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The Psychology of Pricing by Leigh Caldwell

24 October 2013 BY

Leigh Caldwell is a leading pricing psychologist and author of The Psychology of Price, a book showing companies how to set pricing strategies to achieve their business goals – profit, market share or customer satisfaction. In this session from today’s Conversion Conference he turns this expertise to the question of conversion strategy.

Leigh CaldwellIf you want to sell more of a more expensive product change people’s perspectives, for example if you sell two differently priced wines, add a third more expensive option and you are likely to see an increase in the sales of what is now middle priced bottle.

Information is complicated. What is a price? So many factors can be involved in making a decision, but the price becomes a dominant piece of information in your decision buying process. Price is an artificial neatener, it simplifies our decisions as we can’t always take into account all of the factors we should.

  • Prices should be tangible – customers should be able to see what they are paying for.
  • Prices should be comparable – on terms that you control.
  • If you want to change your prices you should reframe your product.

Price differentiation is the key enabler of profit – different people have different budgets. Have something for everyone and let them tell you what they want

Price communication shapes the customer’s perception of value.

Be prepared to lose some sales

7 tricks with a sting:

1. Anchoring – signal a higher price first. The standard price looks like a good deal. More powerful if compared to previous price or competitor. The sting is that if users only see the first price they may position you as too high and bounce. Make sure the higher price is not the very first thing users see.

2. Compromise effect – high and low decoy prices push users to the middle product. The sting could be that it increases average price paid and users may come to remember that they are spending a higher average and value perception is lowered.

3. Hyperbolic discounting -Pricing affects the same part of the brain as pain. Put the pain into the future to ease it, for example, monthly repayments, even if it works out far more expensive. The sting is people may cancel.

4. Price discrimination – charge different prices to different groups of people. Captures maximum money from each customer, however people want to be treated fairly and may not return.

5. Price as a quality signal – increases perceived quality of product, however confider if it is actually better in reality as there are a number of other quality signals.

6. Confusion as a strategy – makes it harder to compare competitors. This can make the purchase decision too complicated and put users off.

7. Sales – holding a sale or discounts whereby items are actually at or very close to the original price, but has been offered at higher price briefly, is another example of anchoring. Improves perceived value, but must be legal. Also can affect trust in your business.

The key takeaway is to test everything!

4 techniques for WTP:

  • Change the comparison, Eg how much is a train ticket compared to hiring a car to the same destination?
  • Capture more high end custom
  • Move from benefits to desires
  • Increase psychological distance – price becomes less of an issue

Steps to Power Pricing:

  • Understand your customer’s desires
  • Find out how else they fulfil those desires
  • Use these strategies as anchors
  • Use these techniques:
    – Pinch the competition from top and bottom
    – Sell, then upsell
    – Undercut the competition on payment terms, not price, that just means smaller margins
AUTHORED BY:
h

Laura is a Digital Marketing Executive at Koozai. With search experience in a large number of industries both in-house and agency side, Laura has a strong interest in conversion optimisation and web psychology.
  • Pat Iyer

    Great strategies, Leigh. The warnings about each technique are particularly helpful.

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