The Psychology of Pricing: A Gigantic List of Strategies

The Psychology of Pricing: A Gigantic List

of Strategies
Published on: May 6, 2015
Welcome to a massive list of psychological pricing strategies.
Whether youre marketing a new product, selling items on eBay, or negotiating a deal on
your house, youll learn how to choose a price that will maximize your profit.
This article is pretty beastly. To help you find the pieces that are most relevant to you, I
recorded this quick video.
Video Bonus: Click to watch my free video course on pricing.
(Length: 15 min)

Table of Contents
This article is broken up into four parts, with each part containing various strategies and
tactics.

Step 1: Determine Your Price

Strategy: Use Charm Pricing
Tactic 1: Reduce the Left Digit By One
Strategy: Use the Proper Amount of Fluency

Step 2: Influence Their Perception

Strategy: Reframe Your Price
Strategy: Prime a Small Magnitude
Strategy: Maximize Their Reference Price
Strategy: Emphasize the Gap Between Reference Prices

Step 3: Motivate Them to Buy

Strategy: Reduce the Pain of Paying

Strategy: Use Discounts Strategically

Step 4: Maximize Your Revenue

Strategy: Make Price Increases Undetectable
Strategy: Avoid Harmful Pricing Strategies
Conclusion

Step 1: Determine Your Price

Large companies have an advantage. They can aord cream-of-the-crop marketing
research (e.g., conjoint analysis) to find the optimal price for their product. Small
businesses dont have that luxury.
Fortunately, thats where psychology can help.
Based on research in cognition and behavior, certain prices are more eective than
others. Even if you dont find the exact sweet spot, you can make small yet powerful
adjustments to maximize the eectiveness of your price. All for free.
In this section, youll learn how people process numerical values (and how to choose the
numbers in your price, accordingly).
Related Resources:

Use Charm Pricing

For the past couple decades, the marketing world has been inundated with charm pricing
prices that end in 9, 99, or 95.
And the results speak for themselves. Check out Gumroads sales:

Source: Gumroad
When people see those positive results, they often credit the 9s in the price. However,
theres another culprit responsible: the left digit.
Tactic 1: Reduce the Left Digit By One
Charm pricing is most eective when the left digit changes. A one-cent dierence
between $3.80 and $3.79 wont matter. However, a one-cent dierence between $3.00
and $2.99 will make a huge dierence.
Why is the left digit so important? It involves the way our brain encodes numerical values.
Our brains encode numbers so quickly (and beyond consciousness) that we encode the
size of a number before we finish reading it. Thomas and Morwitz (2005) explain that:
while evaluating 2.99, the magnitude encoding process starts as soon
as our eyes encounter the digit 2. Consequently, the encoded magnitude of
$2.99 gets anchored on the leftmost digit (i.e., $2) and becomes significantly
lower than the encoded magnitude of $3.00 (pp. 55).
Bonus Tip: You could emphasize the new base digit by visually minimizing the digits after
the decimal.

Use the Proper Amount of Fluency

When determining the numbers in your price, you should also consider processing
fluency.
Processing Fluency The ease in which we process information.
We can infer certain characteristics about a price, based on the ease of processing (i.e.,
easy vs. dicult). This section will teach you how to choose numbers with the proper
amount of fluency.
Tactic 2: Use the Right Amount of Roundedness
One aspect to consider is the roundedness of your price. Round prices (e.g., $100) are
processed fluently, whereas non-rounded prices (e.g., $98.76) are processed disfluently.
Could one choice generate more sales? Researchers think so.
Wadhwa and Zhang (2015) found that round prices because they are fluently
processed work better for emotional purchases. When consumers can process the
price quickly, the price just feels right.
The researchers also found the opposite to be true. Consumers need to use more mental
resources to process non-rounded prices. So those prices seem more fitting with rational
purchases.
Despite the direct evidence, Ill propose a caveat.
Even if your purchase context is emotion-based, you should still avoid rounded price
intervals (e.g., $100, $5,000). People assume that those prices are artificially higher, as if
they were plucked from thin air (Janiszewski & Uy, 2008).
So where can roundedness help? That principle can help you determine whether to add
cents to your price.
If your purchase is based on emotion, then leave out the cents.

If your purchase is based on rationale, then add some cents.

