It isn't easy to price a product. It’s where a lot of business owners get stuck and put an arbitrary number on their product that just barely turns a profit.
But did you know you can build a pricing strategy for your business that not only increases profits and also helps you sell more?
That’s why we wrote this post. We’ll lay the foundation for an effective pricing strategy by using psychological pricing tactics—your golden ticket to selling more.
Pricing strategy starts with understanding psychology
Simply put, it's a strategic way to price your products or services to influence people when making a buying decision.
It isn’t clear how psychological pricing came into common use, but we do know that the practice arose sometime during the late 19th century with newspaper pricing competition.
Companies big and small sometimes have teams dedicated to pricing products—and in some cases, a psychological pricing strategy is built in from the ground floor as part of their brand marketing.
Here, we'll take a look at how Apple has used pricing as a part of their overall marketing and product strategy to land them in the high-end hardware market.
Psychological pricing the Apple way
Apple has maintained a price point that hovers around $1000 (and with the new Apple Watch some $20,000) for practically their entire product line.
And, even with that in mind, buyers will flock to every product release making them the first company ever to be worth $1 trillion.
So what gives? How do they get away with it? It's because Apple has always planned to be aggressive with their pricing strategies. It goes back to the psychological phenomenon that if something is expensive, it must be good—we'll get into that later.
This echoes the thoughts of Steve Jobs, whose strategy for Apple has four pillars:
- Offer a small number of products
- Focus on high end products and consumers
- Give priority to profits over market share
- Create a halo effect that makes people starve for new Apple products
In this case, depending on who you talk to, that holds true, but in reality they're just selling laptops, phones, and watches. By the way, I absolutely adore Apple products, so I’m not trying to downplay their quality.
Tim Cook (CEO) said in an interview in regards to iPhone “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience.” And, with that in mind—it has paid off for them, tremendously.
Apple rarely (if ever) offers discounts on their products. The most you’ll see is generally a student discount, and even still, it’s usually only $100 or so off a $1000+ product. That pricing strategy is applied across all retail locations, and even resellers. You just won’t find a brand new, unopened Apple product for anything less than what they sell it for at their stores.
Let’s take a closer look at some examples of Apple’s pricing strategy. See if there is anything you can learn from Apple and apply it to your business.
The left digit effect helps you sell more
There’s a reason why businesses like Apple will price a laptop at $1299.99 and not a flat $1300. That $0.01 actually makes a surprising difference in the amount of sales that can be made.
Instead of charging $1300, charging $1299 for the product makes the price appear to be in the “$1200” range rather than the “$1300” range. Thus, as a consumer—we perceive the price to be lower than it actually is. We think of it as a bargain at that price.
Many studies have shown that generally, consumers prefer to pay less for products and often associate prices ending in a nine with discounts and bargains. This works because of something called the left-digit-effect. The majority of people read left to right. Apple incorporates this into the entirety of their product line.
You won’t find an Apple product selling for a round number—they’ll always be priced with the “teen ranges” or "$999" model in mind.
Smart, strategic—and definitely on purpose. The takeaway is to try using odd pricing on a new product you’re launching. Consider using two different price points—one with odd pricing, and another with flat pricing to test which one works for you.
If a product is expensive, it must be good
If that doesn’t sum up the Apple pricing strategy, I don’t know what does. Think back a few years ago when you saw friends and family using Apple products. Chances are you thought they were crazy for spending so much money on something like a laptop or desktop computer—but now it seems like everyone is using a Macbook.
There's a reason behind that too, and it isn't just Apple's marketing strategies. When you are paying more for something, you appreciate it more. Now—when you compare a $20,000 Apple Watch to another smartwatch product like the $99 Pebble Smartwatch (I realize these products are vastly different in terms of design, but they serve the same purpose), the Apple Watch must be brilliant. Right?
Consumers equate price with quality. This was studied through diners at a New York restaurant. The group of people all ate the same food at an Italian buffet, but some were charged $4 and the others $8. Those who paid $8 found the meal to be much better, and enjoyed the food much more than those who paid $4.
The conclusion? Expensive = good. Be sure to read about how Kanye West APC's $120 plain white shirt sold out almost instantly to see how this strategy is applied to bigger clothing brands.
Key takeaway: Pricing strategies can be applied to almost any business. If you are selling a t-shirt for $100 it might sell just as much as one that’s the exact same selling for $20.
