Price positioning is one of the most important – and often misunderstood – aspects of marketing.
Many of the largest companies in the world know that pricing and positioning are everything. They use psychological pricing to take advantage of the way our brains process information.
As a result, these companies are able to increase sales and profits, sometimes by hundreds of millions of dollars.
The good news is that you can use these exact same techniques.
In this article, we’ll discuss what price positioning is, how it works, and cover 21 different ways you can use pricing to your advantage.
Price Positioning: Why Psychological Pricing Works
Let’s start with covering what price positioning is and why it works so well.
Price positioning is the art and science of strategically setting the price of a product or service.
It’s about more than just finding the “right” price. It’s about understanding how people perceive value, and using that knowledge to influence their buying decisions.
It’s a way to increase sales by using behavioral science, psychological triggers, and innocent factors (like fonts, placement, and colors) to make prices more appealing.
For example, people are far more likely to buy a product that costs $39 than one that costs $40.
Although the difference between these two prices is negligible, our brains perceive the $39 price as being significantly lower than the $40 price.
Large companies spend a tremendous amount on pricing research, and there are dozens of ways they attempt to sway our buying decisions.
Let’s dig into some of the most effective psychological pricing strategies, and how you can apply them within your business.
1. Charm Pricing
Charm pricing is when a prices ends in 9 ($9.99 instead of $10).
A study by two professors at Rutgers found that prices ending in “9” result in higher sales than prices ending in any other number. They proved that changing this one digit in a price can give as much as an 8% increase in sales.
This applies to everything from small purchases (coffee) to high ticket items (cars and homes).
Researchers believe this is because the human brain processes “9-ending” prices as being significantly smaller than they actually are.
When we see a price that’s close to a round number, our brains tend to round down and focus more on the first digit than the last.
This gives us the illusion that the price is cheaper than it actually is – we see $9.99 as $9 rather than $10.
2. Loss Leaders
The loss leader strategy prices certain items below cost to increase traffic and visibility in the store, with the hope that customers also purchase higher margin products.
Grocery stores are one common example…when was the last time you went to a grocery store and just bought one item?
A grocery store might sell a gallon of milk for $0.99 even though it costs them $1.50 to produce it. They do this because they know that most people who come in to buy milk will also buy other items like bread, eggs, and cereal.
While the grocery store takes a loss on the milk, they more than make up for it with the higher order value through sales of other items.
3. Prices Without Dollar Signs
In a Cornell study, guests given a menu with no dollar signs (just numbers, e.g. 25) spent significantly more than those given a menu with prices showing dollar signs ($25) or written out in words (twenty five dollars).
The thought process is that dollar signs can trigger purchasers into feeling the “pain of paying.”
When items are marked without the dollar signs, businesses are hoping customers won’t have any negative association and will be willing to spend more.
4. Decoy Pricing
Decoy pricing is a phenomenon relating to how customers change preferences when buying options increase from two to three.
Humans are outstanding at comparing two items, but this is thrown off when a 3rd option is added. At this point, our focus transitions to finding the best value.
Companies will often include a decoy option to accentuate the value of their target option (the choice they want you to pick). They have no intent to sell the decoy, it’s strictly to draw your attention to the target option.
Simply put: it’s a clever way to switch your choice from one option to a more expensive one.
One brilliant example of decoy pricing was applied by The Economist (screenshot below). They wanted to drive up membership in their wildly profitable “Print & web” subscription.
Since it was over twice as expensive as the Economist.com “web only” option, it wasn’t very compelling. Adding in a “Print only” option at the identical price served as the perfect decoy. Its only purpose was to frame “Print & web” as being a bargain.
All of a sudden the “Print & Web” option looked extremely valuable.
The decoy resulted in an increase of 262.5% in “Print & web” sales despite the significant cost increase.
5. Per Customer Limits
Another common pricing strategy is to put a limit on how many items a customer can purchase.
When stores add limits (e.g. “limit 5 per customer”) it typically persuades shoppers into thinking a few things:
- The product is in high demand
- The product is hard to find
- The price is low
You find yourself buying several when you would normally buy just one, just to avoid missing out.
6. Anchor Pricing
Anchor pricing is when you use a high price point as a reference point, making all other prices seem like a bargain in comparison.
This taps into a psychological bias we have that overemphasizes the first piece of information we see. For example, if you’re selling a $20 product, you might list the price as “$99” and then offer a discount to bring it down to the $20 price point.
You’ll see this pricing strategy often used in the travel industry. Let’s say you’re looking for a hotel room and you see two different options:
Option 1: $160/night
Option 2: $200/night with a 20% discount applied ($160)
Which option would you choose? Most people would choose Option 2 because it seems like a better deal, even though the final price is identical.
