The Basics of Pricing

[MidwestLandlord]

@Vigilante mentioned in this thread how he set the price for his new book, and mentioned price points in consumer psychology: Vigilante's Book "Vigilant Kids" Step by Step

I used to consult for a major fastfood chain, and was responsible for pricing with all new franchisee's in the USA. Figure I'd share the knowledge. Of course, I use all this in my B&M too. I assume most of this knowledge would also work for ecom, and I know for a fact they work with selling services as well.

Caution: Long post!

What is a price point?

A price point is just that, the retail price. However, a price point is much more than just the sale price, and there are several strategies you can use when pricing to create the effect you want.

1) Charm Pricing

Charm pricing (also called psychological pricing) is using the specific digits of the price to affect the consumer, and sales, in the way that you wish.

a. Ending pricing.
This is where the price ends in either a '9' or a '5'
Several studies have shown that ending prices in a '9' has resulted in increased sales volume of up to 60.7% compared to evenly priced products. This is why you see $19.99, instead of $20.00

Prices ending in '5' are less common, but have also shown to have positive impacts on sales in the +30% range, again compared to even prices. Obviously, the "best practice" is that if you can price it ending in '5', you can price it ending in '9' and increase your margin with no negative impact.

(Fun Fact: this is why gasoline is priced in the USA with tenths of a cent in the price. $2.299 seems cheaper than $2.30. Also, gas stations used to compete using lower tenths of a cent, like .498 per gallon instead of .499)

Example: A product with a $5 cost and you are after a 50% margin. An exact 50% margin would be $10.00. In this case you would price at $9.99 (seems much cheaper, no?)

b. Dollar Digit
Charm pricing also involves excluding odd numbers in the DOLLAR digit of your price. The theory is that consumers are turned off by odd prices in the dollar digit, and you should hit an even dollar whenever possible (far from a hard and fast rule though)

Example: Instead of pricing an item at $13.99 (an odd '3' in the price) you'd price at either $12.99 or $14.99

2) Price Limits ("that's too expensive!")
This of course depends on what you sell. However, there are several "limits" that consumers will be hesitant to purchase if your price crosses, and your price should be set below or above these limits to account for them.

Common limits are: .50, $1, $5, $7, $10, $13, $15, $20, (every $5 thereafter)
After that, major ones are at $50, $100, $500, $1000

Example: A product with a $6.50 cost and you are after a 50% margin. At margin, your price would be $13.00. $12.99 would work well here as it keeps you under the $13 limit, ends in '9' and has an even dollar digit. Another option if you feel the market would support it is to go to $14.99. This is just like the $12.99, but falls just under the next mental "that's too expensive!" price limit.

As a very soft rule: If they will pay $13.99 (odd dollar), they'd pay $14.99
If they'd pay $15.99 (odd dollar), they'd pay $16.99

3) Decoy Pricing (I use this OFTEN)

This is where you use 2-3 products at different prices, to intentionally drive sales for a certain product.

Example: I'll use Vodka, as Vodka is all pretty much the same...but has multiple price points.

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99

In this example ^^, most people will buy the cheaper option as it is below the $10 mental limit and is cheaper than the only other option. But what if the mid-tier has better margin and you want to sell more?

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99
The good stuff: $19.99

With this example ^^, what mental effect will these prices have on the consumer? The first two Vodka's are exactly the same as the first example after-all...

The result will likely be that most people will purchase the mid-tier Vodka. Why?

1) The cheap Vodka now looks low quality compared to the other two. "I deserve better than that!"

2) The mid-tier Vodka is under a lower mental price barrier compared to the higher priced Vodka. "That's a good deal!"

3) The good stuff looks rather expensive, as it is above the mental price limits of the mid-tier Vodka and the cheap Vodka. "Ohhh that's too much...maybe after my next paycheck!"

You sell more of the product you want to sell, and the others are directing the consumer in the direction you want!