Now that we’ve taken a look at the fundamentals of how psychological pricing works, let’s examine a few tips you can use to develop a basic ecommerce pricing strategy.
Tips to develop an ecommerce pricing strategy
With the advent of highly competitive pricing tools, winning the online pricing war can be a lose-lose for ecommerce businesses. Large online retailers like Amazon have an advantage in competitive pricing, as they can set the price low enough to run smaller retailers out of business.
But there are other ways to compete, and it all starts with developing (or at least thinking about) an ecommerce pricing strategy.
Here are 6 tips that will help you develop an ecommerce pricing strategy:
1. Know your margins
The reality of ecommerce pricing is that the lowest price doesn’t always win. In fact, pricing battles usually end with you pricing your products too low.
Even with enough customers, you still may not make a profit. If you are lowering your prices to a point where you are losing money, you should consider finding a better source, or adjust your product offerings to include more profitable items.
Getting your online store into a pricing battle can hurt you in the long term as well. When you consistently price too low, your customers will always expect the lower price, even when it is unsustainable to your business. As a result, you could lose those customers over time.
2. Know your unique selling proposition (USP)
What makes us different? Every company has to tackle this question to determine their unique selling proposition and target market.
For online retailers, a unique factor could be excellent customer service (i.e. Zappos), free or timely S&H (i.e. Amazon Prime), or product you can't find anywhere else (DODOcase). Of course, there are many more.
With pricing competition at an all-time high, retailers have to think outside of the box when crafting a marketing or promotional strategy for their online store. Some retailers have found success by appealing to a sense of charity, especially around the holidays.
For example, Shopify store owner, Ricky Padilla donates $1.00 to fund clean water projects every time someone purchases coffee from his ecommerce shop Brown Water Coffee. He also offers free shipping on orders over $20 - which is a great pricing strategy that encourages people to buy more than 1 lbs of coffee.
3. Loss-leader: Selling below market value
Highly discounted pricing can be advantageous if paired with the appropriate merchandising strategy. The loss-leader pricing strategy assumes that an item sold below market value will encourage customers to buy more overall.
Using this strategy, online store owners have the opportunity to upsell, cross sell and increase the total shopping cart value (average revenue per user).
Even if the profit is not impressive, this strategy stimulates client acquisition, opening the door for further marketing efforts. The value of customer acquisition outweighs the value of the transaction. A corollary strategy is to choose products that have a low CPA (cost per acquisition), to minimize loss.
The end goal is to sacrifice losing money on one item in order to make a profit on the rest of the products sold (i.e. cereal cheap, milk expensive).
4. Offer incentives
Once you know your margins, and price accordingly, then you can offer incentives to motivate your customers to buy. Even if you can’t sustain an ultra-low price in the long term, you can always offer limited time pricing to reach these customers. For example, “Purchase in the next hour and receive 20% off!”
Semantics are also important here, as the language you use can attract customers and minimally affect your bottom line. If you have a surplus of products, you can profitably offer a ‘twofer’ (2 for 1). Additionally, people perceive large percentages as big savings. For example, “Buy one, get one 50% off!” The customer sees the 50% off, but really they are only getting a 25% discount.
Shopify App Bold Discounts will let you run sales in your ecommerce store based on a variety of conditions: by product brand, type, collection, and more—so "buy one get one free" , "buy 3 get one 75% off" and similar sale situations are easy.
Being savvy with your incentives allows you the ability to garner attention to your products, and build a reputation for having good deals, without breaking the bank.
5. Diversify product offerings
To offer a diverse product offering that will sell, ecommerce store owners must first understand their market demand. Make sure that you are up to date with current trends by reading ecommerce news. Use products like “Google Trends” or “Google Insight” to check the popularity of a SKU and try to attend local Meetups with fellow online retailers.
Having a better idea of what your customers want gives you the opportunity to sell and generate profit from diversified products. When in doubt, give your customers multiple options to help them figure out what they want.
In the lecture "Are We In Control of Our Decisions," Dan Ariely recounts an MIT experiment he conducted to test the effects of product and pricing diversification. The entire video is worth a watch, but skip to 12:30 for the most applicable example.
Dan Ariely found that giving a customer more options influences their choice and their perception of a ‘good deal.’ Specifically, one unattractive option can emphasize the utility of other options, helping the consumer decide on an option that best suits them.