Tactic 3: Choose Numbers With Fewer Syllables

Our brain uses more resources to process phonetically longer prices (which triggers a
fluency eect). Since we use a larger amount of mental resources, we falsely infer that
those prices must be larger.
The flipside is more important. People will perceive your price to be lower if it contains
fewer syllables.
But Nick! When I see a price, I dont say it out loud. I just read it.
Same here. But according to researchthat doesnt matter. When you read a price in
written form, your brain nonconsciously encodes the auditory version of that price
(Dehaene, 1992). You dont even need to verbalize the price in your mind your brain
encodes it either way.
Still skeptical? Coulter, Choi, and Monroe (2012) found a positive relationship between
syllabic length and perceived magnitude. Even if two prices have the same written length
(e.g., $27.82 vs. $28.16), people perceive the phonetically longer price to be higher in
magnitude.

Step 2: Influence Their Perception

All our knowledge has its origin in our perceptions.
Leonardo da Vinci
Nothing in this world has concrete meaning. Everything we know results from our
perception. At the end of the day, price is merely a perception. Nothing more. Nothing
less.
And thats good news for you. There are no universal standards that dictate whether a
price is high or low it all depends on perception.
In this section, youll learn some clever tactics to alter peoples perception. Youll learn
how to make your price seem even lower (without changing the actual price).
Related Resources:
In order to appreciate the strategies in this section, you need to understand how people
develop their perception of prices.
I explain that process in this quick video.
You can watch the full video here.

Reframe Your Price

As I mentioned in that video, you can influence peoples memory for your price. When
people compare your price to a reference price, you can influence them to pull a lower
price into that comparison.
Why would people pull a lower price into the comparison? This strategy takes advantage
of our brains laziness for encoding numerical values. Adaval and Monroe (2002) explain
that:
price information about a product is unlikely to be coded into memory in
terms of exact numerical digits but, rather, is coded spontaneously in more
general magnitude terms (e.g., low, high). Thus the numerical price is
susceptible to the influence of its original context when people attempt to
reconstruct it later. (pp. 585)

With such a hazy memory, you can influence how people recall your price. How? You just
need to reframe your price into a lower numerical value. Exposing people to that lower
value will cause them to encode a smaller magnitude.
Here are a few tactics that can help.
Tactic 4: Keep the Shipping and Handling Separate
If you sell products online, you should usually separate the shipping and handling fees.
When you use partitioned pricing (i.e., breaking up your total cost into multiple
components), you anchor people on your base price, rather than the true total cost
(Morwitz, Greenleaf, & Johnson, 1998). When people compare your price to a reference
price, theyll be more likely to pull your base price into the comparison.
Hossain and Morgan (2006) tested that possibility with eBay auctions. They set up
auctions for music CDs, and they analyzed dierent bidding structures.
Some auctions oered a low opening bid with a shipping cost (e.g., $0.01 with
$3.99 shipping).
Some auctions oered a higher opening bid without a shipping cost (e.g., $4 with
free shipping).
In the end, auctions with low opening bids (plus shipping charges) attracted more bidders
and generated more revenue. Ohand Clark and Ward (2002) found similar results with
auctions for the Charizard Pokemon card.

Tactic 5: Oer Payments in Installments

Likewise, when you give people the option to pay for your product in smaller increments
(rather than one lump sum), you anchor people on the smaller price.
Suppose that youre selling an online course for $499. By oering payment installments
(e.g., 5 payments of $99), you taint peoples comparison process. Theyll be more likely to
compare your installment price ($99) to a competitors lump sum price (e.g., $500) a
huge dierence that makes your oering much more appealing.
But you shouldnt get the wrong idea. People arent stupid. They know that comparing
$99 and $500 isnt an accurate comparison.

Luckily, it doesnt matter. Since people usually compare reference prices subconsciously
(Muzumdar & Sinha, 2005), your installment price has a good chance of sneaking into
their comparison.

Tactic 6: Mention the Daily Equivalence

Similarly, you can achieve the same eect by reframing your price into its daily
equivalence (e.g., $0.87/day).
Often referred to as pennies-a-day pricing, that strategy influences people to perceive a
lower overall price (Gourville, 1998).
You should still make your regular price the primary focus. Simply mention the daily
equivalence. That low number will anchor people toward the lower end of the price
spectrum.

Dont worry if you have trouble reframing your price into a specific daily cost. You can
achieve the same eect by comparing your price to a petty cash expense, such as a cup
of coee (Gourville, 1999).

Prime a Small Magnitude

The previous strategy explained how numerical anchors can influence peoples perception
of your price. However, anchoring eects stem beyond numerical values. You can also
influence peoples perception through general magnitudes.
For example, Oppenheimer, LeBoeuf, and Brewer (2007) found that people made lower
numerical estimates if they were asked to draw a short line (compared to a long line).