Keep in mind this all applies whether you are the one selecting brands to sell and pricing them (like me), or if you are the brand owner and need an MSRP, or are deciding on pricing compared to the competition for direct sales.

If there's any interest in this, I can cover other strategies I often use(d) like:

Skimming
High-low
Penetration pricing
Price discrimination
Yield management pricing

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

More on Charm Pricing:

The tenths of a dollar digit can be manipulated to drive sales, effect perception of values, and adjust for mental limits in what people will pay.

This is especially true, in my opinion and experience, with products under $20

Remember, people are more likely to buy with pricing involving even numbers. So in my business, I have many products that sell for cheap, and taking whole dollar increases or decreases is not practical. So I often end up with pricing in-between two dollar points.

I always make sure the the tenths of a dollar digit is even, and I always round up.

Example:

To make margin on a product, I need to sell it for at least $4.35

I don't want to go to $4.29, as that is less than my margin.

I don't want to just round up to $4.39, as this has an odd '3' in the price.

So in this example, I would go to $4.49 as that gives me even numbers, and if they will pay $4.39, they will not hesitate to pay $4.49

Now, in this low price range, the $4.50 would be a mental limit (remember 50 cent as a mental limit in my long post above?), so I would NOT go to $4.69 or $4.89 (and I would never go to $4.59 or $4.79 either)

Make sense?

 

[MidwestLandlord]

Great thread.

Whats your thoughts on a $1000 product?

How far down the pricing rabbit hole do ya wanna go?

Short answer: $999

Long answer:

I'll have to dig up the studies I used when consulting that showed all this.

There are 3 theories that would help at this price range.

1) We read left to right

$999 instead of $1000

In studies, subjects were asked the price of something they had just purchased moments ago. They couldn't remember. What they did remember was the FIRST digit of the price (and sometimes the second). So a $9.99 item was remembered as $9

So the point of Charm Pricing is NOT to end the price in a '9', but to reduce the first digit. Essentially, you are "sneaking in" the other 99 cents (or dollars)

The theory is that since we read left to right, the first digit is what triggers an emotional reaction in our brain. The brain tends to "gloss over" the rest of the digits after that. (this is why the digits after the decimal are often in smaller print in ads, to help the brain ignore it)

2) We have 5 fingers on each hand

This theory states that since we are born with 5 fingers on each hand, and as children use our fingers to learn how to count, that the brain places emotional significance on "5's" and "10's"

So we read a price from left to right, which creates an emotional reaction. The brain also places special significance on "5's" and "10's", creating an even stronger emotional reaction if that is the digit we first read.

3) Number of digits

First study: Had subjects read 2 cards. Both were approximately the same price, but one had cents added to it...resulting in 5 digits instead of 3. Later the subjects were asked if the first or second card had a higher price. The overwhelming majority could remember which card was higher, but not the actual price. Researchers believe this means that the brain created an emotional reaction to the number of digits, and not the price itself.

Example:
Card one: $999.99
Card two: $999

They could remember that card one was more expensive, due to 5 digits.

Second study: Had subjects read 2 cards. Both were prices, both had 3 digits, but one was significantly higher in price. Then they were asked later if the first or second card was a higher price. They couldn't remember. The researchers believe this to mean that the brain has an emotional reaction to the number of digits in the price, and not necessarily the price itself.

Example:

Card one: $9.99
Card two: $999

Subjects could not remember which card was higher, implying that the larger valued price did not make a significant emotional impact compared to the lower price, because they are both 3 digits. (I know, I thought it was bullshit too, but it seems to work IRL)

Logically of course, we know one price is higher than the other. However, we humans are much more instinctual and emotional than we like to admit.

Also, it seems to be more and more common now that retailers are selling products over $100 without any "cents" attached to it.

$149
vs
$149.99

Bottom line:

$999

Less digits and avoids the mental price sensitivity limit of $1000

 

[MidwestLandlord]

Pricing as a Negotiating Tool

The pricing rabbit hole is deep. Multiple uses for the psychology behind numbers.