The end result of proper diversification is that online retailers will offer bad options to emphasize the good, driving customers to act based on perceived value.
6. Test your ecommerce pricing strategy
As with many things in ecommerce, one size does not fit all, so it is important to measure and test the success of changes you make to your online store's pricing strategy.
Ideally, every change should be tested and validated with an analytics tool (i.e. Mixpanel, Google Analytics, Shopify Sales Dashboard).
For example, find out if your ‘Summer Sale’ (where you implemented one of these strategies) increased your conversion as you expected, or if the new, trendy products in the store are generating more profit than older products.
Pricing experiments to consider in your testing process
To help get the gears turning around what elements of your prices you might test, we compiled a list of five pricing experiments that showcase just how significant small changes can be to customer perception.
1. Is similarity costing you sales?
By now, you've likely heard about how excessive choices can be demotivating. The classic example is the jam study from Columbia professor Sheena Iyengar.
You would expect that since too many options can reduce consumer commitment, it might make sense to have identical price points for similar items, right? Perhaps not: according to a paper from Yale, if two similar items are priced the same, consumers are much less likely to buy one than if their prices are even slightly different.
In one experiment, researchers asked participants to choose or “pass” (keep their money) on two different packs of gum. When the packs of gum were priced exactly the same at 63 cents, only 46% made a purchase.
Conversely, when the packs of gum were priced differently—at 62 cents and 64 cents—more than 77% of consumers chose to buy a pack. That’s a significant increase over the first group.
Neuromarketing expert Roger Dooley notes that customers may be less likely to delay their decision thanks to the differing prices: “...a tiny price difference seems to make the similar products more alike, and increases the probability that a decision will be made and not deferred.”
Strange indeed. Before you head to your store and wildly change prices on random items, remember to take a scientific approach. If, for example, you have certain items that are similarly priced but have different features (e.g. crew-neck shirts and v-neck shirts), you should consider testing how sales are affected when you subtly adjust their prices to be different.
2. The golden rule when comparing prices
Promoting your fair prices makes sense, but if you go about it the wrong way, your chest thumping about low prices may scare people off.
According to research from Stanford, the act of comparative pricing can cause unintended effects in consumer evaluations if there is no context for why prices should be compared.
In other words, inviting explicit price comparisons—when a company outright asks you to compare—may cause customers to lose trust in your business. According to the lead researcher from the study, “The mere fact that we had asked them to make a comparison caused them to fear that they were being tricked in some way.”
So what should you do? Esurance offers a great example. First, they explain why bottom dollar insurance isn’t always the answer, and also create a marketing message that gives customers information on why they can charge less: they were "born online" and raised by efficiency, and the money they save by operating with a lean online setup allows them pass the savings on to you. Focus on why prices are cheaper, not just that they are.
An ecommerce company like NFNT might focus on why their watches are significantly cheaper than many of the entry level 'big brands' (Seiko, Citizen, etc.) because they are made from all natural bamboo. With the right context, you can make price comparisons work to your benefit.
3. Test different levels of pricing
According to William Poundstone, psychologist and author of the book Priceless: The Myth of Fair Value, human beings have practically no understanding of intrinsic value; instead, we determine the “correctness” of price by utilizing exterior information.
In one example, Poundstone discusses a study where a few varieties of beer— cheap, regular, premium, and ultra premium— were offered to participants. Below, I'll relay the findings from his tests, and show you how different offerings (and levels of pricing) can affect consumer purchasing patterns.
In this initial test with the regular beer and a premium beer, 4/5ths of participants opted for the premium offering. This would be excellent news for any store owner, but that doesn't mean it shouldn't be put to the test. What would happen if a third offering was introduced?
When a cheap beer was introduced at $1.60, it not only didn't sell, but it made the premium beer seem much more expensive. Now participants were just fine purchasing the regular beer, overwhelmingly so. This is price anchoring gone wrong. If customers don’t want a cheaper beer, perhaps a more expensive beer might work?
As this last test revealed, these particular customers were receptive to an ultra-premium beer: 10% had no problem paying it's significantly higher price. But there was a bonus: with the ultra-premium beer now serving as an anchor for the other offerings, the premium beer was now looking even better.
The change in context had made $2.50 seem like a fine price, and this theoretical bartender would reap the benefits of not only selling a more expensive product to a select group of customers, but could also push the $2.50 beer to more customers than in Test #1.
