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Neuro on pricing

By Femke van Zandvoort, with input from Leigh Caldwell, Michael E. Smith and Leon Zurawicki

When searching for price strategies online, you’ll be amazed by the amount of hits you get. We’ve picked the most interesting ones that deal with psychological pricing and asked experts in the fields of neuromarketing and behavioral economics to give their views.

#1. The only way to increase sales is by lowering your price

It may sound tempting to lower your prices so everyone can afford your product and people will sprint to your shop in large numbers. Manic scenes during Black Friday come to mind, with shoppers battling their way through the doors to get their hands on a specific product before it is snatched away by someone else. But does lowering your price actually increase sales? Offering the lowest price could also deter consumers from buying your product. When your prices are much lower than the competition, people might think there is something wrong with your product. It could actually pay off to focus on offering reasons for people to pay a higher price, for instance the higher quality of your product, or the better customer service they will receive.

Michael E. Smith explains that pricing strategy in general is a complicated area that is at the heart of marketing strategy, and what is appropriate and likely effective really depends on the overall strategy. Michael: “I don't think anyone would disagree with statement #1, it just depends on the context. From a simple pricing economics perspective one tries to assign the price that maximizes profits, an issue that all students of microeconomics are taught. The same goes for the next statement.”

#2. Don’t be cheap

Trying to be the cheapest of all is one of the biggest misconceptions in pricing strategies. A race to the bottom is one of the worst ways to compete, as we’ve already touched on in #1. Despite this, the strategy is seen all over the retail industry, and especially in the FMCG market, where supermarkets try to outrun the competition by offering even lower prices. Lower prices mean lower revenue rates, obviously, which implies the number of sales must increase to cover the losses made. The real danger lies in ending up in a different market segment and losing your existing customer base. This may not be a big deal in the supermarket in the short term but will pose an issue when talking about luxury cars.

#3. The myth of the price conscious consumer?

Consumers, as we’ve seen over the years, are thought to make many of their purchases in a non-conscious manner. Will this perception change now that we’ve learned that 75% of the millennials reported they track their expenses carefully and 67% stick to a budget (compared to 55% of Baby Boomers) [1]? Why this discrepancy? And how can companies understand their customers better?

Michael: “I don't think you could classify this as a myth. There are certainly some shoppers who are very price conscious, and probably everyone is to a certain degree, especially when considering purchases at price-points that are outside their comfort zone.” To accommodate those shopper differences, many product marketers adopt a tiered pricing strategy to match the individual consumer's willingness to pay. “For example, I worked on a client project at one time where they were selling peanut butter. They had two prices for their peanut butter product; a ‘quality’ version and a ‘discount’ version.

Each had different packaging and product claims on the labels, with the intention of appealing to consumers with different price-point comfort zones. But in fact, the actual content of the two packages was exactly the same peanut butter, in the same amounts. That is, they recognized that consumers vary in their ‘cost consciousness’, and priced and marketed their product accordingly. Most product and service marketers do this to some degree. So I wouldn't consider the notion of ‘cost consciousness’ to be a myth, it is just a complication to be dealt with in one's marketing strategy.”

#4. Choosing and comparing options

Choosing between two pricing options, or comparative pricing, is another effective psychological pricing strategy. Give the price conscious consumers options and they’ll choose the cheapest. Right? Wrong. Offering two similar products simultaneously will suddenly make the price of one product much more attractive than the other. This strategy works well in fashion for instance, but interestingly, most people will not buy the cheaper dress, but go for the more expensive option, as more expensive must mean better quality.

Leon Zurawicki, marketing professor at the University of Massachusetts explains: “Price as a signal of quality and the degree of potential need satisfaction can definitely steer the buyer towards a more expensive option. The logic ‘pricier=better’ works for the relatively less informed consumers compared to the ‘experts’ and might not work for those buyers who have a certain budget in mind and enough will power to stick to it. Eventually, the outcome of the price comparisons depends to a high degree on the individual ‘buying style’ related to the personality traits of a buyer.”