If you want people to perceive your price to be smaller, you need to associate all of its
related features with a small magnitude.
Here are some tactics that can help.
Tactic 7: Position Prices Toward the Bottom-Left
If you want people to perceive your price to be smaller, you should physically position
your price to be on the left (Coulter, 2002).
It sounds odd, but hear me out.
Research shows that directional cues are associated with certain concepts. For example,
your spatial concept for up is metaphorically associated with good qualities:
the righteous go up to Heaven, whereas sinners go down to Hell. In the
media, movie critics give good movies thumbs up and bad movies thumbs
down. people who smoke marijuana get high, but when the euphoria
diminishes, they come down (Meier & Robinson, 2004 pp. 243)
Due to our association between up and good, priming the spatial concept of up can
trigger associations with good. Meier and Robinson (2004) found that people
recognized positive words faster when those words were positioned toward the top of a
screen (and they recognized negative words faster when they were positioned toward the
bottom).
The same principle applies to numbers. Dehaene, Bossini and Giraux (1991) found that
people conceptualize numbers on an imaginary horizontal line, with numbers growing
larger from left to right.
In their study, they presented participants with digits ranging from 0 and 9, and they
asked participants to indicate its parity (i.e., whether it was odd or even). As expected,
people responded faster to smaller numbers when using their left hand (and vice versa). In
other words, people responded faster with the hand that matched the same side of
their mental ruler.
How does that finding relate to pricing?
Since we conceptualize smaller numbers as belonging on the left, positioning prices
toward the left can trigger peoples conceptualization for a smaller magnitude, thus
altering their perception of your price (Coulter, 2002).
Since we can also associate numbers with a vertical magnitude (with smaller numbers
positioned toward the bottom), you might want to position your prices toward the bottomleft.

Tactic 8: Use a Smaller Font Size

In addition to directional cues, the physical size of your price can also influence peoples
perception.
Thanks to processing fluency, people will perceive your price to be smaller if you display
that price in a smaller font. This tactic is particularly eective when you contrast your
price with a larger sized reference price (Coulter & Coulter, 2005).
And dont forget about the fonts kerning the spacing between letters. Fonts with
smaller kerning should also influence people to perceive your price to be lower.

Tactic 9: Remove the Comma When Possible

Besides font size and kerning, another consideration is punctuation. Researchers found
that removing commas (e.g., $1,499 vs. $1499) can influence people to perceive your
price to be lower (Coulter, Choi, and Monroe, 2012).
Why does that happen? Although physical length plays a role, theres another principle
involved. Weve already discussed it.
Can you think of it? When you remove the comma, you reduce the phonetic length of your
price.
$1,499: One-thousand four hundred and ninety-nine (10 syllables)
$1499: Fourteen ninety-nine (5 syllables)
Consistent with fluency, that adjustment can cause people to perceive your price to be

lower.

Tactic 10: Use Congruent Language

Be careful when choosing the language near your price. Certain words can taint peoples
perception.
For example, Coulter and Coulter (2005) presented participants with various descriptions
for an inline skate. Some descriptions emphasized a Low Friction benefit. Other
descriptions emphasized a High Performance benefit.
Even though participants rated those benefits as equally important, participants were
more favorable toward the price when the description contained Low Friction.
When you choose the language near your price, choose words that are congruent with a
small value (e.g., low, small, tiny).

Tactic 11: Be Precise With Large Prices

Thomas, Simon, and Kadiyali (2007) analyzed 27,000 real estate transactions. What did
they find? Buyers pay more money when prices are specific (e.g., $362,978 vs. $350,000).
Is it because of the negotiation aspect? If someone asks for a very specific price,
wouldnt potential buyers perceive less room to negotiate?
Thats what I thought. But nope. Researchers ruled out that possibility. Surprisingly, the
real culprit involved priming a small magnitude.

Think about it. When are you more likely to use a precise value? Answer: when youre
dealing with small numbers (e.g., 1, 2, 3).
Due to the association between precise numbers and small values, precise numbers
trigger an association with small values, thus influencing peoples perception.
Bonus Tip: Since a house is a rational purchase, you could enhance the psychological
impact by using a precise, non-rounded number (e.g., $362,798.76)

Maximize Their Reference Price

The past two strategies helped you lower the perceived magnitude of your price.
However, you can achieve the same eect by maximizing the perceived magnitude of
reference prices.
This section oers a few tactics.
Tactic 12: Start Negotiations With a High Precise Number
Due to anchoring, its no shocker that sellers can get more money by starting negotiations
with a high initial oer (Galinsky & Mussweiler, 2001). That high number establishes an
anchor point, pulling the final settlement closer to that range.
Not only should you start with a high initial price, but you should also use a precise value.
In one study, Janiszewski and Uy (2008) asked participants to estimate the actual price of
a plasma TV based on the suggested retail price either $4,998, $5,000, or $5,012.
When participants were given precise values ($4,998 and $5,012), they estimated the TVs
actual price to be closer to that range. When the suggested price was rounded ($5,000),
participants believed the actual price to be much lower.

