Psychology of Setting Prices

Pricing is one of the four major components of marketing. Psychological pricing forms one of the key elements of demand pricing wherein the consumer demand is the main focus. The price and quality relationship that governs the central theme of the consumer market relationship is surrounded by uncertainty and gives the consumer the perception that higher the price, better the quality.

The science of pricing is an art in itself. Rounding off the figures may be good for basic math but never in business. The art of setting prices for articles has been an ever challenging task in business. Keeping in mind the changing economy, heavy competition in the market and consumer affordability, the trick of pricing an article has been more on a psychological evaluation of the consumer. Pricing is usually done by keeping with industry standards. But in order to sell their products after a baseline or whole sale price has been fixed, individual business organizations have most often dealt with pricing in terms of smaller denominations such as cents and pennies.

While quoting the universal example of $9.95 or 9.99 being more attractive to consumers as compared to $10, this psychology seems to hold in business world wide. The main reason for this is that people tend to see the first figure in dollars as compared to the cents. $9 is cheaper than $10, and the cents don't figure in the perception. While shopping, consumers tend to overlook small differences in cents but go by the dollar value. And funnily, the highest single odd digit is the most psychologically favored and 9 is that most fortunate figure of acceptance. However one cannot rule out the fact that the cents are totally ignored by the customer but the ignorance is at the subconscious level and is partial. Also the use of odd figures has a background in that it was used to curb theft by employees by way of forcing them to give change and enter the amount in the cash register a practice that was originally put forth way back in 1875 by the publisher of Chicago daily news, Melville E. Stone.

Another most popular way of attracting consumers has been introductory offers. Suppose a new toothpaste is released in market, it often sells better when its accompanied by a free sample, a toothbrush or even 25% extra toothpaste. And more so when the actual price is quoted and struck off, with a new pricing quoted in a different color alongside to attract the consumer. Often in these cases the consumer has this inherent feeling that he is getting more for a lesser price. Sometimes he also compares another similar priced similar product with the one available on discount to satisfy himself that he is certainly getting more for the price quoted.

When an article comes to shelf with a certain price, consumers most often never question how and why it was priced. If a group of articles is priced at say in the range of $20's, the price is taken for granted and the evaluation and comparison of prices is limited to that range only even if the product may be of lower or higher value of that price. However, when the price of the same set is increased after a certain period, the consumers do not appreciate it. The tactic of increasing the price by 20% and giving a 10% discount on the same article is perceived better than just an increase in price. "Buy one take one free" is another pricing tactic to attract buyers although the offer maybe for a limited period of time. Definitely such articles sell fastest.

By increasing the price of a product by a few cents, a company can earn profit as there seems to be no complaints from the consumer as the price hovers around a key threshold point and minor increase is accepted. Consumer sensitivity in pricing can be found when the consumers have no other product to compare with or when the product is exclusive and unique. Even in such cases, when the product is bundled with a few other accessories, the aspect of consumer emotion is very much aroused and they sell better.

Above all, when a customer is satisfied, both the company and the customer are profited. But then the response to the concept of psychology pricing has always been mixed. As long as the customer is not cheated, the concept is of advantage to sellers.

Copyright 2005 Konstantin Goudkov

Konstantin Goudkov studies the psychology of pricing, ways to manipulate prices for maximum profit, and tactics to control consumer price perception. You can find his latest report at: http://www.PricePointReport.com

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