Thursday 11 July, 2013

The Basics of Price Psychology

Do you ever wonder why the prices of information products always end with 7? It’s not a financial consideration but a psychological one. Somebody somewhere figured out that prices ending in 7 – like $7, $27 or $97 – lead to higher conversions.

Does they really? Maybe or maybe not. Internet marketers think they’re brazen individuals but often they’re simply sheep. Few bother to test this premise themselves, and since every market is different, it certainly doesn’t hold true for every niche. But this illustrates an important consideration when creating an information product. It’s not just about the content and how you market it, but how you set your price.

The Science of Price

Welcome to the science of price psychology. And at its best, it is a true science. Marketers conduct studies to figure out how consumers view prices and price their products accordingly. This is why we use $9.99 instead of $10. The consumer feels like they’re paying less when it’s actually only a penny.

Price psychology is complicated and like all areas of science, theories change and evolve. The rules aren’t hard and fast, but here are a few basic principles that you can use to set your prices.

Prices Are Relative, Not Absolute

Consumers judge prices relatively, not according to absolute principles. In other words, they decide whether something is cheap or not by comparing it to similar products. If they’ve been downloading podcasts for $1.99 per mp3 for the last year, they’re going to balk at your $2.50. Then again, they’ll think they’re getting a steal at $0.99.

Cheap and Free Are Not Always the Best Deals

It’s taken as common sense that people want stuff free or cheap. But this isn’t always the way it works. The price you set influences the consumer’s perception of the product. Let’s say you’re at the store purchasing wine for dinner and you’re conflicted between a $10 bottle and a $4 bottle. Obviously, you’re probably going to pay more for the $10, which must be better quality.

Sometimes a higher price tells the buyer that this is a really good product. If you’re giving away something for free or for very cheaply, they may feel that it’s not worth much.

People Love Flat Rates

If you’re offering a continuing service, give your customers a flat rate. Across the board, people would rather pay flat rates than experience ‘bill shock,’ which is where you get your bill and it’s more than you expected. People will pay more for a flat rate because they’re also paying for the reliability of the rate being the same.

Time Isn’t Money

A few studies in price psychology have found that mentioning time rather than price moves more units. When advertisers stress the time you’ll spend with a product, rather than the money you’ll spend (even if it’s incredibly low), products sell better. The idea of spending time with a product increases its perceived value. You’ll get more out of it.

Know Thy Customer

The key to successful price psychology is to know your customer as well as possible. Try to understand who they are, where they come from, how they feel about your product, and what they believe it will do for them. Then, set a price that makes your product’s advantages worth it to your buyers.

Bob Steele

Bob Steele is an entrepreneur, software developer, marketer, and author living in the Denver metropolitan area. He’s an avid outdoorsman who loves skiing, hiking, fishing, boating, and just plain having fun. His interests include games, space, technology, physics, cooking (well eating actually), economics, business, internationalism, and team sports. With over thirty years of professional consulting experience, Bob has been exposed to many diverse business models and has gained a sensible approach to life. Bob’s company, WaveCentric is focused on commerce, marketing, and entertainment related products.

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