When an anchor is precise, we adjust our estimate past fewer units. Why? You can thank
your mental ruler. As Thomas and Morwitz (2002) explain:
If adjustment is viewed as movement along a subjective representational
scale, then the resolution of this scale might also influence the amount of
adjustment. X units of adjustment along a fine-resolution scale will cover less
objective distance than the same number of units of adjustment along a
coarse-resolution scale. (pp. 121)
That insight works particularly well in eBay auctions. When creating your auction, you can
generate more revenue by establishing a high reserve price a price that needs to be
met in order for the item to be sold. Higher reserve prices anchor people toward the
higher end of the price spectrum, resulting in more revenue (Kamins, Dreze, & Folkes,
2004).

Tactic 13: Expose People to a Higher Incidental Price

Given our tendency to assimilate toward an anchor point, could exposure to high prices
even for unrelated products anchor people toward the higher end of the price
spectrum? Would those people pay a higher price for your product?
Nunes and Boatwright (2004) tested that possibility. On a popular boardwalk in West Palm
Beach, the researchers sold music CDs. Every 30 minutes, the adjacent vendor alternated

the price of a sweatshirt on display either $10 or $80.

What happened? You guessed it. The sweaters price anchored people toward the
respective ends of the price spectrum. When the price of the sweatshirt was $80,
shoppers paid higher prices for the CDs.
If youre selling items on eBay, you might want to mention some of the other items you
have for sale (the more expensive items, of course).

Tactic 14: Expose People to Any High Number

Anchoring not only works for prices, but it also works for any number, regardless whether
that number is a price.
Heres a striking example. Ariely, Loewenstein, and Prelec (2003) showed participants
various products (e.g., cordless keyboard, rare wine, Belgian chocolates). They asked
participants whether they would purchase each product at the dollar amount equal to the
last two digits in their social security number.
After receiving a YES/NO answer, researchers then asked participants to state the exact
dollar amount they would be willing to pay.
Remarkably, the researchers found a direct correlation between the social security
number and the price that participants were willing to pay. Heres the data for one of the
products, a cordless keyboard:

How can you apply that finding? Should you simply ask customers to contemplate a high
number? Not quite. Luckily, your job is easier.
Anchoring eects occur subconsciously, so consumers dont need to contemplate a
numerical anchor. In fact, Adaval and Monroe (2002) subliminally exposed people to a
high number before displaying a price. That exposure caused people to perceive the
subsequent price to be lower.
The takeaway? Even if potential customers dont consciously notice your numerical
anchor, they just need to be exposed to it.
If you run an online store, you could simply mention your total number of customers near
your price. When people generate their reference price, that high number will trigger an
anchoring eect (and their reference price will be even higher).

Tactic 15: Raise the Price of Your Previous Product

If youre launching a new (more expensive) version of your product, how should you price

the old product?

Some businesses will lower the price of their old product to gradually phase it out of the
market. Surprisingly, though, that strategy is often the wrong approach.
Baker, Marn, and Zawada (2010) suggest raising the price of your old product. By raising
the price, you raise peoples reference price (thereby enhancing the perceived value of
your new product). Youll be releasing the new product into more favorable conditions.
Conversely, if you lower the price of your old product, you set yourself up for failure. Youll
reinforce a lower reference price, which will make your new product seem more
expensive.

Emphasize the Gap Between Reference Prices

The previous strategies either minimized the perceived size of your price or maximized the
perceived size of reference prices. This next strategy will help you maximize the perceived
distance between your price and higher reference prices.
Related Resources:
Tactic 16: Visually Distinguish Higher Price Comparisons
When you compare your price to a higher price, people are more likely to buy your
product because they feel less motivated to research the decision (Urbany, Bearden, &
Weilbaker, 1988). Theyve already done their homework.
But heres a neat psychological trick to enhance that comparison.
If you visually distinguish your price from a reference price (e.g., using a dierent font
color), you trigger a fluency eect. Consumers will misattribute that visual distinction to a
greater numerical distinction (Coulter and Coulter, 2005).
That fluency eect not only works with font color, but it also works with physical distance.
When your price is horizontally farther away from a reference price, people perceive a
greater numerical distance (Coulter & Norberg, 2009).
And dont forget about font size. Smaller font sizes are especially eective when theyre
positioned next to a larger reference price (Coulter & Coulter, 2005).

