10 Psychological Pricing Strategies to Boost Marketing Results

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You’ve followed every strategy in the digital marketing rule book yet sales is not forthcoming.

Designed a high-converting website? Check!

Used valuable content to build a loyal following? Check!

Optimized your digital marketing funnel across multiple customer touch-points? Check!

What could possibly be the reason for your abysmal sales?

The answer may lie in something far more fundamental and basic: your pricing strategy.

What I’m going to show you isn’t Marketing 101 stuff. Instead, we’re going to venture into the realm of psychological pricing and examine 10 tricks which marketers commonly use to get their customers to buy more.

Drawn from Robert Levine’s wonderful book The Power of Persuasion – How We’re Bought And Sold, these 10 rules of framing your sale can radically change your marketing effectiveness.

#1 Separate Gains

Imagine winning $10,000 in a lucky draw contest. Would you prefer to pick up the $10,000 in one prize or perhaps split the $10,000 into three different amounts on three separate occasions?

Apparently, most people prefer to opt to receive the three smaller amounts. And they often feel happier doing so, especially if the larger amount comes later (eg $2,000 first, then by $3,000, followed by $5,000)!

This is the principle of “separate gains” whereby people feel happier to receive multiple instances of a reward or gift.

One way to use the “separate gains” principle is to offer customers a free gift with your product rather than more of the same product itself.

For example, when people sign up for your customer loyalty programme, you can immediately offer them a ‘mystery’ gift rather than just more reward points. Those can come later as an add-on.

You can also consider these strategies:

• Give your staff multiple smaller bonuses or pay increments spread over time — rather than one huge raise or bonus
• Deliver your product/s over time, wrapped in different wrapping paper so that they appear separate
• Split up your customer rewards over a few occasions — eg birthdays, Christmas, anniversaries, etc

#2 Separate Small Gains from Larger Losses

We humans are bad at handling losses. This is why any profit that your customer may enjoy tends to get buried (and forgotten) when it is considered against a bigger loss.

To avoid this, consider applying the following:

• Provide “savings” information separate from your customer’s actual bill, eg “Congratulations, you’ve saved $50 on your course today!”
• Offer rebates rather than reduce prices as an upfront discount. Once again, make sure that they arrive as a separate cheque or gift rather than an actual reduction in your initial price.
• Deliver these bonuses as an unexpected gift, rather than associating it with how much your customer has spent

#3 Consolidate Losses

Which would make you more pissed?

1. You received a letter from your electricity company saying that they made an error and you need to pay an additional $30 for your bill. Two days later, you received another letter and bill saying that you need to pay an additional $20.
2. You received a letter from your electricity company saying that they made an error and you need to pay an additional $50.

The answer is probably 1 in most cases. In the words of Levine: “every loss stings no matter how much the total.”

To apply this principle, try to bundle losses (ie purchases) wherever possible. So if you’re selling a new gadget, throw in accessories as a package deal rather than get them to buy these add-ons later in dribs and drabs.

#4 Bundle Small Losses into Larger Gains

Since bigger gains are subject to the law of diminishing returns, there may not be any psychological differences between a big gain and a larger gain.

However, small losses packaged against a larger gain can be viewed more positively.

Here are some examples you can learn from:

• Encourage your customers to pay through automatic deductions like GIRO or credit card deductions spread over time. The payment of income tax over 12 months is a good example here.
• Insurance premiums is a good example here. By deducting a certain amount every month from your payroll (or social security/ Central Provident Fund (CPF) in Singapore), you don’t feel the pinch relative to the gain (eg a bonus payout of $200,000 in 10 years for instance).
• Use subscription fee structures (eg $50 per month) over a 12-month period (ie total cost $600) rather than an upfront initial payment.

#5 Appeal to Risk Taking for Losses, to Safety for Gains

One of the great idiosyncrasies of humans is that we experience pain more acutely from a loss, than the same measure of pleasure from an equal gain.

In other words, losing $500 will make you far angrier than the joy you may feel from gaining $500. Bad emotions feel worse than good emotions feel good. This is also known as “loss aversion.”

(Levine estimates that the average person needs five good experiences to balance out a single bad one!)

