Some common behavioural patterns stand behind customers' decision to grab an item from the shelf and buy it. Typically, this process involves discovering information about a product or brand, carrying out a cost-benefit analysis, comparing features, etc.
However, a great deal of this information can be obtained just by glimpsing at the price tag. Price allows for communicating a lot between a seller and a shopper. Without seeing a good, people can easily define a segment, special offer a retailer provides, or some other details since all information is coded in digits.
Power of Psychology
It's a common practice for many people to leave a shop, understanding that they've bought a few products out of their shopping list. There are several reasons standing behind a desire to buy more stuff than is actually needed. And the price is one of them. Needless to say that an attractive price or a great offering, backed up by an attractive price, can do its magic.
Yet, the price itself isn’t a magic wound but a lever that has a significant influence on buyers' decision-making due to some psychological patterns lying at the heart of this process. Choosing the right tactics and formatting prices in line with its psychological perception can bring many benefits to business and help retailers hit their goals: augment sales, generate revenue, to name a few.
Let’s deepdive and figure out pricing tactics and their role in the pricing strategy. But before moving forward, it’s crucial to mention that retailers can mix these practices or opt for one of them, keeping in mind a backfire effect that may put metrics down.
Price Anchoring
Price anchoring implies that customers' choices are more likely to be influenced by a specific piece of information (the anchor). This method is suitable for businesses that employ a tiered pricing structure, which provides multiple options and related features of the core product at various prices, as well as for newly introduced products in the merchandise mix.
Price anchoring can guide consumers in the direction of their chosen price tier and assist them in making the decision to select the most beneficial product. Retailers should offer a deal with several pricing choices once they have decided to adjust their pricing approach by using price anchoring.
For example, a retailer sells a T-shirt at $28, and this price serves buyers as an anchor. In contrast to that, a retailer can offer a T-shirt at $23, which the client finds to be far fairer and a "good deal." Customers are thus more likely to buy the second T-shirt than they would have been if they hadn't noticed the anchor.
Charm Pricing
Research shows that charm pricing is 24% more effective than rounded pricing. The main reason is the "left-digit bias," a phenomenon in which consumers' perceptions and evaluations are disproportionately impacted by the leftmost digit of the product price. Charm pricing requires the usage of prices ending in the number nine.
With charm pricing, it's possible to take a great benefit from applying the difference of one cent as it affects buyers’ perception of the price offered by a retailer. More sales are brought about by setting prices of .99 (such as $199) than rounding up to the next round price point (such as $200). The human mind unconsciously rounds $199 to $100 rather than $200.
Thus, companies with non-luxury products that want to convey a “deal" make the most out of charm pricing. The strategy, in fact, isn’t effective for the recreational and luxury segment since rounded prices bring more benefits for these types of products.
Odd-Even Pricing
Odd-even pricing is similar to charm pricing but has a broader implementation. This pricing method is grounded on a psychological assumption that buyers are more sensitive to certain ending digits. For luxury goods, even pricing performs best. However, odd pricing is more beneficial for other groups of products.
An odd pricing method means that retailers set their prices ending in 1,3,5,7,9 (e.g., $3.43). Even pricing refers to a price ending in a whole number or tenths (e.g., $5.00 or $10.50). Retailers often choose an odd pricing method in order to show off a deal for consumers, manipulating consumers’ desire to make a purchase and even buy more products. That doesn’t mean even pricing doesn’t have a place, though. Luxury brands tend to use even pricing to create a perception of premium.
Odd and even pricing enables retailers to provide their customers with a sense of a deal and luxury purchase, respectively. Given that, businesses should use odd-even pricing to boost product's appeal for customers and foster their purchase intentions.
Technologies Bring Rounding Pricing to the New Level
The techniques described above seem to be quite simple to use, and they truly are. Yet, rounding prices turns into a real challenge for retailers with hundreds and thousands of SKUs in their portfolio. And given that rounding prices manually is no longer a way out.
The use of modern technologies can significantly simplify this process. It allows retailers to forget about scrutinizing which price will perform better, ending .49 or .50, $99 or $100, by delegating this part of work to computers.
Technologies like Competera allow pricing managers to quickly test different scenarios, monitor results and determine the most optimal ratios for a specific group of goods, keeping an exceptional clarity of the process. It, in turn, saves time and makes calculations more accurate.
Rounding rules is a feature on the Competera Pricing Platform that empowers price management and makes it seamless. With this function, pricing experts can manipulate prices and customize them in line with their own pricing strategy. The system allows to set up a specific price range and apply a relative rounding tactic.
Users can also opt from three parameters before setting their price. They include rounding type(higher, lower, or mathematical), factor, and difference. What is more, the platform enables retailers to trim prices. It means that a user selects end digits, e.g. 3,5,7, etc, and the system offers the best options.
Get your pricing strategy wrong and you may create problems that your business may never be able to overcome. With the solutions Competera provides, you receive data-powered suggestions to prognose results and enhance your pricing strategy.
- Best of NRF 2022: Top Trends and Their Significance for Retail Future
- Takeaways from Future Stores UK 2019
- Competera Welcomes Lori Mitchell-Keller to Advisory Council, Bringing Her 30 Years of Experience in Technology Transformation and Business Improvement to Help Retailers Optimize Pricing Strategies