Tactic 17: Oer a Decoy Product

Oftentimes, people use your own products for reference prices. To ensure that their
comparisons are conducive for your bottom line, you should consider adding a decoy
product.
You might be familiar with the infamous study. In Predictably Irrational, Ariely (2008)
describes a strange oering from the Economist magazine. One day, he noticed three
subscription options:
Web Only: $59
Print Only: $125
Web and Print: $125
At first glance, it seemed like the print only option was a mistake. Who would choose
that option when you could choose a web and print subscription for the same price?
But Ariely noticed an underlying motive. He conducted a study to test his hunch. And he
was right. The print only option made a huge dierence.
Without the print only option, people couldnt accurately compare the options. How
much should you pay for a web and print subscription? Who knows. Most people chose
the web option because it was cheaper.

However, the print only option helped people compare those two options. Because it
was a similar, yet worse, version of the web and print option, people could easily
recognize the value of the web and print subscription. With more people choosing web
and print (a more expensive alternative), the Economist generated 43% more revenue.

When you oer dierent versions of your product, people will naturally compare those
options. To guide people toward the more expensive version, you can take the same
approach.
By adding a similar, yet worse, version of your expensive product, you influence the
comparison process. Suddenly your expensive product becomes more appealing.

Step 3: Motivate Them to Buy

Even if you reduce the perceived magnitude of your price, customers might be stagnant.
You should give them a nudge.
This section will teach you some pricing tactics that can motivate people to buy. Youll
learn (1) how to reduce the pain that we associate with paying and (2) how to properly
use discounts to drive purchases.
Related Resources:

Reduce the Pain of Paying

Each time we purchase something, we feel a sense of pain often referred to as the
pain of paying (Prelec & Loewenstein, 1998).
More specifically, the pain emerges from two factors:

1. The saliency of the payment (e.g., we feel more pain if we see money leaving our
hands)
2. The timing of the payment (e.g., we feel more pain if we pay after we consume)
Considering those two factors, you can see why Uber a ride-sharing service
revolutionized the taxi industry.
In traditional taxi rides, the saliency of payment is very high. You see a meter constantly
rising. Each minute evokes an increasingly painful sensation. Plus, at the end of the ride,
the taxi driver makes you pay by cash or credit card. So. Much. Pain.
Uber is dierent. No visual meter. No physical payments. Everything is automatically
charged to your card. Much less pain.
Credit card processing is one tactic to reduce the pain of paying, but you can reduce that
pain in other ways too. This section will give you a few ideas.
Tactic 18: Remove the Dollar Sign
The pain of paying can be triggered pretty easily. In fact, the dollar sign in your price can
remind people of that pain, and it can cause people to spend less (Yang, Kimes, &
Sessarego, 2009).
But dont get too trigger-happy. Before you start removing dollar signs, you should
consider the overall clarity of your price.
Oftentimes, you need a dollar sign to indicate that your number is, indeed, a price. In
those cases, dont risk losing clarity by removing the dollar sign. Only use this tactic in
formats where customers will expect a price to appear (e.g., restaurant menus).

Tactic 19: Charge Customers Before They Consume

When possible, your customers should pay before they use your product or service.
Prepayments benefit all parties involved.
For one, you wont be delivering your product or service without being compensated.
Youll be more likely to get paid. Pretty helpful.
Second, people will be happier with your product. When people prepay, they tend to
focus on the benefits theyll be receiving, which numbs the pain of paying. If theyve

already experienced the benefits of your product, their payment becomes significantly
more painful (Prelec & Lowenstein, 1998).
That insight can be helpful with monthly subscriptions. If you charge customers monthly
payments, you should charge them at the beginning of the month (and frame your
message in a forward-looking manner).
Avoid sending receipts at the end of a month (or summarizing the previous months
payment). Youll just be rubbing salt in the wound.

