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When It Comes to Pricing, Perception Beats Reality

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A consumer’s perception of a brand and its values, products, and services can have a dramatic impact on purchase behavior. Believe it or not, most of us act upon our powers of perception rather than on unbiased, objective reasoning. Given nearly identical facts about a brand’s products and services, consumers with similar requirements often make different choices on which product to purchase, suggesting that consumers’ perceptions are much more influential than the objective reality. It is important that marketers understand psychology’s role in consumer decision-making.

The impact of human psychology on marketing is not new or a big secret. We all have been raised, since our ability to read and do simple math, to believe that $2.99 is a lot less than $3.00 when contemplating our decision to make a purchase. But like everything else that has to do with human behavior, there are few, if any, absolutes. A 2005 Thomas and Morwitz study, “the left-digit effect in price cognition”, found that “Nine-ending prices will be perceived to be smaller than a price one cent higher if the left-most digit changes to a lower level (e.g., $3.00 to $2.99), but not if the left-most digit remains unchanged (e.g., $3.60 to $3.59).” Wait a minute, it’s about to get even more complex!

When considering a product’s “prestige”, the opposite effect comes into vogue. Prestige pricing refers to rounding-up values to the next whole number; i.e., $199.99 is converted to $200.00. According to a study conducted in 2015, rounded numbers, even if they are higher, are more fluently processed and encourage purchase decisions that are based on consumers’ feelings about a premium brand or product. In the Zhang and Wadhwa study, “consumers were more inclined to buy a bottle of champagne when it was priced at $40.00, rather than $39.72 or $40.28.” To add some complexity to this process, comparative pricing has been shown to be very effective in getting consumers to select a more expensively-priced item over a similar, but less expensive, product by offing the customer more than one choice. Offering a decoy – a third priced option – is generally most effective.

“Free” is a four-letter word for many profit-centered businesses. However, couch an offer as “buy one and get a second free”, and both the seller and buyer perceive it a victory. A discounted price has been proven to be more successful when the original price remains next to the reduced price. And according to research, altering the font, size, and color of the sale price and placing it near the original price will increase the number of purchases. Eliminating the original price from a consumer’s consideration often can bring about negative results. The once iconic retailer JC Penney learned the lesson of anchoring bias firsthand when it altered its long-time pricing strategy. Instead of showing a higher original price next to a lower sale price they took a storewide, “everyday low price” posture, and sales dropped significantly. The action forced the retailer to return to the original pricing policy, proving that when it comes to being on the right side of human behavior, it matters how identical information is presented for interpretation.

Employing psychology to marketing is a time-tested and widely successful tactic, but if over-used, it can cause a misperception of the product’s real value. Not every tactic is equally effective across the full spectrum of consumer products and services. Regardless of the psychological methods deployed in a pricing structure, the best pricing strategy is a customer-centric one that results in the consumer feeling as though they are the winner, whatever the price.