You want to make money. That’s why you run a business. Whether you're selling a product or a service—you'll have to put a price on what you're selling at some point.
It isn't easy to price something. It’s where a lot of business owners get stuck and put an arbitrary number on their product that just barely turns a profit.
But did you know you can build a pricing strategy for your business that not only increases profits and also helps you sell more?
That’s why we wrote this post. We’ll lay the foundation for an effective pricing strategy by using psychological pricing tactics—your golden ticket to selling more.
What Is a Psychological Pricing Strategy?
Simply put, it's a strategic way to price your products or services to influence people when making a buying decision.
It isn’t clear how psychological pricing came into common use, but we do know that the practice arose sometime during the late 19th century with newspaper pricing competition.
Companies big and small sometimes have teams dedicated to pricing products—and in some cases, a psychological pricing strategy is built in from the ground floor as part of their brand marketing.
Here, we'll take a look at how Apple has used pricing as a part of their overall marketing and product strategy to land them in the high-end hardware market.
Psychological Pricing the Apple Way
Apple has maintained a price point that hovers around $1000 (and with the new Apple Watch some $20,000) for practically their entire product line.
And, even with that in mind, buyers will flock to every product release making them perhaps the first company ever to be worth $1 trillion.
So what gives? How do they get away with it?
It's because Apple has always planned to be aggressive with their pricing strategies. It goes back to the psychological phenomenon that if something is expensive, it must be good—we'll get into that later.
This echoes the thoughts of Steve Jobs, whose strategy for Apple has four pillars:
- Offer a small number of products
- Focus on high end products and consumers
- Give priority to profits over market share
- Create a halo effect that makes people starve for new Apple products
In this case (depending on who you talk to) that holds true—Apple products are pretty great—but in reality, it’s just selling laptops, phones, mp3 players and now watches. By the way, I absolutely adore Apple products, so I’m not trying to downplay their quality in any way.
Tim Cook said in an interview with regards to the iPhone, “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience.” And, with that in mind—it has paid off for them, tremendously.
Apple rarely offers discounts on its products. The most you’ll see is generally a student discount, and even still, it’s usually only $100 off an over $1,000 product.
That pricing strategy is applied across all retail locations and even resellers. You just won’t find a brand new, unopened Apple product (besides an online marketplace like eBay) for anything less than what they sell it for at their stores.
Let’s take a closer look at some examples of Apple’s pricing strategy. See if there is anything you can learn from Apple and apply it to your business.
The Left Digit Effect Helps You Sell More
There’s a reason why businesses like Apple will price a laptop at $1299.99 and not a flat $1300. That $0.01 actually makes a surprising difference in the amount of sales that can be made.
Instead of charging $1300, charging $1299 for the product makes the price appear to be in the “$1200” range rather than the “$1300” range.
Thus, as a consumer—we perceive the price to be lower than it actually is. We think of it as a bargain at that price. Many studies have shown that generally, consumers prefer to pay less for products and often associate prices ending in a nine with discounts and bargains.
This works because of something called the left-digit-effect. The majority of people read left to right. Apple incorporates this into the entirety of their product line.
You won’t find an Apple product selling for a round number—they’ll always be priced with the “teen ranges” or "$999" model in mind.
Smart, strategic—and definitely on purpose.
Key takeaway: Try using odd pricing on a new product you’re launching. Consider using two different price points—one with odd pricing, and another with flat pricing to test which one works for you.
Comparison Pricing Is a Clever Pricing Tactic
Comparison pricing isn’t just another word for marking items down to compare one price to another, no—it’s a marketing technique in which the price of one offer is directly contrasted with the price of another offer.
Here’s an example of what that might look like from Apple’s position:
Apple is selling two MacBook Airs. One is $899 for an 11” MacBook Air, and the other is $999 for a 13”. Therefore, the 13” option is $100 more, which means we presume it to be better quality. And, in most cases it usually is.
But, which one sells more? In Apple’s case, we really don’t know. But with almost the exact same pricing strategy—Williams-Sonoma was able to move the needle quite significantly on one of their products.
In a study published by The Wall Street Journal, we learn that Williams-Sonoma had a $275 bread maker in their catalog that wasn’t performing too well.