Tactic 20: Bundle Your Product

To reduce the pain of paying, you might consider bundling your product. When you oer a
packaged product, people cant attribute a specific dollar value to the items within your
bundle.
Related Resources:
Five Ways to Use Psychological Pricing Arie Shpanya
If you decide to bundle your oering, you should follow two important rules. Whichever
product you add, it should be (1) hedonic, and (2) similarly priced.
Lets look at each scenario.
First, your product should be hedonic (emotional), rather than utilitarian (rational). Since
hedonic purchases trigger more guilt (Khan & Dhar, 2006), a bundle reduces that guilt,
especially when you attribute the discount to the hedonic product.
As Khan and Dhar (2010) explain:
framing the discount on the hedonic item provides a justification required
to reduce the guilt associated with the purchase of such items. However,
since no such guilt is associated with the purchase of utilitarian items,
framing the discount on utilitarian component of the bundle has little
additional impact. (pg. 18)
If you can only add a utilitarian product, then describe a hedonic use for that product.
Khan and Dhar (2010) tested a bundle that consisted of a $50 lamp and a $50 blender.
People were more likely to purchase the bundle when the description emphasized a
hedonic use for the blender (e.g., making exotic cocktails) compared to a utilitarian use

(e.g., making healthy shakes).

Second, avoid bundling expensive and inexpensive products. Inexpensive products

reduce the perceived value of expensive products.
Brough and Chernev (2012) asked people to choose between a home gym and a 1-year
gym membership. Roughly 51 percent of people chose the home gym a pretty even
split. However, when the researchers bundled the home gym with a free fitness DVD, only
35% of people chose it. The fitness DVD reduced the perceived value of the home gym.

Tactic 21: Shift the Focus Toward Time-Related Aspects

When describing your product, avoid mentioning any references to money. Instead,
mention a concept that has a much greater benefit: time.
Mogilner and Aaker (2009) conducted an experiment with a lemonade stand. They
alternated three signs advertising the stand, each emphasizing a particular quality:
Time: Spend a little time and enjoy C & Ds lemonade
Money: Spend a little money and enjoy C & Ds lemonade
Neutral: Enjoy C & Ds lemonade
When participants arrived at the stand, they were told that they could choose how much
they wanted to pay anywhere between $1 to $3.
The results were clear: the time sign outperformed the others. Those people paid twice
as much (and that sign attracted twice as many people).
The researchers attributed those results to a personal connection with the product:

Because time increases focus on product experience, activating time (vs.

money) augments ones personal connection with the product, thereby
boosting attitudes and decisions. (Mogilner & Aaker, 2009, pg. 1)
When writing copy, emphasize the enjoyable time that people will spend with your
product or service. Not only will that message make your oer more appealing, but it will
also distract people from the pain of paying.

Tactic 22: Create a Payment Medium

What do casino chips and gift cards have in common? They both reduce the pain of
paying.
By creating a separate medium between your customers money and their payment, you
distort the perception of paying. Theyll know that theyre paying, but it wont feel like it.
Why wont it feel like paying? Researchers find that, with the presence of an additional
medium, people are too lazy to calculate the conversion between those currencies (Nunes
& Park, 2003).
Heres a cool idea. When new customers open an account with your business, you could
require them to deposit a refundable $10 into their account (to be used for your services).
Since the money is refundable, customers might not give too much additional resistance.
More importantly, that payment medium will distort the essence of that money. Once it
enters a separate medium, it wont feel like money (and people will be more willing to
spend it).

You could also strengthen that perception by referring to that money as [Your Company]

Balance (or any other name that avoids connotation with real currency).

If you implement that strategy, you might also want to match customer deposits by a
certain percentage. For example, if a customer deposits $10 into their account, you could
match it by 10% (which would bring their account value to $11).
By matching their deposits, you trigger two benefits.
First, you incentive customers to deposit more money. With the psychological impact of
payment mediums, you should enhance the appeal of deposits as much as possible.
Second, you create an o-balance conversion between their money and their account
value. Dreze and Nunes (2004) explain that payment mediums become more eective
when consumers have trouble converting the values:
With increased exposure and experience, the conversion between two or
more particular currencies can, in theory, become second nature. If this were
the case, we would expect that combined-currency prices across the
currencies lose their ecacy. (pp. 72)

Use Discounts Strategically

If not used properly, discounts can actually harm your business. In fact, some people
suggest that you should never use discounts.
That advice is pretty extreme. You can use discountsyou just need to use them
properly.
Where can you go wrong? If used too frequently (or too deeply), discounts can make
people more price conscious moving forward. Theyll keep waiting for the next discount.
Discounts can also lower peoples internal reference price for your product, causing them
to buy less in the future (because your price will seem too high).
Reducing the frequency and depth of your discounts can help. However, this section will
give you a few additional tactics to maintain the strength of your discounts.
Related Resources:
Tactic 23: Follow the Rule of 100

Earlier, you learned that people can perceive dierent magnitudes for the same price,
depending on the context.
Discounts are no dierent.
When you oer discounts, you want to maximize the perceived size of them. That way,
people feel like theyre getting a better deal.
Consider a $50 blender. Which discount seems like a better deal: 20% o vs. $10 o?
If you do the math, both discounts are the same monetary value. However, one discount
has an advantage over the other.
How do you pick? Jonah Berger (2013) suggests following the Rule of 100.
When your price is under $100, use a percentage discount (e.g., 25% o).
When your price is over $100, use an absolute value (e.g., $25 o)
In both cases, youll be choosing the discount with the higher numeral (which will
influence peoples perception of the magnitude).

