Psychological pricing is mainly used by retailers who can take advantage of this strategy, which is based on the idea that certain prices have a psychological impact on the customer. Basically, this strategy relies on the customer’s emotional response in order to encourage sales.
1) Odd pricing –
One type of psychological pricing is odd pricing when the retailer sets up the price slightly lower than a rounded number, so it is expected that customers will not round up these prices, and will treat the price lower than it actually is. For example – the 49 and 99 stores where people do not think the price is 100 or 50, they think it as 40 or 90. Customers tend to price lower in their mind even though the price is higher. This type of pricing is very common in consumer markets.
2) Prestige pricing –
A variation of psychological pricing is also when businesses sell products at a high price and pass it on as a premium product. The premium pricing counts on the fact that the customer will give more importance to a product sold at a premium price and will therefore think it as higher quality. The same is explained in price quality approach of positioning. The idea is to foster the impression that they sell not only a high-quality product, but also a bundle of intangible benefits which come with the brand, as usually these businesses have a strong positioned brand. This type of pricing is also called prestige pricing.
When selecting a psychological pricing strategy, one must know that it is the target audience that determines the way the products or services are priced. The business must determine exactly whom they want to reach. They can also make customer profiles to target customers better.
The nature of the product or service the business is selling, is also an important factor. For instance, a high-end product sold by the means of odd price strategy, might not record high sales, as the intention is not to make these products more affordable. Moreover, when using psychological pricing, the business must also consider its competitors and their prices, because moving far away from the similar products, will just make one’s product less competitive.
There are several benefits of using psychological pricing strategies.
First of all, businesses can take advantage of this method without making significant changes to the product. By choosing the right psychological pricing strategy, the product looks like it is the best offer on the market. In the case of high-end products, pricing strategy will elevate them and compete with the top offers available at the moment.
Another benefit is in discounting prices, in the situation when the retailer wants to have an increased sale on selected goods. In this case, the retailer can just alter the ending digits of the price to identify the products as being on sale. For example, all the product prices ending in ‘’.97’’ will receive a 20% discount.
Odd prices offer the advantage of a better control over financial flow. Due to the fact that the prices are fractional, it becomes much more difficult for an employee to make a dishonest sale transaction, since it is burdensome to calculate the right amount of cash planned to be stolen.
Another characteristic of psychological pricing is the non-rationality. If the business is targeting the segment of customers who are persuaded by incremental price discounts, then it means that every time when a product is promoted on discount, high sales are ensured.
Even if the psychological pricing concept has some faults, it is clear that businesses are setting prices in such manner that they stay competitive. Of course, it is also clear that the strategy is not efficient for all the customers, as some of them make purchasing decisions based on rationality.