To be fair, you can't just keep raising prices to infinity and beyond— at a certain point, context won't matter, you'll just be charging too much. Yet this pricing experiment shows that you may be charging too little and not even know it. Are your premium products priced appropriately in relation to your flagship products? Do you need or even have an ultra-premium version?
This may require more substantial testing and a close look at the feedback you're getting before you make a decision, but you should recognize the potential that a premium product can bring to your existing lineup.
4. Apply the KISS method of pricing
We've long been told to "keep it simple, stupid," but this next pricing experiment takes this mantra to the logical limits.
In the paper published in the Journal of Consumer Psychology, researchers found that prices that contained more syllables seemed drastically higher to consumers. Subjects were shown the following pricing structures:
The study revealed that the top two prices seemed far higher to consumers than the third price. This effect occurs because of the way one would express the number verbally: “One thousand four hundred and ninety-nine,” vs. “fourteen ninety-nine.” This effect even occurs when the number is evaluated internally, or not spoken aloud.
Even more interesting, when CBS News covered research, featuring William Poundstone, on so called sneaky retail tricks, they came to a similar conclusion: “Prices marked with dollar signs have been proven to reduce consumer spending. For example, a 2009 Cornell University study found that diners in upscale restaurants spent significantly less when menus contained the word "dollars" or the symbol "$." In a society where we're overloaded with information, consumers tend to follow the path of least resistance.”
This is a pretty easy test to run, and won't require any real change in prices. Perhaps minimalist pricing is just what your product pages need.
5. The merits of the number 9
It would be nice to sell your reasonably priced $40 product for exactly $40, but sometimes it pays to play the pricing game. There is no better example of this then the classic '9' pricing scheme: we've all seen this one at one point or another and have wondered, "Does charging $39 really move more products than $40?'
According to one study published in Quantitative Marketing and Economics, the answer is a yes. Prices ending in 9 were so effective they were able to outsell even lower prices for the exact same product.
Women's clothing was used in one test, with a $35 price and a $39 price. They found that the price ending in 9 outperformed the lower price point by 24%.
For a split second while reading the study, I thought the number 9 might have met its match. Sale prices—“Was $60, now only $45!”—were able to beat out the number 9.
However, when the number 9 was later included in the sales price comparisons, it again outperformed lower price points. The following options were compared:
- Was $60, now only $45!
- Was $60, now only $49!
To might not be surprised to hear the bottom sale price outsold the top one, even though the top price was actually less expensive. You can read more about this phenomenon in this great post by Peep Laja.
Apparently store owners should ignore the power of '9' at their own risk.
How changing perception of price can increase sales
When it comes to developing a smart ecommerce pricing strategy, we’ve seen how there are important lessons to be learned from the world of psychology.
1. How to sell to tightwads
In nearly every industry that you can sell in, minus ultra-luxury goods, you're going to have to deal with customers that neuroscientists have labeled as tightwads. Don't worry, it's not an insulting term. It has to deal with how much "buying pain" these people receive versus the average consumer.
Considering the fact that neuroscientists have labeled our spending habits as, literally, "spend 'til it hurts," it's important to understand what makes these customers respond the way they do. According to research, there are 3 customer types that ecommerce merchants should be aware of:
- Tightwads (24%): These customers spend less on average before they hit their pain limits.
- Unconflicted (60%): These are your average spenders.
- Spendthrifts (15%): These customers spend more on average before they hit their pain limits.
With nearly a quarter of your typical customers falling into the "tightwad" category, it pays to know how to sell to these people in a manner that doesn't affect your other buyers. Fortunately, research in this area has revealed three foolproof tactics.
Changing a single work makes a big difference
When it comes to selling to tightwads, it seems that you should "sweat" the small stuff: it could have a huge impact. In a study from Carnegie Mellon University, researchers tested the difference that a single word might play in response rates.
In this case, they tested the copy used to describe the fee associated with joining an otherwise free DVD trial offer. The two versions they tested were:
- "a $5 fee"
- "a small $5 fee"
Seems somewhat silly, right? As it turns out, the impact was deadly serious: by using the second option ("a small $5 fee"), the researchers saw response rates improve by 20%. That's a noticeable improvement as a result of a single added word. Try playing with the language on your ecommerce website and track the results. Sometimes the smallest change will help you convince those on the edge into making a purchase.