Tactic 24: Provide a Reason for the Discount

To avoid the negative perception of discounts, you might want to avoid the term
discount. At the very least, you should give a specific reason for the discount.
For example, every-day-low-pricing stores often refer to supplier price cuts:
In advertising rollback prices, EDLP stores (e.g., Wal-Mart) often convey the
message that additional cost savings they are able to obtain from suppliers
are being passed on to customers presumably to minimize the negative
eects of promotions (Mazumdar, Raj, & Sinha, 2005, pp. 88)
By providing a reason behind your discount, you reinforce that the new price is unusual.
Since the price is abnormal, people will be less likely to incorporate it into their internal
reference price.

Tactic 25: Avoid Discounts With Precise Numbers

Earlier, I explained that you should use precise numbers for large prices. Since people
associate precise numbers with small values, you can influence people to perceive large
prices to be smaller in magnitude (Thomas, Simon, and Kadiyali, 2007).
With discounts, you want to maximize the perceived magnitude. Choosing discounts with
precise numbers can actually hurt you. Those precise numbers will make your discount
seem smaller.
Supporting that notion, Thomas and Morwitz (2006) found that people perceived the
dierence between 4.97 3.96 to be smaller than the dierence between 5.00 4.00,
even though the dierence is roughly the same (1.01 vs. 1.00).
To maximize the perceived magnitude of your discount, use rounded values. Customers
should be able to compute the general magnitude pretty easily.

Step 4: Maximize Your Revenue

Your job doesnt end when a customer purchases from you. Whether you want repeat
purchases or a continuation of your subscription service, healthy businesses generate
multiple streams of revenue from existing customers.
This section will teach you a few pricing strategies that play a role in your long-term
revenue. Youll learn (1) how to make price increases more undetectable and (2) which
pricing strategies can damage your reputation.
Related Resources:

Make Price Increases Undetectable

In a world with inflation, its inevitable. Your prices will increase at some point.
Since most people are familiar with inflation, theyll be forgiving, right? Surely, theyll
understand.
Unfortunately, its not that easy. Despite inflation and other valid reasons, most consumers
dont see the justification for price increases.
Bolton et al. (2003) analyzed that perception. They found that consumers underestimate
the eects of inflation, overattribute price dierences to profit, and fail to take into
account the full range of vendor costs. Welp, thats unfortunate.
Although you wont be able to eliminate all negative eects from price increases, you can
make those price increases more undetectable (without being manipulative).
Tactic 26: Use More Frequent (Yet Smaller) Price Increases
The easiest way to control price perception is through the just noticeable dierence (JND).
Just Noticeable Dierence The minimum amount of change that triggers
detection (i.e., the dierence thats just noticeable)
If your price is $11.79, an increase to $14.99 will be more noticeable than a smaller
increase to $12.99.
In theory, that concept is really intuitive. Obviously people will notice larger price
increases.
In practice, however, that principle is very counter-intuitive. Since businesses are afraid of
increasing their prices, they often save that tactic as a last resort. They wait until its
absolutely necessary to do it.
However, if you reach that point, then youll usually be desperate for revenue. You wont
be able to increase your price by a tiny amount. Youll need to increase it by a noticeable
amount.
What should you do?
If you know that youll need to increase your price eventually, you should use more
frequent (yet smaller) changes. Avoid waiting until the moment of desperation.
With more frequent price increases, you also avoid reinforcing a concrete reference price.
If your price stays the same for years, then people will become accustomed to your price
at that specific level. Once you change your price, people will be more likely to notice.

Tactic 27: Downsize a Feature Besides Price

You can also use the just noticeable dierence for other aspects of your product.
Food marketers know that consumers are pretty familiar with prices, so they often avoid
price increases by reducing the physical size of their products (e.g., potato chip bags,
candy bars, etc.).
By reducing physical size by a small amount, food marketers lower their costs and
increase their margin. More importantly, they increase their revenue without increasing
their price (or alerting people to any negative changes).
If you decide to downsize your product, you should reduce the size of all three
dimensions height, width, and length by an equal amount. Consumers are less likely
to notice a change in all three dimensions (Chandon & Ordabayeva, 2009).

