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When starting a business, one of the most important things you will need to do is take a decision the price of your products. If you are a start-up company, or a small to medium sized company, cream of the crop research analyses might not always be an option, since they are very complex and pricey.
So How can we use psychology to determine price? Here are a couple of strategies you can put in place easily. It will cost you mothing, and involves only clever number games.
Charm Prices are prices that end in 9, 99 or 95. Those are effective because of the way we process numerical values (Thomas & Morwitz, 2005). Let us take €4.99 as a price example. When you start reading from left to right, your mind starts encoding the value before you even reach the end of that number, and thanks to that process, the ‘4’ will anchor your brain to perceive a price closer to that value. So when your brain reads ‘€5.00’ and encounters the ‘5’ first, it encodes a value closer to ‘5’. So when determining your price, try to reduce the first digit.
When you evaluate information, you make judgements about that information based on the ease and speed with which you are able to process it. When determining your price you should use rounded prices for emotional purchases (Wadhwa & Zhang, 2015). Since those prices are processed more fluently, the price would just kind of seem right. The opposite is true for rational purchases. Since people use more mental resources to process non-rounded prices, those prices seem more fitting when they are paired with rational purchases.
Also related to processing fluency is the phonetic length of your price. When your price has many syllables, it increases process influence and because it requires a large amount of mental resources to process, people falsely infer that the price must also be larger (Coulter, Choi, and Monroe, 2012). Let us take €27.12 vs €26.72 as an example. Clearly, €26.72 is cheaper than €27.12; however €26.72 has more syllables, increasing the mental process, leading us to falsely infer that €26.72 is larger. So when determining your price, choose prices with fewer syllables. People will perceive those prices to be lower.
And lastly, should you still encounter difficulties in justifying prices to clients, you might wish to focus on your communication of the value of the product you are trying to sell. Try to adjust your value proposition to convey the value of your service, or product instead of focusing on a new price. Think of what makes your product different from the rest? What makes it special? What would customers get out of it? In a nutshell, communication value of product together with the strategies mentioned earlier should achive a positive impact on sales.
Thomas & Morwitz, 2005 http://forum.johnson.cornell.edu/faculty/mthomas/LeftDigitEffect.pdf
Wadha & Zhang, 2015
Coulter, Choi, and Monroe, 2012