If ending a number in '9' lowers the first digit, and creates a positive emotion in the person reading it (or rather, avoids a negative emotion), can you use that in negotiating?

I think so.

Example:

I bought a rental house not long ago.

Was listed at $59,900

I told the realtor I wanted to offer $50,000 for it.

She said, "Let's just take $10,000 off, and offer $49,900"

I said no, then got on my pricing soapbox and schooled her.

$49,900 is good for the buyer, as it is not $50,000

But as the seller, the opposite is true. I didn't want this guy to have a negative emotional reaction to a price that started with '40' instead of '50', even though the difference is only $100

It's a BIG $100, emotionally.

He accepted the deal.

So...

Have you ever negotiated a deal, maybe a used car, and tried to get the price under the next digit? Maybe you offered $8,999 instead of the $9,999 they were asking?

Was that because of YOUR emotions regarding the price starting with an 8?

Did they counter with a price still in the same starting digit? Maybe $9400 or something? I would bet they did.

Would they have reacted different if your price still started with 9?

Lot's of unconscious emotions with numbers and prices.

Something to think about for sure.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

Really wish I had known this a long time ago. Learned it by putting product on the shelf and being baffled at why it wouldn't move at a lower price point.

Rep++ - for all the noobs out there, @MidwestLandlord just gave you a free lesson that other people have paid tens of thousands in lost sales to learn. Read this shit.

Thanks for the reps!

Ever notice that the cheaper vodka is also in plastic bottles and not glass?

Is that to lower cost, or to manipulate your perception of its value and get you to buy the more expensive vodka?

 

[G-Man]

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99
The good stuff: $19.99

Really wish I had known this a long time ago. Learned it by putting product on the shelf and being baffled at why it wouldn't move at a lower price point.

Rep++ - for all the noobs out there, @MidwestLandlord just gave you a free lesson that other people have paid tens of thousands in lost sales to learn. Read this shit.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

Price Discrimination

I hate this term, but that's the usual name for it. I call it "Market Specific Pricing"

I'm allergic to the word "discrimination"...makes me break out in lawyer bills.

This is where you sell identical items in different markets, and adjust the price for varying demographics in each marketplace.

A VERY common strategy that most people don't realize exists. If they have seen it, they don't realize WHY it happens.

Example #1:

Ever notice how some towns have a Wal-Mart in a nice area, and also a Wal-Mart in the "my cousin Jeb got busted for starting a meth lab in the men's room" area?

This is intentional. Wal-Mart is targeting different markets, based off different demographics. In this case, income.

If you look at the prices between both of these Wal-Marts, you'll see that some items (not all) are identical, but are priced differently.

This is due to price sensitivity in different market demographics. Income, age, race, gender, and product type have big effects on price sensitivity.

Example #2:

I have B&M stores in high-income areas, and low-income areas. Identical items, some are priced slightly different. (5-50 cents)

Junk food is priced higher in low-income areas, due to lower price sensitivity.
Healthier food is priced lower in low-income areas, due to higher price sensitivity.
Addictive items (caffeine, nicotine, alcohol) is priced higher in low-income areas, due to lower price sensitivity.

Household goods are priced higher in high-income areas, due to lower price sensitivity.
Personal care items are priced higher in high-income areas, due to lower price sensitivity.
Junk food is priced lower in high-income areas, due to higher price sensitivity.

Etc...

Now, if the only thing you got out of this post was:

MidwestLandlord is an a**hole that rips off poor people!

Then you missed the point.

The point is:

Know your market. Know how your customers think. Their spending habits. Their income. Their needs. Their wants.

And set prices accordingly.

Again, I'm not telling anyone how to price. Just laying out strategies. This is an advanced concept, use at your own risk.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

Chances are, your attitude about pricing STINKS

Two very common attitudes about pricing I run into with business owners:

1) "I know what the price should be!"

This is where a business owner sets a price based off margin or whatever, and refuses to budge. They KNOW what the product is worth, and by golly, people are gonna pay it!