7. Offer a “Free” Deal (Buy One Get One Free)
A “free” promotion is when a company offers a product or service at no charge for a limited time.
The idea behind this pricing strategy is to create a sense of urgency and encourage people to take advantage of the offer before it expires.
For example, many restaurants will offer a “free” appetizer or dessert when you purchase a meal. With these types of deals, customers feel like they’re getting twice the value for their money.
The goal is to get customers in the door and hoping they’ll spend more money on other items once they’re there.
Companies know “free” is the magic word which makes us feel like we’re getting a better deal. So they roll out deals like buy-one-get-one-free, sometimes persuading us to buy things we wouldn’t normally purchase.
8. Bundle Pricing
Bundle pricing is when you offer multiple products or services as one package for a discounted price.
This entices customers to buy more than they would normally if they were buying each item separately.
You’ll see this strategy frequently within the travel industry. When you book a hotel room, you’re often encouraged to create a bundle by adding on a rental car, tickets to a show, or other activities. Piecing together the vacation separately can often be cheaper, but the flat rate is easier to predict (and less painful: you only have to pay once) so many prefer going with bundles.
It’s also a great way to get rid of older inventory that you can’t sell at full price.
For example, let’s say you own a clothing store and you have a lot of summer clothes that you need to get rid of before fall.
Rather than mark them down individually, you could create a bundle deal where customers can buy three items for the price of two. This would not only help you get rid of your old inventory, but it would also likely result in a surge of sales.
9. Follow the Rule of 100
If you are selling a $150 item, should you show the discount in percentage (20% off) or absolute terms ($30 off)?
Here’s the answer:
- Over $100: show in absolute terms (e.g. $30)
- Under $100: show in percent (e.g. $20%)
Why is this? In both situations, it’s more persuasive to show the higher numeral for the discount. It’s all in the optics.
10. Use “Just Noticeable Differences”
The concept of “just noticeable differences” states that humans are more likely to notice small changes when they’re already familiar with the subject matter.
This principle can be used in pricing by slightly changing the prices of products or services that customers are already familiar with. For example, a company might increase the price of a product by $0.99 instead of $1.00.
This change is so small that customers are unlikely to notice it, but it can still have a significant impact on the company’s bottom line. On a related note, testing higher prices is one of the first growth strategies I recommend to business owners.
11. Price Reframing
Price reframing is when you present the price of a product or service in a way that makes it seem like a better deal.
For example, rather than listing the price of a product as “$100,” you might list it as “10 payments of $10.” You could even go one step further and break down a big ticket price ($3,000) to a daily price ($8.22), and compare it to an everyday activity like purchasing lunch.
This makes the price feel more affordable and encourages people to buy the product. The lower number provides less pain and friction for the customer.
Another example of price reframing is when companies offer free shipping for orders over a certain amount. This encourages people to add more items to their cart so they can qualify for free shipping.
The company makes more money per order and the customer feels like they’re getting a deal.
The key to successful price reframing is to find a way to present the price in a way that makes it seem like a bargain.
12. Flexible Payment Terms (Buy Now, Pay Later)
The “buy now, pay later” pricing strategy allows companies to make their products and services appear more affordable and ease sticker shock.
About 56% of consumers used “buy now, pay later” options in 2020, and this number will likely continue to increase in the coming years.
With this pricing strategy, customers can purchase a product or service, lower the immediate out of pocket amount and spread the cost over a period of time. For example, many furniture stores allow customers to finance their purchases and pay for them over the course of several months.
There is a lot at play here: the customer gets to purchase the product or service immediately (immediate gratification) and doesn’t have to pay for it all at once (removing pain), while giving the illusion of affordability.
13. Include Multiple Pricing Tiers
Offering pricing tiers is a quick way to increase revenue, as customers will often choose the middle or upper-tier option when given the choice.
For example, you might offer three different versions of their product: a basic version, a mid-level version, and a premium version.
Many will go with the mid-level or premium version because of the additional features and perception of higher value.
As I cover extensively this post, 5 – 20% of your customers are not fully satisfied with your existing offerings. These top customers will spend more money with you if given the chance.
Adding tiers is low hanging fruit and something you can implement very quickly.
What would you have to do to add perceived value and improve the customer experience?
14. Appeal to Ethics
An ethical pricing strategy is one that takes into account the impact that the price of a product or service has on society.
This has become more and more popular in recent years, since many consumers want to support companies that share their beliefs and philosophies.
For example, some companies choose to charge more for their products if they’re identified as environmentally friendly.
You’ll often see certain products labeled as “climate pledge friendly,” which makes price less relevant for many consumers.