This psychological quirk makes people more willing to gamble when they face a loss, compared to the risk giving up something they already possess. A study showed that given a choice between an 85 percent chance of losing $1,000 versus accepting a sure loss of $850, most people chose the 85 percent gamble.

The insurance industry players recognize this syndrome. They phrase their policies not as a “buffer against unpredictable loss” but as a “way of protecting the valuables you possess.”

#6 Let Customers Buy Now, Pay Later

This rides on two related psychological traits:

1. We hate to give up what we posses
2. We are quick to assume psychological ownership

Offering test drives for cars, free trials for software, and trying out of clothes at a boutique rides on this principle. The closing of the sale only happen later when the sales person can frame not buying as a loss.

Magazines used to offer this with a subscription card with two boxes marked “Payment enclosed” and “Bill me later.” Doing so makes it easy for people to start their subscription without forking out payment.

#7 Frame as Opportunity Forgone rather than Out-of-Pocket Loss

Legal rule of thumb: possession is nine-tenths of the law. The same might be said about psychological possession. – Robert Levine

We feel out-of-pocket losses more painfully than lost opportunities.

Take a look at these two scenarios:

1. You’re expecting to receive a gift voucher from an online shop. It arrives in the mail – a $200 voucher. A few days later, another note came saying that there is an error, and that you must return $50 of that voucher.
2. You’re expecting to receive a gift voucher from the online shop of $200. However, when it arrives you find that it’s only $150.

Which would be more aggravating? If you’re like most people, returning the $50 voucher will probably raise your ire far more than receiving a smaller sum.

One way to take advantage of this is to offer products that people can redeem with no-interest credit using their credit card rebates or loyalty points. It is less painful for your customers to part with money they don’t yet possess than with their cash-at-hand.

Banks also capitalise on this psychological quirk. They’ll offer you a ‘free’ savings accounts if you maintain a minimum balance, rather than make you pay a monthly service charge.

In reality, the interest rate gains which you may forego from this ‘free’ account is likely to be higher than the out-of-pocket costs that you’ll incur from the monthly charges. However, the majority would still opt for the free-account option.

#8 Emphasize Sunk Costs

Loss aversion sometimes lead consumers to make stupid decisions. For example, most investors prefer to sell winners rather than losers in the stock market, even though the advice is to “cut your losses short and let your profits run.”

This is an example of a “sunk-cost trap” – a phenomenon where your aversion to loss makes you throw good money after bad money. Simply because you don’t wish to waste your earlier investment.

You can use this quirk by getting your customers to make a small initial investment. Once they are in, they are much more likely to make a larger one later.

#9 List High, Sell Low

The age-old concept of listing a higher “suggested retail” price and selling low is a tale as old as time. I mean, wouldn’t you be suspicious of “Every Day Sale” offers popping up across malls everywhere?

A high reference price not only makes a shop’s discount look more attractive – even people skeptical about a suggested reference price may be more willing consumers (up to a logical limit of course).

Another way to ride on this trait is to manage the sequence of presenting different-priced items. Say you want to sell consumers a $69 hunter knife. Studies show that they’ll be more likely to buy the knife if you show several higher-priced knives first.

This phenomenon known as top-down selling is frequently employed in catalogues which display items from the most expensive to least expensive.

#10 Never Exceed the Reference Price

Consideration that the first price becomes an “anchor” in the minds of your prospect, it is important not to exceed their reference price.

Here’s an example taken from the book to illustrate this principle:

“Imagine you need gas and have to pay with a credit card. You are confronted with signs for two adjacent gas stations. Which would you choose?

1. Station one, which sells gasoline for $1.39 per gallon but advertises a 10 cent discount if you pay cash.
2. Station two, which sells for $1.29 per gallon but advertises a 10 cent surcharge if you use a credit card.

Chances are that most people will choose the first station.

While there isn’t any difference in real cost, the high initial preference point in the first station offers the illusion of an opportunity for savings, while the second station holds out nothing but an in-your-face loss.”

Conclusion – it’s all about Framing

Thanks to the studies of consumer psychologists like Robert Levine, marketers like us now know how we can better price our products and services to sell.

On the flip side, as consumers ourselves, we can be more mindful about falling prey to pricing strategies that tap on our inherent psychological quirks.

Which of these pricing strategies would you apply in your online marketing efforts? How would you use them?

I’d love to read your ideas!