The Psychology of Price

psychology-of-price

“It’s like when a 39-year-old turns 40, the birthday feels like a big deal,” says Robert Schindler, a professor of marketing at UCLA. He’s talking about the effect of prices that end .99, how just a single penny between two larger amounts creates this symbolic buffer in our minds. So we perceive £3.99 as being closer to £3 than £4, just as the 39-year-old man still believes he’s in his mid-30s: it’s both completely irrational and perfectly understandable. Welcome to the world of psychological pricing.

Shoppers have to process a lot of prices, especially online, to the point where it becomes overwhelming. Our memories only process the first couple of digits of a figure at a time so pounds inevitably take precedence over the trifles of pence. The effect is powerful. When a Chicago grocery store dropped the price of margarine from 89 cents to 71 cents it saw sales rise by a modest 65%. But then it lowered the price again, by just two cents, to 69 cents. The result was a sales jump of 222%. Subtracting that single penny or dollar to reveal a pair of nines is a magic trick for retailers, but it can come at a larger price.

What the industry calls ‘just-below’ prices are linked in our minds with special offers and promotions. According to marketing professor Robert Schindler, the format was introduced in the 1870s as a way for retailers to distinguish discounted products from their full price stock. But at some point the just-below prices simply became the norm, sale or no sale. And so, in 1894, James Eaton & Co could assure the public that its $9.99 check suits were ‘Always the Cheapest’ in newspaper adverts that did away with whole number prices altogether. Today, however, certain stores still retain the approach’s original meaning.

Take Nordstrom, by Wikipedia’s admission an upscale fashion retailer. They price their clothes in whole numbers: a pair of swimming trunks can be yours for precisely $152 and a bow tie will set you back exactly $55. There are cheaper places to buy your swimwear but even Nordstrom have clearance sales. Then you’ll see all sorts of prices: a wool fit suit is now $465.65 and a pair of toe cap boots are down to $126.96. The discounted prices are left with ragged edges. So why use whole numbers in the first place?

psychology-of-price-qualityLet’s take another study: a pair of identical shoes were shown to customers at two different prices, $75.00 and $79.95. When asked to pick the higher quality shoes, most people pointed to the $75 pair. That’s because whole prices imply good quality, so if Nordstrom reduces a pair of plimsolls to $134.98, and clearly shows they were previously $225, our perception of the shoes’ quality is unaffected by the new price.

Whole numbers are also simpler, more human. We use them when we’re asked to ‘name our price’ and most of us will round up a restaurant tip (only the miserly would fiddle around to leave 99p). There’s a reassuring solidity and trustworthiness to them. Perhaps that’s why the supermarket ASDA recently ditched the decimal point from many of its price tags, to simplify them, to show customers were getting an honest deal.

But there’s only so far a penny will get you. You won’t convince anyone that a $9.99 pair of shoes will last a lifetime just by adding another cent to the price. A cheap product just looks cheap.

It’s the same with chocolate. A stall at the 2006 Brussels Food Fare sold Belgian chocolates. On the first day it charged €9 a box and sales were pretty good, so on the second day it decided to up the price to €15. Oddly, sales doubled. But then on the third day the price of a box fell to just €2. Hardly anyone wanted to buy a €2 box of Belgian chocolates.

As an experiment the chocolate stall was a success, demonstrating how much meaning we ascribe to the price of something. In this case, a box of €2 Belgian chocolates was read to mean a box of cheap chocolates, and no one visits a food fare to buy that. Researchers at Caltech took this further by presenting participants with two identical bottles of wine, saying one cost $10, the other $90. Most people said they preferred the latter.

psychology-of-price-ikea (1)But a cheap price doesn’t always harm the perceived value of something. You just have to explain why the price is so low. IKEA has built an entire business model around this, turning it into a sort of philosophy. Even in the IKEA restaurant you’ll see it, where ‘Why should I clear my own table?’ signs spell out exactly why the meatballs are only £3.80, why the desserts start from 50p, and why drink refills are free (you have to clear away your own tray).

Pricing is largely abstract and arbitrary – it’s just numbers after all. The diamond cartel De Beers demonstrated this to dramatic effect. It was able to take a product with little intrinsic value and artificially arrive at the price of ‘two months’ salary’ – in part because of the stone’s rarity, but largely because they wanted to sell diamonds as something eternal, romantic and expensive. A $3 diamond just doesn’t say “lasting marriage”.

We like to think of pricing as being precise and objective, of being about the purity of numbers. But it’s people who browse, compare and buy, not computers, and the way we see a price tag is largely irrational, influenced by unconscious prejudices, assumptions and anchored by context. It’s by understanding this irrationality and creating sense from it that retailers are able to arrive at a fair price that also communicates a product’s value symbolically.

Speak Your Mind

*