When they introduced a similar bread maker for $429—which was only marginally better—and placed it next to the $275 bread maker in a print ad, sales for the $275 bread maker skyrocketed and almost doubled.
“The lesson learned here: When you’re launching a new product or service in the market, consider leveraging relative pricing. Create a tiered product strategy like Williams-Sonoma or try offering a discount for a longer commitment (for example, 25% off if you make a yearlong commitment). Remember that people don’t make decisions in a vacuum and price your product in a way that takes advantage of that.”
In the Williams-Sonoma example, consumers may have said, “I don’t know much about bread machines, but if I can buy the $275 model that's almost as good as the $415 model, then I must be getting a good deal.”
Anchoring is what's happening here. Anchoring refers to the tendency to rely heavily on the first piece of information offered—and then weighing their purchasing decision based on that.
Key takeaway: Try positioning your product collections with comparison pricing in mind. Try to introduce a more “premium” version of your product and see if your normal product sells more.
If It’s Expensive, It Must Be Good
If that doesn’t sum up the Apple pricing strategy, I don’t know what does.
Think back a few years ago when you saw friends and family using Apple products. Chances are you thought they were crazy for spending so much money on something like a laptop or desktop computer—but now it seems like everyone is using a Macbook. There's a reason behind that too—and it isn't just Apple's marketing strategies.
When you are paying more for something, you appreciate it more. Now—when you compare a $20,000 Apple Watch to another smartwatch product like the $99 Pebble Smartwatch (I realize these products are vastly different in terms of design, but they serve the same purpose), the Apple Watch must be brilliant. Right?
After all, if it were not extraordinarily better they wouldn’t charge so much for it, would they? Consumers equate price with quality. This was studied through diners at a New York restaurant.
The group of people all ate the same food at an Italian buffet, but some were charged $4 and the others $8. Those who paid $8 found the meal to be much better and enjoyed the food much more than those who paid $4.
The conclusion? Expensive equals good.
Bonus: Be sure to read about how Kanye West APC’s $120 plain white shirt sold out almost instantly to see how this strategy is applied to bigger clothing brands.
Key takeaway: Pricing strategies can be applied to almost any business. If you are selling a t-shirt for $100 it might sell just as much as one that’s the exact same selling for $20.
The Fallacy of Competitive Pricing
To buyers, cheap items equate to low-quality offerings. The consumer may think: What’s missing from this service? What’s the hidden costs?
“Your brand identity as ‘the cheapest seller’ is constantly under suspicion because a competitor can always undercut you at any time,” states Aaron Traywick, COO at Global Healthspan Policy Institute. “Bargain hunters are only loyal to price — and their constant demand for lower prices threatens your profits just as consistently.”
Understand that your competitor’s prices will fluctuate. Your business shouldn’t depend on how the competition runs their operations.
Pricing strategies should concentrate on your store’s ability to meet profitability goals. Moreover, lowering your prices affects all parties involved. Customers receive lower quality services, businesses struggle to gain a decent profit by selling to the masses.
Competing based on pricing is a loser’s game. Stay in the winner’s circle by highlighting value.
Understanding the Customer
Today’s consumer has access to a lot more information than previous generations.
Advances in technology allow people to research products in minutes, purchase services on-the-go, and receive customer support without a phone call.
To compete on value, you must understand your customer’s behaviors and lifestyles. Developing a demographic buyer persona isn’t effective anymore. Your team must dig deeper.
Lee Huang, senior vice president and principal of Econsult Solutions, suggests asking yourself the following questions:
- What problems are customers trying to solve?
- What questions are buyers trying to answer?
- What information is hard for your audience to find?
- How are your customers’ behaviors and preferences changing and evolving?
Some of the best products were created by predicting the consumer’s future needs.
“Great brands create desire by anticipating a need in the marketplace or in the eyes of their client. Most things we consider innovations started as anticipations. Tablets, remote ignitions, magic erasers and most every innovative product we use today started as an anticipation,” states Gabriel Aluisy, founder of Shake Creative.
Narrow down what your customers need. Then, develop a sales plan geared toward meeting those demands.
