Psychological Pricing

9 Key excerpts on "Psychological Pricing"

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  eBook - ePub

  Management of Marketing

  • Paul Reynolds, Geoff Lancaster(Authors)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  Target pricing is used by skills based companies and business-to-business companies whose price philosophy is one of a ‘fair return-on-investment’. In most marketing situations, the technique has limitations. In particular, demand elasticity is ignored. Thus, although a given level of output may be prescribed which only requires a relatively low price, there is no guarantee that this volume will be bought by the market. Conversely, if the company wishes to reduce output, and still reach the target profit, a higher price must be charged which may not be acceptable to the market.

  7.5.3 Psychological Pricing Techniques

  It is the market place and not the company that exerts the greatest influence when prices are being determined. Although an individual company cannot significantly alter basic market structure, it has some influence when marketing implications are considered. Management is faced with a general level of demand for a product or service. Inside this demand level are opportunities for strategies to be developed which focus specifically on consumers. The importance that consumers attach to prestige value allows for Psychological Pricing techniques to be developed. Some consumers believe that price is an indication of quality; the consumer uses this perceived quality to enhance the image of his or her lifestyle.

  The purchase of a ‘prestige’ product can then become an expression of ‘self-concept’. ‘Designer clothes’ are a good example of prestige products; their perceived value is greater than their cost. Consumers see value in exclusivity and the ability to display that they are prepared and able to pay high prices for such fashionable items.

  The influences on the consumer that make prestige pricing possible are numerous and these have been discussed in Chapter 4

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  eBook - ePub

  Essentials of Marketing Management

  • Geoffrey Lancaster, Lester Massingham(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  It is now recognized that pricing sends many complex signals to customers. Moreover, these price signals do not always mean the same thing to each customer. As a result, they are often interpreted and acted upon in different ways. There are behavioural forces at work with respect to price, involving psychological factors such as perception, learning and personality. These behavioural forces have led to the notion of considering the psychology of pricing processes. Examples include:

  • Odd pricing: often prices are set to end in an odd number (e.g. £4.99 instead of £5.00). There is some evidence that customers then see the product as falling into the lower priced category (i.e. £4.00) rather than the higher one, to which it is actually much nearer.

  • Price and perceptions of quality: price is often used by potential customers as an indication of quality, particularly where they are unfamiliar with a brand or supplier. This means that a low price may be taken as a sign of low quality and vice versa, meaning that it is possible to price a product too low.

  • Price and social status: the marketer needs to be aware that some customers will regard the prices they and other people pay as an indicator of status. This is related to price as an indicator of quality. Again, some customers may be deterred by low prices even if they know it represents the best possible value, because they feel it detracts from their social status.

  Other products in the line/mix

  In a multi-product company many products have interrelated costs and/or demand. When setting a price on an individual product in the line, consideration should be given to the overall profitability of the product mix. For example, we might decide to set a lower price on an individual product than we might otherwise do because it helps to sell other, perhaps more profitable, items in the line.

  Other elements of the marketing mix

  As with all marketing mix elements, it is important that pricing reflects, and is consistent with, other elements of the mix. A high-quality, expensively packaged product may be looked at with some suspicion by potential buyers if it carries a bargain price tag.

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  Managerial Economics

  Problem-Solving in a Digital World

  • Nick Wilkinson(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  27 12.6 Psychological Pricing 589 12.6.4 Pricing for Quality Whereas most of the practices above relate to offering lower prices than ‘normal’, there are some situations in which higher prices may increase sales and profits. There is certainly evidence that a high price can donate prestige to a product, by making it exclusive, even if the evidence of greater objective quality is dubious. This leads to the strategy sometimes referred to as ‘prestige pricing’; German luxury saloon and sports cars, such as Mercedes, BMW and Porsche, enjoy this cachet. This is not to imply that such cars are lacking in objective quality! However, other firms may try to employ the same strategy without necessarily ensuring a higher-quality product. Consumers may feel better when they buy and use prestige brands. This phenomenon may relate to conspicuous consumption, whereby consumers gain utility from asserting a higher status that is visible. However, there is some evidence that even for non-conspicuous goods, such as underwear, consumers feel better when they use prestigious brands. The psychology here can be summarized by a phrase from Ariely: 28 ‘The brain gets what it expects.’ This means that not only do we expect higher quality from more highly priced goods, but we also tend to experience higher quality. The two studies described below illustrate this phenomenon. Waber, Shiv, Carmon and Ariely 29 examined the effectiveness of a placebo for reducing pain. Subjects were administered electric shocks in two consecutive treatments, but given a ‘drug’ purported to be a painkiller before the second treatment. Sure enough, the subjects reported less pain in the second treatment compared to the first, even though the ‘drug’ was actually a vitamin C capsule.

