Pricing is one of the most fascinating aspects of business. Behind pricing decisions are lots of careful calculations … both numeric and psychological. The latter owe to shoppers’ irrationality when it comes to prices.
This SmartMoney article outlines five pricing tricks retailers use to exploit shopper psychology:
- Use round dollar amounts. JC Penney is doing this to differentiate itself from other mass-market retailers. $20 seems simpler and less “tricky” than $19.99, meaning JC Penney’s trick (er, strategy) is to seem less tricky than the competition.
- Offer less for the same price. Customers don’t generally like this, but when the product is a guilty pleasure, such as Ghiradelli chocolate, they may pat themselves on the back for being slightly less sinful.
- Provide a reference point. Especially for large, infrequent purchases, customers may not have a good idea what they want to spend or what they can get for their money. As such, retailers can nudge customers toward the product they want to sell by placing it next to something either far more expensive (to make the product seem more affordable) or far less desirable (to make the product seem more attractive).
- Offer a bulk price. Apparently, many customers don’t do the math to realize that buying five lemons for $1 is no better deal than buying one for 20¢, so they buy five even if they only need one or two (or even three or four!).
- Use non-round dollar amounts. Walmart is the best example of this. It sets a price at $2.28 and customers think they’re getting a better deal than if the price were $1.99. The non-round dollar amount makes it seem like Walmart has squeezed every last penny it can, when that might be far from true.
When it comes to pricing, buyer beware: Your irrationality is no secret to wily retailers.