The Psychology of Pricing


This article covers some essential information on the psychology of pricing and how you can use it to your advantage.


The psychology of pricing

A lot goes into a price. That’s because we expect a lot out of it. 

Ask anyone you know to define ‘price’ and they’ll tell you that it’s the amount charged to purchase something. And that’s right,  but it’s much more than that. Price is the aggregate of several factors, all of which have the supreme capacity to create a business that fails or a business that soars.

Price has a very big job.

Among other things it helps a seller:

  • Make a profit
  • Earn market share
  • Define their value 
  • Create a brand image

A lot of businesses spend far too much time changing their prices in hopes of increasing sales. But they’ve got it all wrong. The secret to more conversions does not lie in the price, but rather in the positioning and placement of it and how it’s viewed by your buyers.

By simply understanding a few simple concepts on the psychology of consumer behavior and having a good handle on what your ideal customers are looking for, you can start selling more products with very minimal effort.


Here’s how it works

Everyone is different and unique, but as it turns out, we all have very similar natural reactions to a variety of stimulus. Price is no exception. 

Psychological pricing is a method of pricing your offerings in a way that has greater appeal to buyers, based on typical human behavior. The idea is to take what scientists, researchers, and doctors know about behavioral science and apply it to the buying environment.

Since the turn of the century, businesses have been leaning on psychology to try to figure out better, more effective ways to connect with customers in hopes of getting them to buy more, and buy often.

For years researchers (myself included) have focused on the intricacies behind the psychology involved in pricing. Today I’m sharing five of these important strategies and the rationale behind them in hopes of helping you get closer to your ideal audience so you can find creative and ethical ways to turn your prospects into buyers.


01. Price anchoring

One of the first concepts you should understand when delving into the psychology of pricing is the magic of the reference price. A reference price is the cost that a buyer anticipates they will have to pay for a particular product or service. It’s important because the reference price provides the consumer with an emotional anchor to compare all of their other options to.


The initial price a customer comes into contact with is encoded into their minds giving the product an identifiable value that the buyer can lean on throughout their decision-making process. Any prices that come after it will be unconsciously judged against this reference price. 


>> If the price is higher than the reference price, the consumer will determine it’s too expensive. 

>> If the price is lower than the reference price, then it will be perceived as a good deal. 


Understanding what your reference price is and making adjustments around it will help you influence a consumer’s decision regarding whether or not your item is fairly priced.



How to put it to work

There’s an old saying in sales, ‘What’s the best way to sell a $2,00 watch? Place it next to a $10,000 watch.’ That’s the reference price model paraphrased. You can easily start using price anchoring to help move some of your inventory. For example, say you’ve got a handmade necklace that you’d like to get $150 for. Some buyers may see it and instantly begin rationalizing why they don’t need to part with their $150 in exchange for your necklace. A lot of customers rationalize why not to buy something. Most, in fact. But you can use an anchor price can help overcome this. 


If you can give the buyer a point of reference as to why $150 is a good deal for your necklace, then you’ll have a far better chance of selling it. For instance, try placing it next to a $300 necklace that you also have available for sale. Next to $300, suddenly $150 isn’t looking so bad. Go through your offerings and see how you can use the reference price to help move some of your inventory into the hands of happy buyers.



02. Charm pricing

Prices ending in the number nine are everywhere: $.99, $11.99, and even $12,499.  As consumers, we come across this highly utilized technique just about every time we shop, though we may pay little attention to it, cognizantly anyway. With this strategy, often called charm pricing, the left digit is reduced from a round number, usually by a penny.  Charm pricing is a common strategy that takes advantage of the reference price in hopes of making a product appear like a better deal. 


But, are customers really going to think they’re getting a better deal by saving a single penny?


The short answer is, yes. And there’s plenty of proof. Pricing that ends in “9” works powerfully. One of the reasons for this lies in the way we mentally absorb information. Because we read left to right, we begin encoding a number (in this case, a price) when we see the left number. So when we see $7.99, our minds instantly think $7. It’s called the ‘left-digit effect’.