Re-frame the value by changing the timetable
When it comes to larger purchases, we all struggle in evaluating value. With some awesome neuroimaging studies that tested price perceptions, ecommerce merchants have a way to entice buyers into purchasing more expensive options.
One easy way to do this is to re-frame the product's value. This strategy eases the buying pain for everybody, but especially for tightwad customers. If, for instance, I tried to sell you on my product that costs $1,000 a year, you'd be a bit hesitant right? That's because $1,000 isn't peanuts, and it's a large enough number that it makes you hesitant to buy, even if the offering is very valuable to you.
Now what if I offered a service for $84/month? It's a lot easier to gauge how much value you'd get out of that. If you can justify 30 days worth of value for $84, the purchase seems like a no-brainer. The thing is, $84 a month is exactly $1,000 a year.
You can see this in practice on all sorts of software pricing pages. Most services are offered for a yearly fee, but almost all companies prefer to showcase the lower monthly price.
The research has shown that when prices are broken down into smaller increments, our brains are just better at processing the potential value, rather than having to deal with larger numbers—even if they are the same overall price. If your product is a large purchase that will be used over an extended period of time, be sure to remind customers of the daily/monthly value that they will be getting out of the product, it makes it much easier to rationalize a purchase.
Reduce multiple pain points with bundling
When it comes to the pain of buying, the less it has to happen, the better.
Research from professor George Loewenstein has shown that customers favor bundling if it allows them to avoid multiple purchases. He's asserted that his findings show we prefer to pay more for bundled items if it helps us reduce the amount of individual purchases, showing how averse we are to those multiple pain points.
We can justify getting an upgrade package, but it would be harder to justify individual upgrades of leather seats, and navigation, and 18" AMG 7-Double Spoke Wheels. Store owners should bundle products with often purchased accessories. You'll be preventing multiple pain points and allow people to solve their problems in one efficient buy.
When to sell time over money
According to research from Stanford University, there is definitely a reason that big brands like Miller Brewing Company have slogans like, "It's Miller Time!" rather than focusing on the low prices of their bargain beers.
In research conducted by Jennifer Aaker and her colleagues, a lemonade stand was set up with multiple signs (and actual kids to seem legitimate) in order to test the effectiveness of each sign's message. The 3 different signs used in the study were as follows:
- Focus on time: “Spend a little time and enjoy C&D’s lemonade.”
- Focus on money: “Spend a little money and enjoy C&D’s lemonade.”
- Neutral: “Enjoy C&D’s lemonade.”
With such subtle changes, you wouldn't expect huge a difference, but there was. The first sign not only attracted twice the amount of customers, but they were willing to pay twice as much for lemonade as well.
There's a theory that says money will always be thought of in a negative way, because consumers are reminded of the cost of acquiring a product rather than the pleasure of consuming it. Aaker and her fellow researchers conducted a follow-up study where they took a poll at a concert. Although the concert was free, people had to wait in long lineups to get good seats.
Aaker asked the individuals one of two questions: "How much time will you have spent to see the concert today?" or "How much money will you have spent to see the concert today?" In most cases, asking specifically about time increased participants' favorable attitudes toward the concert. In fact, those who had incurred the most "cost" (standing in line the longest) rated the concert best of all.
So what are the implications of this research? According to Aaker, “One explanation is that our relationship with time is much more personal than our relationship with money. Ultimately, time is a more scarce resource—once it’s gone, it’s gone—and therefore more meaningful to us. How we spend our time says so much more about who we are than does how we spend our money.”
So how do you apply the findings of their study to your ecommerce store? When a product is already a bargain, placing an emphasis on the time you'll enjoy with it (or the time it will save you) is likely more effective than parading the fact that your product is inexpensive.
Will this strategy ever not work? As noted by the research, there is one area where this method could fall flat: luxury purchases. According to professor Mogilner, “With such ‘prestige’ purchases, consumers feel that possessing the products reflect important aspects of themselves, and get more satisfaction from merely owning the product rather than spending time with it.”
Premium goods with premium prices should emphasize their quality. On the other hand, if you're selling goods in a bargain oriented area, you should try to get your customers to imagine the great times they've had (or will have) with your products, rather than putting all the focus on the price.
Pricing your products on purpose
All of the research and strategies above are an entry point into the world of ecommerce pricing, but remember that, eventually, you just have to put a price on your product and see what happens.
Product validation and confirmation that you got your pricing “right” only happens when money changes hands. Use what’s covered above to inspire you, and then start selling!