Finding what consumers value is one task. But communicating that value is another endeavor.
You’ll have to persuade potential buyers that prices are irrelevant. Focus the conversation on the customer experience.
Inc. contributor Sandra Wear, states, “Making a ‘value promise’ will help focus your thinking and delivery. The promise needs to be consistently communicated in everything your company does, from marketing materials to culture to user experience.”
For example, work with your team to develop a customized price structure. It will clarify your value and diminish price sensitivity. This strategy worked for one popular tire manufacturing company.
Goodyear experienced issues with convincing customers to pay a premium for their tires with extended tread life. With no reference point, buyers continued to purchase the lower-priced tires.
To solve the problem, Goodyear started pricing their tires based on how many miles they would last. This change gave customers an opportunity to compare offerings. Consumers immediately saw the product’s value and began purchasing the premium tires.
Communicate your brand’s value with a purpose. And don’t be afraid to do things differently. “We have a mantra around here and it’s all about being fearless,” says Lauren Fleischer at Mondelez International, the maker of Oreo cookies. “We market fearlessly which means we’re disrupting the status quo to accelerate growth in ways that are also meaningful to customers.”
Differentiation isn’t about being different than your competitors. Instead, your business should aim to offer a distinct value to consumers.
A brand differentiator sets you apart from others in the marketplace. It can be a specific expertise, proprietary information, or unique management systems.
More importantly, it gives the buyer a benefit. It helps them solve a problem, avoid a disaster, or improve a situation.
For some brands, the differentiator is high-quality products. That can be luxury items with first-class customer service and one-of-a-kind loyalty programs.
“It’s only for the sake of luxury that you would pay for something you can get for free...Enveloping your prospect in luxury throughout their experience makes paying for the indulgence more palatable,” writes Joanna Wiebe, a conversion copywriter and the founder of Copy Hackers.
People like convenience. And they are willing to pay to avoid any unnecessary headaches.
Well-known for its helpful customer service, Zappos considers quality service as its differentiator. It’s one of the main reasons for the company’s significantly high customer retention rates. The online clothing store found that “70-75% of purchases came from returning customers.”
Social proof is another way to be valuable to your customers. Product reviews provide social proof to potential buyers.
According to researchers, 90% of consumers say their buying decisions are influenced by online reviews. They can provide a better perspective on your brand than a product description.
“Anyone can become an online retailer and offer products,” writes Angelica Valentine, content marketing manager at Wiser but only the most trustworthy and consistent will gain a loyal following. A substantial number of positive reviews provides a snapshot of a product’s quality and makes it easier for shoppers to complete their orders.”
Differentiation isn’t always centered around the product. What about your employees?
Your team has remarkable skills and talents. Their viewpoints give context on how to serve your customers better.
David Wolfe, co-founder of Leesa, believes his company’s employees are the ultimate differentiator. “We’ve built a business with a soul,” Wolfe says. “And that’s what differentiates us from competitors.”
Going Beyond Price
Future business growth hinges on innovation, not pricing.
Walmart is notable for its low price guarantee. However, a study revealed that the big box retail chain is losing ground.
Data showed that Walmart’s “electronics cost on average 8.3% more than Amazon’s.” Now, the brand plans to impede the competition with a wider selection of products and curbside pickup.
“Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability. No matter who wins, the combatants all seem to end up worse off than before they joined the battle,” writes Akshay R. Rao, an associate professor at the University of Minnesota.
Focus on your customers. Carve your marketing message around their perceptions of value. For instance, “50% of purchasers between the ages of 40 and 44 are willing to pay more for products from socially responsible companies.”
Flaunting elaborate features won’t suffice. Give benefits that enhance the customer experience.
“Those who can leverage technology to engage customers and create experiences that impress and exceed expectations will be the ones who win new business and see their market share grow,” says Ross Beard, marketing at Elucidat.
Ecommerce Pricing Strategies: Psychology Plus Value
Price-obsessed customers will always exist. The key is to provide value that exceeds the customer’s expectations.
To do that, you need to understand the purpose behind the purchase. This means leveraging psychology and communicating value that will captivate the buyer.