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How to Profit From the Twists and Turns of Pricing Psychology

by Marcia Yudkin

Prices are numbers, but how those numbers are selected, justified and displayed can have much more impact than bean counters would like to admit.

Pricing can increase or dampen desire, and you'd be horribly mistaken if you assumed lower prices always win the battle for buyers. In fact, there are a great many subtleties in pricing that surprise even the researchers in this field.

Many of the studies are carried out by researchers in behavioral economics, which studies the way social, cognitive and emotional factors affect the economic decisions of consumers and others. Another hotbed of pricing research is the field of menu engineering, which looks at how the wording, images and placement of various items on restaurant menus affect which items get ordered most. And then there are countless controlled tests carried out by sophisticated marketers and their consultants.

Recent scientific findings reveal some unintuitive principles of pricing psychology that you might be able to put into practice in your own business. For example:

* Presentation order matters. People are more likely to buy a $10 item if you show it after $100 and $1,000 items than before. Always show the most expensive option first.

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* People love windfalls. Offers have greater appeal when you promise additional items of a different type as extras than when bundling the same items into a single package.

* People love savings. When you call attention to the amount of a discount, customers focus on that amount as earnings rather than think about what they spent.

* People hate surprises. When customers expect to pay $21 and do, they're much happier than when they expect to pay $20 and encounter a charge of $21.

* People dislike separate charges. It hurts more to pay $50 plus $120 plus $75 than $245. If you can then arrange for that $245 to be deducted automatically from expected income, as from paychecks or tax refunds, the payment psychologically disappears.

Other lessons about pricing from veteran marketers:

* Posting high prices for professional service firms (who traditionally post no prices at all) attracts million-dollar clients, because it helps eliminate doubts about the value of a firm's services. If others have paid premium prices, they must be worth it, people think, consciously or unconsciously.

* Sheer nerve has a role in pricing. If you don't dare to price your wares high, you'll never discover that a sufficient number of buyers accept those prices without question.

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* Two-tier pricing, with regular and deluxe options, adds to revenues not only from the higher-priced product or service, but also from increased sales of the regular version. The higher tier boosts the perceived value of the lower-priced option.

* In a market where many customers shop by price, there are always others willing to pay premium prices for extra value: faster delivery, guaranteed return phone calls, training or advice included in the price or a bundling of products and services not available elsewhere.

* What someone can afford and what they will pay aren't necessarily related in a logical or predictable way. For any given offering, one customer may have next to no income or savings yet decide they have to have it, while someone with a Fortune 100-sized budget decides the same offering costs too much.

Copyright 2010 Marcia Yudkin.  All rights reserved.

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