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  Pricing

  A Guide to Pricing Decisions

  • Ragnhild Silkoset(Author)
  • 2023(Publication Date)
  • De Gruyter

    (Publisher)

  Accordingly, even though we decided to go for the second choice with a price of $3,227, the realized price will be close to $4,430. The most expensive option on the first hotel for this period is stated as being US$10,460. This is admittedly exclusive of taxes. But then we are probably over in a customer segment where the price is insignificant, and that segment is hardly in the target group for this book, so we leave it at that.

  Remember that all the world’s psychological tricks cannot fix a bad, overpriced product to make it good. Deceiving a customer to make choices they could otherwise not have done hits back hard. You only fool a customer once. Then they, and everyone around them, are gone forever. And so it should be. Transparency and openness about what customers pay is the rule.

  Steps in Psychological Pricing

  As we have seen in the previous example, there are many ways to present prices, including which numbers to use, print size, color, comparisons, order, the time factor, shortages, and so on.

  In this section, I will go through a whole series of such techniques and explain how they work. All techniques are based on research in reputable academic journals. The techniques are based on established theories within the information economy, and especially the theories around reference price effect, anchoring effect, prospect theory, and endowment effect.

  Because this book has an applied purpose, I decide to focus on how the theories are applied. To simplify the process, I’ve organized it into four steps (see Figure 9.3 ). These are Step 1, the choice of numbers; Step 2, map the surroundings of the numbers; Step 3, identify the motives for purchase; and Step 4, create a good trade.

  Figure 9.3: Steps in Psychological Pricing.

  Step 1: Select Which Numbers to Display

  In this first step in Psychological Pricing, we will look at how numbers should be presented to customers. We will first look at the well-known 99 ending technique. Then we will look at how the way the numbers are presented influences the perception of whether the price is high or low. Are there complicated numbers? Sometimes it’s an advantage, other times not. Which is better, whether a price goes up or down, right or left? Sometimes we accept numbers without reacting, while in other situations a price invites haggling. The techniques here may work a few times but other times not. The sample shows the variation and what the research has found so far. There are no absolutes.

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  eBook - ePub

  Innovation in Pricing

  Contemporary Theories and Best Practices

  • Andreas Hinterhuber, Stephan Liozu, Andreas Hinterhuber, Stephan Liozu, Andreas Hinterhuber, Stephan M. Liozu(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  The first and most important thing managers need to recognize is that getting the “right” price is critical for both revenue and profitability. Clearly, what is “right” depends as much on customers’ differential response to different prices as it does on organizational objectives. But how can a manager gauge the “right price”? One way is through field experiments testing different price/promotion levels (Almquist & Wyner, 2001), an area in which the direct mail industry has previously led the way and in which digital marketers are progressing rapidly (with caution) given increased behavioral data and the chance to manipulate customer exposure to information. Other alternatives exist and simple direct approaches may yield reasonable solutions in some cases (Miller et al., 2011). Yet another part of the solution is the acknowledgment that the value of a product or service sets the upper limit for how high a price can be raised, and that value is made up of psychological and objective or utilitarian value. Managers must understand what this psychological value is and the attributes of their products and services that relate to it. The psychological value of a product is not only determined by its brand, rarity and social norms, but is also affected by perceived fairness or “rightness” of a price. These issues of fairness may be influenced by how, when and where prices are charged and involve both affective as well as cognitive decision processes.

  Gourville and Soman (2002) assert that consumers typically tend to look at price differences in terms of the saving as a proportion of actual price and as an indicator of the size of the incentive to enter the transaction. Similarly, they may resent prices that are not a reflection of the costs of a good and sellers may need to add features that justify the perception of higher costs. For some goods, a reference price might be used to identify what is “fair,” while what is a fair price might be the subject of more intensive introspection for utilitarian goods compared to luxuries. These insights suggest buyers make various judgments about perceived value and a fair price that, in common with decision-making generally, suffer from extensive biases.

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  Handbook of Marketing

  • Barton A Weitz, Robin Wensley, Barton A Weitz, Robin Wensley(Authors)
  • 2002(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  The method is tested successfully on two inexpensive grocery items and an inexpen-sive durable good. B EHAVIORAL M ODELS Many customers actively process price information; that is, they are not just price ‘takers’ (to use the con-ventional term from microeconomics). Customers continually assess the prices charged for products based on prior purchasing experience, formal com-munications (e.g., advertising) and informal com-munications (e.g., friends and neighbors), and point-of-purchase or web-derived listings of prices, and use those assessments in the ultimate purchase decision. Some key concepts relating to the psychological aspects of pricing that have been the subject of recent research in marketing are the following: • price judgments • reference price • ‘odd’ pricing • the communication aspects of price. MARKETING ACTIVITIES 270 Price Judgments The previous section of this paper focused on measuring price thresholds, or judgments about whether prices are too high or too low. However, additionally, when confronted with a price or a set of prices, consumers process the price information and form preferences about the product or service in question. The prices could be in the same store, from multiple stores, from several types of channels (e.g., retail, Internet, catalog), and take a variety of forms (even price endings, endings with nines). In addition, consumers often have to make judgments about prices occurring over a period of time. For example, when asked to sign up for a fitness club, people are given the option of paying all at once or on a monthly basis. All of these different scenarios in which price processing occurs shows the impor-tance of context in understanding how consumers form judgments of price. The question of how consumers react to alterna-tive pricing strategies has been studied by Alba et al.