15. Dynamic Pricing
Dynamic pricing is a pricing strategy that involves constantly changing the price of a product or service in response to changes in demand.
This strategy coordinates supply and demand to maximize profit based on inventory or time availability.
For example, airlines use dynamic pricing to adjust the prices of their tickets based on how many people are searching for flights. If there’s high demand for flights, the prices will shoot up. But if there’s low demand, the prices will sink.
This pricing strategy can be beneficial for companies because it allows them to maximize profits by charging more when demand is high and less when demand is low.
A handful of ways to do this:
- Peak/Surge pricing: charging more during times of high demand
- Segmented pricing: different user segments are charged different prices for an identical product
- Time based pricing: pricing based on how long product has been on the market (i.e. reducing the price of an older product can increase sales).
16. Prestige Pricing
Prestige pricing is when you charge a high price for a product or service in order to make it seem more exclusive or luxurious.
This pricing strategy is often used for products that are seen as status symbols, such as luxury cars or designer clothes. After seeing an expensive price tag, customers assume the products are of the highest quality. Prestige pricing can be a major lever to build appeal and create loyal buyers.
17. Encourage Impulse Buys
An impulse buy is a purchase that’s made without any prior planning or thought.
This type of purchase can be triggered by anything from a sale to an emotional response. And it’s often done on the spur of the moment without any consideration of the long-term consequences.
Research shows that impulse buying accounts for between 40% and 80% of all purchases.
Encouraging impulse buys can be a great way to increase sales, especially if you offer products that are popular or in high demand.
Here are a few ways to encourage impulse buying:
- Offer discounts for customers who make a purchase on the spot (offer a 10% discount for customers who buy a product within the next five minutes)
- Create a sense of urgency. This can be done by setting a time limit on an offer or by running a sale that’s only available for a limited time.
- If you have a physical store, create a path for customers to follow and be thoughtful about product placement. Place lower-priced impulse buys near checkout.
- Display impulse products near items that are in high demand
- If you can, offer a free sample or demo of your product. Giving a preview can boost impulse buys.
- Train your team to make complementary product suggestions and encourage impulse buys
18. Freemium Pricing
The freemium pricing model is when a company offers a basic version of their product or service for free and then charges for additional features.
This pricing strategy is often used by software companies. For example, many accounting software programs offer a basic version of their program for free. But if you want to use advanced features, like invoicing or tracking inventory, you have to pay a monthly fee.
The freemium pricing model can be beneficial because it allows people to try out your product or service before they commit to paying for it.
It essentially warms up prospects to your product and gets them used to using it. Then, when they need the advanced features, they’re more likely to pay upgrade to the premium version.
19. Use Reference Prices (e.g., “50% off our regular price of $100”)
When customers see that they’re getting a good deal, they’re more likely to buy. So using reference prices is a great way to increase sales.
Reference prices can be either absolute or relative. Absolute reference prices are based on the actual price of the product, while relative reference prices are based on the price of similar products.
For example, if you’re selling a shirt for $50, you could say that it’s 50% off the regular price of $100.
20. High-Low Pricing
High-low pricing is a strategy that involves setting a high price (reference) for a product or service, lowering it during a promotional period, before again increasing the price.
The goal of high-low pricing is to create urgency since this amazing price won’t be available forever.
The high-price remains visible to keep the perceived value high persuading to take advantage.
You’ll see this approach used in all sorts of industries, here is one example:
21. Reduce Emotional Pain
One common theme you’ve probably noticed is these strategies is an attempt to minimize the pain of purchase and provide the illusion of a bargain.
Here are five more ways you can do this:
- Be precise with large prices: in real estate, specific prices (e.g. $431,456) have been shown to be more effective than rounded prices ($400,000). We associate precision with small values, as we’re more likely to use specific numbers when dealing with smaller values.
- Use small fonts: our brains confuse visual size for numerical size. Think about using small fonts so the number is perceived to be smaller.
- Remove commas: studies have proven that prices seem cheaper without commas ($1,299 vs. $1299)
- Change the payment medium: typically customers find credit card purchases less painful than handing over cash. This can go a step further and be more effective if you’re able to change the payment into monthly credits or gift cards (will increase customers willingness to spend).
- Offer discounts towards the end of the month: purchases are more painful when they come from a smaller budget. Discounts are more effective at the end of the the month as most have depleted their monthly budgets, and are looking to save money. This is known as “bottom dollar” effect.
As we covered, there are many ways to use price positioning to tap into psychological triggers.
Which pricing strategy is best for your business will depend on a number of factors, including your product, your target market, and your goals. Experiment with different tactics and see what works best for you.
Have you used any of these strategies in your business?
If not, which will you try first? Let me know in the comments.