What Is a Psychological Pricing Strategy?

by Wendel Clark - Updated September 14, 2018

If you want to make your company's prices more attractive to consumers, you do not necessarily need to lower the prices. Instead, you can use psychological pricing strategies to maintain the price while making it more attractive. A psychological pricing strategy relies on the nature of human psychology to make prices appear more attractive to consumers. It takes advantage of the ideas that humans do not always act rationally and that certain prices may seem more appealing for reasons beyond just being lower. When choosing a psychological pricing strategy, consider your specific product's image and remember that effectiveness can vary by market.

How Psychological Pricing Works

A psychological pricing strategy works by selecting prices to which consumers will have an emotional reaction. For example, a car might be priced at $15,999 rather than at $16,000. A completely rational consumer would recognize that a price difference of $5 is negligible on a big ticket item such as a car. In reality, however, consumers do not tend to behave in such a rational manner, but will tend to act emotionally and round down prices. Although the price of the car is closer to $16,000, many consumers will tend to think of it in the $15,000 range.

Types of Psychological Pricing Strategies

There are five basic types of psychological pricing strategies: odd-even pricing (also called charm pricing), prestige pricing, multiple pricing, promotional pricing, and price lining. Odd-even pricing is a strategy of setting prices in odd numbers just below an even price, for example pricing an item at the odd $19.99 rather than the even price of $20.00. Sometimes called .99 theory of pricing, the intention of odd-even pricing is to make the price appear considerably lower than it is, even if it's just one cent short of an even number. Prestige pricing works on the opposite premise; rather than making prices seem low, prices are inflated in order to create a sense of greater value. For example, a wine might be priced at $20 per bottle rather than $12 merely to give the impression that it is a better product.

Multiple pricing is a psychological pricing strategy in which items are bundled together, such as two for $5 rather than $2.50 per item. This strategy creates a sense of value and can help boost sales volume by encouraging the purchase of multiple items. In contrast, promotional pricing is the psychological pricing strategy in which a price is temporarily lowered in order to attract customers. Lastly, price lining is an effective form of psychological pricing for companies with an extensive product line; it involves creating a price range for a particular line, for example a budget clothing line with items all priced below $10.

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Selecting an Effective Strategy

When selecting a type of psychological pricing strategy it is important to select the strategy that is best aligned with the product. For example, a luxury item will not likely benefit from odd-even pricing. In fact it might actually hurt the product by making it appear cheap. In such a case it would make more sense to employ prestige pricing, which will actually boost the product's image as a luxury item.

Psychological Pricing: Pros and Cons

The chief benefit of psychological pricing is that it allows marketers to influence the way that consumers view a product without the need to actually change the product. This can make it a very cost effective way to influence consumers compared to other marketing strategies that require the use of resources. However, psychological pricing will not be effective for all markets. Commodities, that is to say products with little or no differentiation (such as ore, oil or electricity), are less likely to be affected by psychological pricing. In this case, consumers are much more apt to behave rationally in their purchasing behavior, and a non-psychological pricing strategy is more apt to be effective.

About the Author

Wendel Clark began writing in 2006, with work published in academic journals such as "Babel" and "The Podium." He has worked in the field of management and is completing his master's degree in strategic management.

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