How to put it to work

Experiment with prices ending in 9 to see how it works for you. It might cost you a penny up front but statistically, it should make you plenty more pennies down the line.



03. The brand effect

Brand perception and placement are extremely important when considering your prices, though both are also often grossly overlooked. It’s fair to say we place a higher premium on the things we value and admire. The same holds true for branding. The perceived value, and subsequently the price that consumers are willing to pay for your offerings, is in direct correlation to how they view and think about your brand. 


The more elegant and upscale your brand looks the more likely it is that a customer will spend more once they’ve chose you. If your brand is seen as luxury and upscale, people are not only willing to pay more for your items, they often expect to. People are more likely to spend more for a Starbucks coffee than one at Dunkin’ Donuts, or even a gas station brew.


Where you buy is just as important as what you buy.
If a consumer sees your business as a more of a bargain brand, they expect to pay less. Consequently, they have an understanding that the quality will be in line with the price they paid for the offering. Target is a good example of this type of ‘middle of the road’ brand. If a buyer is unfamiliar with your brand, they most likely expect to pay less or worse yet, they will not buy anything at all.



How to put it to work

As a Brand Therapist™I have spent years perfecting the fine art of using psychology to help brand creative businesses for maximum profit. Take my complimentary Archetypal Branding Assessment to get started. It will help you figure out your brand persona and show you what you need to do to start building a consistent, head-turning brand that your ideal customers will feel comfortable buying from.



04. Reciprocity

The principle of reciprocity states that when someone gives us something, we feel compelled to give something back in return. It can also be defined as exchanging with others for a mutual benefit. Some examples are Thrive Causemetics and Tom’s. Both of these companies give a product of equal value away to someone in need each time you buy a product from them. It’s philanthropy in action. The idea is two-fold. On the one hand, you’re doing a genuinely kind and generous thing for someone else. Second, from a business perspective, you’re hoping buyers are compelled to participate and facilitate your gesture through their purchase. In that way, they can feel like they did something good, too.



How to put it to work

Put reciprocity to work in your own business by offering a free gift or sample with purchase. You can also look into donating a portion of your sale proceeds to a charity of your choice. 



05. Scarcity

The concept of scarcity is as common as it is impactful. Any time something is positioned as being scarce, buyers are subconsciously drenched in the fear of missing out. When that FOMO factor kicks in, logic goes out the window. Not only does this pricing positioning tactic give the impression that quantities are scarce, but it also implies that there’s a large demand for the item. And as savvy sellers know, greater demand equals more sales. You can use this tactic most effectively when you have a lot of something to get rid of or when you want someone to try different varieties of the same item (colors, flavors, scents, styles, etc.).



How to put it to work

Try creating a little FOMO in your buyers with phraseology like:

“Only a few remain at this price!” (Scarcity on amount.)

“Today only!” (Scarcity on time.)

“Only two seats left!” or “Space is limited!” (Scarcity on space.)

“Limit of 3 per customer!” (Scarcity on availability.)


See what items you have the most to get rid of and start there. The worst thing that can happen is you lighten your stock supplies, make some sales, and gather some new followers.



In closing

So there you have it, five super powerful psychology-based pricing strategies that you can start using right now in your own business. 


For as different as they are, each of these different psychology-based pricing tactics share a common element. They all rely on emotion. That’s because humans innately respond to emotion over logic. It’s our natural default, we just can’t help ourselves. Logic plays a role but it pales in comparison to our feelings. So when it comes right down to it, it doesn’t really matter how reasonable your price is, what truly matters is that your customers feel like they’re getting a good deal.


While there are dozens more where this came from, these are a good jumping off point to help start you on the path to increased profits in your own little corner of the handmade world.


Think about your own pricing models and strategies. How can you use what you’ve learned here to appeal to the heart of your customers while creating greater profits in the process?