15 Psychological Pricing Advantages and Disadvantages

Psychological pricing is the practice of creating more value for consumers to perceive when they are looking at the goods or services you offer for sale. You must be able to accurately gauge how consumers will emotionally respond to your prices to encourage a purchase. When you are aware of this response, it becomes easier to increase your overall sales without a severe promotional pricing strategy.

One of the most common psychological pricing tools that is used today is called “charm pricing.” Instead of charging $10 for an item, a strategy using this option would price the item at $9.99. Even though the price is only $0.01 cheaper, because it reduces the cost from 4 digits to 3, it “feels” cheaper to the consumer. For the compulsive purchaser, that is enough to win a sale.

The psychological pricing advantages and disadvantages recognize the brain’s desire to save money and feel satisfied emotionally. That’s why these key points are important to recognize with this sales strategy.

List of the Advantages of Psychological Pricing

1. It can offer a business a high return on their investments.

One method of psychological pricing increases the price of an item that is sold. This happens when the product is initially launched. By charging a higher price when demand levels are also high, then it becomes possible to generate a higher return on the initial investments made to bring the item to the market. At the same time, your early adopters become testers that can help you to refine the product.

2. It may discourage competitors from entering your market.

Another option for psychological pricing is called “penetration pricing.” This option targets the consumers who are sensitive to cost within specific market segments. By engaging these consumers with a targeted price that is lower, you’re creating an emotional response within the segment which encourages a purchase. That eliminates cost control pressures and may even create a barrier to entry for competitive products in the future.

3. It creates a chance to be transparent about all costs.

If you’ve shopped online at all for something, then you’ve seen a psychological pricing strategy called “partitioned pricing” for the goods and services offered. This pricing strategy will itemize the various costs that a customer faces, usually at the end of the checkout process. You’ll see separate charges for shipping and handling, administrative fees, sales tax, and other costs. The initial price on the item is there as well. With this transparency, customers can decide if they are actually getting a good deal.

4. It simplifies the decision-making process for consumers.

Many consumers are cost-conscious, so one of their primary screening points is cost. With anchor pricing techniques, you can encourage customers to look at a cheaper item when it is priced better than something comparable. This gives you the opportunity to increase sales for specific products while consumers feel like they were able to get a pretty good deal.

5. It boosts attention to a specific product through its actual cost.

Up to 70% of the products that are sold in stores are influenced by charm pricing. Sometimes called “.99 pricing,” it markets products with an odd number that is just below the full price of what a business wants to receive. Although it is so overused today that it may not be as effective as it once was, small changes to it can make a big difference. Some companies have started using .97 or .95 pricing instead of .99 pricing to create a bigger impact.

6. It offers multiple ways to encourage customer attention.

Although charm pricing is the most common strategy used today in this marketing category, there are other methods of psychological pricing that can be used too. Any pricing strategy which encourages customers to see more value in the product or added value when purchasing multiple items fits into this category. If you know what your customers prefer, then you can implement a pricing strategy that will dominate their attention, which gives you more opportunities to close a deal. Even fast-food restaurants, with their combo meals, employ a psychological pricing method that is called “bundling.”

7. It offers evidence of value.

One of the emerging elements of psychological pricing is called “social proof marketing.” When you engage bloggers, social media influencers, and online personalities to promote your products, they will convey a higher level of popularity to potential customers. In a world where everyone has “this” product, you can charge more because there is perceived value in its overall profitability.

List of the Disadvantages of Psychological Pricing

1. It requires consistent demand levels to be effective.

Psychological pricing is only effective when demand levels for products or services are kept consistent. If you start lowering prices over time, for example, then you may find that consumers wait for the lower prices before upgrading to the next item. Many psychological pricing strategies cannot be implemented over a long-term period because consumers eventually grow wise to the fact that the perceived deals are not that strong.

2. It can create long-term pricing expectations.

If you use psychological pricing all the time to encourage sales, then consumers will expect to see the lowest price possible, whenever possible. When they see a price that they feel is unfair, then they’ll go to a competitor’s product without a single thought. Customers who are always looking for the cheapest price are loyal to the price, not the company. Even worse, a business who appears to cater to cheap pricing will generate questions about the quality of the brand that may stop new customers from coming around.

3. It may drive customers away.

Some pricing strategies in this category lower prices, even if it is only by a penny or a currency equivalent. Others use tactics that might seem like you’re hiding the true cost of the item. If you know a shirt costs $10 and that’s what you can afford, getting blindsided with another $10 in shipping costs during checkout will cause that customer to abandon their card. If you don’t like the idea of getting blasted with hidden costs, there’s a good chance your customers are going to despite it as well.

4. It could hurt the reputation of your brand.

Some psychological pricing strategies are accepted, and even sometimes appreciated. Others create a different result. If a customer is expecting one price, but the final price is different, and that difference is unexpected, then it will create a negative perception of your company. When negativity is what influences consumer reactions, it spreads like a contagious disease to their entire network. It can be difficult to overcome a poor experience, especially when the issue was based on pricing and not a poor customer service reaction.

5. It could cause customers to feel like they’re being manipulated.

Many psychological pricing strategies are based on the idea that customers are purchasing off of impulsive moments instead of well-researched thoughts. If you’re pricing items in a way to manipulate how customers trend through your business, in person or online, then you’re creating the risk of having unhappy people talking about what you’ve done. People who stop to think about a purchase will spot manipulative pricing schemes and either try to beat them or leave your business to shop with someone else.

6. It is a technique that is primarily based in the United States.

Charm pricing and other psychological pricing strategies are most effective when they are used to target American consumers. Research in other markets, such as Europe, suggest that rounded pricing is a better way to generate sales in new markets. The research on psychological pricing also tends to focus on the fashion and grocery industries, which means it may be an ineffective marketing tool if you’re looking to target consumers outside of the United States.

7. It doesn’t let you stand out from the competition.

Every business is conducting psychological pricing on some level today. You don’t stand out in your industry if everyone is doing it. Some consumers might feel that a brand is more honest and transparent if they charge an actual price and run periodic sales instead of employing one of the various psychological pricing strategies that are available. You must be able to recognize what resonates best with your audience, then use that strategy to encourage sales growth.

8. It does not come with a sales guarantee.

No pricing strategy is 100% successful. Some customers will pay higher prices for items because they prefer a different brand. Your goal here is to get attention. Sales might come too, but it is important to maintain a realistic approach. Just because you change your pricing does not mean you’ll get new customers.

These psychological pricing advantages and disadvantages offer ideas that can help businesses create more attention for their goods or services without sacrificing profit margins. Although there are a lot of risks associated with this marketing tactic, it can also be an effective way to boost revenues without a major investment.