Comparing new prices with a previous (old) price may make customers feel happy though. When you offer a sale with a previous price still visible, you could realize more sales because customers feel they are getting a bargain. They are not even interested in researching the price drop. Leon agrees with this statement. “The benchmark (=pre-sale) is very clear and pertains to the same item which now appears a bargain. One can imagine that the consumer who earlier determined that the product in question was of interest will perceive it now of a higher value without inquiring about the causes for the price drop (such as the introduction of a more advanced model by the manufacturer). A distinction, however, should be made between a temporary sale (after which the price reverts to the previous level) and a permanent price reduction. The first case will obviously create a stronger incentive to buy what is interpreted as a bargain.”

#5. Removing the currency symbol

Does that mean that people happily part with their hard-earned cash? Not at all. The pain of paying still exists. A dollar sign preceding your price can remind people of that pain and could result in less spending. That is why the currency symbols on a restaurant menu are often left out, as everyone knows that figure at the end is the price of the dish, but it doesn’t hurt as much.

Leigh Caldwell says this works because currency symbols are a strong and familiar cue for money, so they make people unconsciously concentrate on the price.
Leigh: “Without them, there's a good chance that some customers will simply ignore the price and focus only on the food. If you do that, you'll probably buy something more appealing - and more expensive!” Leon adds that an interesting question is how the price quote expressed in a currency the buyer is not all too familiar with (say, international travelers, or bitcoin users) changes the reaction. Leon: “Does it compound the pain, or would it produce the opposite effect through the association with the ‘weaker’ monetary unit? We do not know.”

#6. Small font, small price

To make the new pricing strategy work even more effectively, you could use another trick; namely change the font and size of the new price. Changing the font, size and even color of the signage of the new price and placing it close to the previous price will increase the number of sales, because customers see the new price as cheaper and a bigger bargain than the previous price. Your brain has a universal conceptualization of size. That’s why customers perceive your price to be smaller numerically if you display your price in a visually smaller font size. This works for discounts as well. But as you want the discount to appear big, you should use a larger font size so people will perceive it as big.

Leigh adds “I am not aware of scientific evidence to support this explanation, but it is quite likely that people will pay less attention to the price if it is smaller and less noticeable. There is clear evidence that when making a choice with multiple decision factors, the factors we pay less attention to have less influence on the ultimate decision. Eye-tracking studies have shown that the items we look at more often and for longer time periods, become more important in the ultimate decision. So if the price is smaller we will inevitably spend more time on other features - where the most appealing values usually correspond with higher price.”

#7. From zeros to nines

Which is the better deal; chocolates for $6.00 or $5.99? You may argue it’s about the same, but your brain may tell you the latter is so much better. This strategy - also called charm pricing - involves reducing the price from a round number by one cent. The technique seems to only work if the left digit is reduced as well (for instance $4.70 versus $4.69 won’t cut it, as the left digit stays the same). Leigh adds: “I find that this technique is even more effective in situations where the consumer has to process many numbers and a lot of information - such as a typical trip to the grocery store. The extra cognitive load and confusion makes it harder to process the rounding-off from $5.99 to $6.00. If the store throws in a lot of other confusing prices such as $3.41 and $8.92 the process becomes even harder.” The exception? Zhang and Wadhwa [2] researched that round numbers are processed more fluently by the brain which would mean that when making a decision based on feelings (e.g. buying a bottle of champagne), round prices are the way to go. Non-rounded prices are, however, better used in the case of cognition.

The jury is still out, according to Leon. “Odd pricing is a nuisance if you need to do calculations. The trick works best for ‘parity products’ (say, gasoline at the pump). On the other hand, it can ‘cheapen’ some fancy products – you would not expect a quote of $39.99 for a box of Godiva pralines.” Leigh would like to make a distinction between impulse buys vs staples here: “Most decisions involve both feelings and cognition - even when you're buying champagne. But the extra fluency and ease of a $1 or $5 ‘round price’ among a sea of complicated numbers will definitely attract the attention of shoppers. So, for products you want to promote as impulse buys - which could indeed be the expensive bottle of champagne, or the high-margin Easter egg - make the prices round - but for the everyday staples, stick with the 99.”

About the authors
Leigh Caldwell is a leading researcher in behavioral economics and author of the behavioral blog http://www.knowingandmaking.com
Michael E Smith is principal scientist and founder at Adaptation Research.
Leon Zurawicki is professor of Marketing, University of Massachusetts and author of the book: Neuromarketing

This was originally published in Insights Magazine, NMSBA members have access to the full archive of this quarterly magazine on neuromarketing. Interested in joining? Check the options

References available on request via office@nmsba.com