Downsizing a feature in your product can be risky. If consumers detect a mischievous

intent, you can lose trust and lower sales.
To maximize your revenue, you need to maintain and cultivate customer loyalty. The next
strategy will describe certain pricing strategies that could damage your reputation.

Avoid Harmful Pricing Strategies

Certain pricing strategies can leave a bad taste. This section will teach you which ones to
avoid.
Tactic 28: Dont Use Bait-and-Switch Pricing

When I was searching for apartments, I noticed an incredibly good deal on Craigslist. I
visited the complex the following day, and I was blown away by the luxuriousness.
Unfortunately, my starry-eyed naivet didnt last long. The deal was too good to be true.
The price from the listing was a blatant lie the cheapest apartment in the entire
complex was an additional $250/month. Yep, I was a victim of bait-and-switch pricing.
Bait-and-Switch Pricing Marketers promote an extremely low priced
product to pull people into a store. When people arrive at the store, the
product is unavailable (e.g., sold out, nonexistent). Marketers then try to
upsell those customers to a more expensive product.
Bait-and-switch pricing is not only unethical, it can also be illegal in some cases.
Even if it were legal, that deception triggers a negative response, which can often lead to
lower sales (Ellison & Ellison, 2009).

Tactic 29: Be Cautious With Dynamic Pricing

Over the past decade, more businesses have been dynamically adjusting their prices for
dierent customers. Based on a variety of factors, their algorithm spews out a price that
should lead to the highest amount of revenue.
That trend is known as dynamic pricing. Even though it seems appealing, you should
usually avoid it. While it can boost sales in the short-term, Dai (2010) found that it can
lower sales in the long-term:
Although dynamic pricing is attractive because it has the potential to
maximize a sellers profit, the results of this study indicate that charging
dierent prices for the same product can trigger negative price fairness
judgments which lead to negative behavioral intentions. (pg. 86)
Is dynamic pricing always bad? Not necessarily. Dynamic pricing can be eective when
adjustments are based on supply and demand (e.g., stadiums trying to fill remaining
seats).
Dynamic pricing becomes harmful when adjustments are based on a customers
willingness to pay. You should avoid charging dierent prices based on past behavior,
demographics, or any other factor besides natural supply and demand.

Related Resources:
Five Dynamic Pricing Issues Retailers Should Consider Patricio
Robles

Conclusion
Did you skip immediately to this conclusion? No worries. Im guessing you want the main
takeaways without trudging through the entire article. If so, then youd love the 15 min
video summary. You can watch it here for free.
Did you trudge through the entire article? Then youre a brave soul, my friend. And you
deserve a huge pat on the back. I spent a ton of time researching and writing, so I hope
you found the insights helpful.
Before parting ways, lets look at a few final topics.

Should You A/B Test Your Prices?

My recommendations are often bizarre. I get that. Thats why I always include academic
citations.
Thats also why I recommend A/B testing my suggestions. Theory is great.
However, theory and practice dont always align. If you were to A/B test images from my
article on stock photos, not every test would be successful.
That means you should test pricing, right? Wellheres the thing. Pricing is a dierent
animal. If customers see two dierent images, no problem. If customers see two dierent
prices, uh-oh. Youve got a problem.
Itll always depend on the situation. But heres my usual recommendation: you
shouldnt A/B test your prices.
You could test dierent features of the price (e.g., color, size, location). However, you
should avoid running A/B or multivariate tests on the actual price itself.
If youre gung-ho about testing your price, then you should run a more controlled
experiment. Send customers a survey (ideally, with a conjoint analysis segment). That
way, youre not altering the price for real customers in real-time.

Related Resources:
Should You Test Prices Online? Linda Bustos

One Final Pricing Tactic

Instead of reiterating all of the pricing strategies, I want to end with one final tactic the
most important tactic in this list.
If you still have trouble justifying your price to customers even after implementing the
strategies in this article then you might not have a pricing problem. You might have a
problem communicating the value of your product.
Instead of focusing on a new price, try adjusting your value proposition to better convey
the value of your product or service.
What makes your product special?
How is it better than other products?
Why would customers enjoy it?
Oftentimes, you can solve your pricing problem by communicating the value more
eectively.
With that tactic and all of the other psychological pricing strategies in this article you
should be able to justify your price much more easily.