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  Psychological Foundations of Marketing

  The Keys to Consumer Behavior

  • Allan J Kimmel, Allan J Kimmel(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  4 Psychology and marketing Box 1.1 Adding aesthetical elements to everyday products In a highly competitive marketplace, it no longer is surprising to find that the designs of many everyday products are increasingly imbued with distinguishing aesthetical elements that are intended to appeal to consumers. Absolut’s iconically-shaped vodka bottle sparked the arrival of a wide array of elegantly designed competitors that are worth buying for the bottles alone, which may remain prominently displayed in the home long after the contents have been consumed. The new Dyson Supersonic hair dryer (below), stands out in the category of hair care products by looking nothing like the archetypal hair dryer that consumers have been purchasing for decades. B&O PLAY’s Beoplay S3 external speakers (below) are among several high-end audio systems intentionally developed with aesthetic congruity in mind. Although higher in cost than more traditional home speakers, the speakers can blend in with most interior room themes, and also offer the opportunity for the user to swap out the face plate to create a better match. insight into human thinking and behavior processes. However, before attempting to further delve into the dynamic interplay between psychology and marketing, it first is necessary to be clear about some terminology. If our goal is to unravel the psychological bases of marketing, we first must have a clear understanding of the terms “marketing” and “psychology.” MARKETING DEFINED Marketing is a term that is used in everyday parlance, but its technical definition tends to vary according to whether it is treated as an independent discipline or as a managerial process. As an independent discipline, marketing represents a scientific field of inquiry that comprises a vast body of knowledge derived from academic research and theory con- cerning marketing-related activities.

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  Problems in Marketing

  Applying Key Concepts and Techniques

  • Luiz Moutinho, Charles S Chien(Authors)
  • 2007(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  Combined with cost functions, it can yield overall insights into profit implications of alternative price levels. Simulation may be applied to complex problems and settings. Yet, as for optimisation, simulation applied to comprehensive settings may become complex, and necessitate the collection of a large amount of information. Price adjustments While the previous methods, alone or in combination, help determine the appropriate amount to be charged to consumers, small adaptations may be needed to translate them into price levels. These adaptations are in line with practical requirements and originate from Psychological Pricing issues. In particular, principles of odd pricing and of price lining (the practice of using a limited number of price points to price products in a line) may be highly relevant here. As indicated earlier, both have psychological as well as practical implications, and therefore deserve managerial attention. Problem Illustration of cost-based pricing rules A manufacturer of toothbrushes considers the following costs and demand level: Production costs £1,000,000 Fixed costs per month £20 Variable costs per unit Expected demand 20,000 units per month Pricing 165 1 To earn an MU of 20 per cent on price, the following unit price should be charged: MU price AC/(1 MU) MU is specified as a percentage of the selling price.Alternatively, MU can be defined as the margin by which price exceeds average costs (MU price average cost (1 MU)).

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  eBook - PDF

  Marketing Management

  • Dawn Iacobucci(Author)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 155 Chapter 9 Pricing 9-6 Customers and the Nudging Psychology of Pricing; A.K.A. Customers Are Kind of Funny Our pricing discussion thus far has involved some strategic thinking and a lot of number crunching. Yet any model you’ll ever see (marketing, statistical, economic, etc.) will be of the form ε Our prediction Our model 5 1 where « (epsilon) is the error term, also referred to as noise, variability, heterogeneity, a fudge factor, or “beats me.” The idea is that, no matter how well we think we know a system (e.g., the factors that influence a consumer’s decision to purchase something), we are still dealing with human beings. And even if the purchase seems simple, seemingly endless factors con-tribute to the decisions. We typically don’t have good data on all the factors, and actually we typically don’t even know what all the factors are. So we acknowledge that the model is a simplification of the world, and that we’ll make some errors in prediction, but we’ll do as good a job as we can (until we can get better data on more factors). Sometimes we use models and they’re consistently off, always predicting too high or too low. When we identify such systematic biases, then we know that something else is going on. In particular, much of pricing has been derived from economics, and it sort of makes economists nuts that human beings introduce systematic variation into the decision making. If we draw from psychology or behavioral economics about nudging, we see that there are eight kinds of so-called biases that are actually quite rational.

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