s getting there…). 

They simplify choices, making the decision process more manageable and more elegant. 

The result? Increased sales.

Offering fewer, more thought-out pricing options is not about limiting freedom. 

It’s about enhancing clarity, reducing anxiety, and crafting a smoother path to purchase. 

In the end, sometimes less really is more. 

And in the world of sales, understanding the paradox of choice might just be your secret weapon to nudging those numbers upwards.

Secret #4: value-based pricing: the psychological pull of perceived value

Imagine two bottles of wine, side by side. 

One is priced at $20, the other at $80. 

Without knowing anything else, which one do you instinctively believe is of superior quality? 

Most people would bet on the $80 bottle, even without a taste test. 

the struggle is real when selecting wine, cheap vs expensive.
The struggle is real when selecting wine, cheap vs expensive.

This is the allure and power of value-based pricing.

Value-based pricing isn’t about determining the cost of production and then adding a profit margin. 

Instead, it’s about gauging the perceived value of a product or service in the eyes of the consumer and pricing it accordingly. 

In many scenarios, people equate higher prices with better quality, more benefits, or greater prestige. 

They’re not just buying a product; they’re investing in perceived value.

The Journal of Research in Marketing highlighted that consumers often equate price with quality.

Now, this isn’t about arbitrarily hiking prices. 

It’s a strategic approach based on understanding what your target audience is willing to pay for the perceived benefits they’ll receive. 

Here are some steps to harness the power of value-based pricing:

  • Know Your Audience: Deeply understanding what your consumers value is crucial. Is it durability? Exclusivity? Prestige? Design?
  • Benchmark Competitors: See what similar products or services are priced at, but remember, your unique value proposition should guide your final price point.
  • Communicate Value: Clearly explain the benefits and value of your offering. This isn’t about features; it’s about the transformations or experiences consumers will have.
  • Test and Adjust: Monitor how your market responds to your price. Feedback, both qualitative and quantitative, will guide any necessary adjustments.

In essence, value-based pricing taps into the psychological intricacies of perceived value. 

If executed well, people won’t just see a product; they’ll see a promise, an experience, a certain je ne sais quoi that compels them to choose it. 

In the end, it’s not just about a price tag; it’s about the story it tells and the quality it signifies.

Secret #5: bundling tactics — how to make an irresistible offer

The concept of ‘bundling’ has its roots deeply ingrained in the human psyche: the more we get, the better the deal feels. 

Think about those TV infomercials — “But wait, there’s more!” 

This marketing tactic plays on our innate desire to receive greater value, making offers seem too good to pass up.

At its core, bundling involves combining multiple products or services and offering them at a discounted rate. 

The psychology here is twofold:

  • Perceived Value Increase: When items are bundled, the perceived value often surpasses the sum of its individual parts. This is because consumers feel like they are getting more for their money.
  • Reduction in Decision Fatigue: By bundling, you’re giving consumers a curated experience. This can ease the psychological burden of choice, aligning perfectly with the previously discussed “Paradox of Choice.”

But how can we make bundling even more effective? 

Enter the Godfather offer, a term popularised by the likes of Dan Kennedy and Sabri Suby. 

This offer is crafted to be so white-hot and irresistible that only a lunatic would refuse it. 

The aim? 

Addressing the bullseye of the market’s wants and crafting an offer that hits it dead centre.

Real examples of the Godfather offer

Here are some real-world examples from various industries:

Dropbox

When Dropbox first launched, they introduced a Godfather offer that was simple but powerful. For every friend you referred to Dropbox, both you and your friend received additional free storage space. 

This offer was so irresistible that Dropbox’s user base grew exponentially without them spending much on traditional advertising.

Dollar Shave Club

When they first began, they offered a month’s worth of shaving supplies for just $1 with free shipping. 

It was an offer so attractive, especially compared to traditional razor costs, that it went viral and garnered them millions of subscribers.

Gym Membership

Some gyms offer a one-week free trial. But to make it a Godfather offer, they might throw in a free personal training session, a custom workout plan, and a nutritional guide. 

This not only provides immense value but also showcases everything the gym has to offer.

how domino's pizza does their godfather offers in marketing.
How Domino’s Pizza does their Godfather offers in marketing

Domino’s Pizza

They once had an offer where if your pizza wasn’t delivered in 30 minutes, it was free. This guarantee made ordering from Domino’s almost risk-free and positioned them as the go-to fast delivery pizza chain.

Online Courses

An online educator might bundle several courses together at a discounted rate. But to turn it into a Godfather offer, they could add lifetime access, free future updates, one-on-one coaching sessions, and access to a private community.

Birchbox

Known for their beauty subscription boxes, they often throw in extra samples or full-sized products for new subscribers or during special promotions, making the deal sweeter and harder to refuse.

Automotive

Some car dealerships, aiming to clear out last year’s inventory, might offer a new car at a discounted rate but with a Godfather twist: including free maintenance for a year, extended warranties, or even a set of winter tires.

The essence of a Godfather offer is to go beyond the usual promotional tactics.

It’s about understanding the deepest desires and pain points of the target audience and crafting an offer that feels tailor-made for them, making it almost impossible to refuse.

Putting it all together — optimise your pricing for maximum ROI

Crafting the ideal pricing strategy isn’t just about setting a number; it’s a psychological chess game that plays a significant role in influencing consumer behaviour.

 Let’s recap the key principles we’ve unearthed:

Anchoring Effect: Your first price point can set a precedent in your consumer’s mind. Introducing premium products first can make subsequent offerings seem more reasonable.

Paradox of Choice: Offering fewer, well-curated options can reduce decision paralysis, encouraging more sales.

Value-Based Pricing: Consumers often equate price with quality. Set your prices not just based on costs, but on the perceived value they offer.

Bundling Tactics: Grouping products or services together at a discounted rate can present higher value, making the deal seem more attractive.

Now, how do we weave these elements into a comprehensive strategy? Start by anchoring with a high-quality product. 

Then, simplify your offerings, ensuring you’re not overwhelming customers with choices. Next, ensure each product is value-priced, reflecting its quality and benefits. 

Finally, introduce bundling tactics to sweeten the deal.

When executed effectively, this strategy doesn’t just optimise pricing — it maximises ROI by effectively leveraging psychological triggers, ensuring your brand remains compelling and competitive in the marketplace.

That said, the real power lies in taking action

Understanding the nuanced psychology of pricing isn’t simply about digesting information; it’s about integrating these insights into actionable strategies that resonate with human behaviour. 

The psychological facets we’ve delved into aren’t whimsical tricks or short-lived tactics. 

They’re grounded in the comprehensive study of human behavioural patterns, providing insights that have stood the test of time.

It’s essential to recognize that these strategies serve a dual purpose. On one hand, they aim to elevate customer experience. 

When customers feel understood, not overwhelmed by choices, and perceive they are getting great value, their overall experience with a brand is enhanced. 

On the other hand, these strategies are designed to amplify ROI for businesses, ensuring sustainable growth and profitability.

However, knowledge without action remains powerless. 

The real magic unveils itself when you actively integrate these principles, tailoring them to fit your business’s unique context. 

By aligning your pricing strategies with human behaviour, you not only tap into the psyche of your consumer base but also pave the way for a symbiotic relationship where both the customer and the business flourish.

Josiah is a multi-award-winning digital marketing consultant and former journalist for the Australia Times. He now helps 6-7-figure brands as a Fractional CMO to generate predictable leads and sales growth.​

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