It's foolish stubbornness, and very detrimental to your success.

This is usually a result of the owner focusing too much on either his competitor's prices, or his COGS (or cost of service sold if applicable)

The market DOES NOT CARE what YOU think the price should be.
The market DOES NOT CARE what your costs are.
The market DOES NOT CARE what your margin is.

The market only cares if your product or service offers a solution for their need, at a price that is warranted.

Either get better at target costing, or ditch the product if the market will not support a decent price point.

2) "I can't charge that much!"

This thought process comes from a few different places:

a. The owner only thinks of price in terms of competing, and not in terms of the price being a reflection of the product's value. (too much focus on the competition's prices)

b. The owner feels guilty for charging a price that the market will support, because he thinks/feels it is too high. Morale superiority, essentially.

c. They don't feel their service is valuable enough to warrant the price (looking at you, upwork copywriters)

Again, the market DOES NOT CARE what your margin is, which means they also do not care if your margin is making you rich.

Really think about that. No one cares if you make a lot of money off them, only that you sold them a solution at a price that is warranted.

Leave your emotions out of it. Provide value, and charge what the market will support in exchange for that value.

 

[Argue]

Hey @MidwestLandlord,

Thank you for posting this thread. I needed this guide.

Yesterday, I posted an ad on letgo listing a watch for sale. In the first hour, I got 100+ views but no one contacted me.

I think the reason I got no offers was because of my pricing. I listed the watch for $550.

1. All odd numbers. Price ended with '0'.
2. Customers perceived number too high.
3. Lacked the digit 9 in my price.

So this morning, I changed the price ($499.95):

After the change, three buyers contacted me. A few buyers might not be many but this stuff works!

 

[AgainstAllOdds]

Amazing response - I sent 199 rep points

Should've sent 200 points. That way @MidwestLandlord would register it in his brain as 100 points more.

 

[MidwestLandlord]

Have you come up with a way to measure tag effect? .

I just wing it.

I use neon pink shelf tags in place of the normal white tags for new products.

I think that 99% of the work is just getting your market to realize the product is there.

The prior efforts:

Filling a need
Producing a quality product
Marketing
Packaging
Presentation
Placement
Etc

...is what sells the product, your price point just needs to not convince them otherwise.

Unless your marketing plan is based on price (good luck), then the goal of the price point is not to sell the product, but to not KILL the sale.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

Skimming

I've heard this called "creaming" too, which is weird...don't be weird.

Basically the exact opposite of Penetration Pricing, and is very common. I use this OFTEN.

This is where you offer a new product or service, that already has strong brand recognition, and you charge MORE than the normal retail price to gain a higher margin yield from the temporarily lowered price sensitivity your customers have from the novelty and excitement of the product.

You then lower the price to your normal margin levels.

Example:

I sell Coca-Cola products. Coke frequently comes out with new products. About 25% of them end up maintaining market presence and share, and I keep them as core items. The rest die a slow death.

When Coke comes out with a new product, they back them with multi-million dollar ad campaigns. I will get people asking for this product because they saw it on the internet weeks before my market can get it from our bottler. Lots of interest, lots of excitement.

I will often bring that product in at a slightly higher than normal price, to benefit from the initial interest and yield a higher overall margin on the life of the product.

So a normal $1.49 might be initially priced at $1.99

Then, if Coke keeps the product and maintains advertising for it, I lower the price to the normal $1.49 so that I don't cross that $1.50 mental price sensitivity barrier that a NORMAL soda has in my locations.

It is now a "normal" product, so people will no longer buy it at a higher price point. If the price stayed higher, their habit of buying it will revert back to whatever they were buying before, because I am violating their price sensitivity limit.

 

[MidwestLandlord]

Re: Decoy Pricing

If your brand is the product being used as a decoy, this can obviously work against you.

I spoke with the CEO of the brand I distribute. He wanted to know why my retailers are selling almost 2x as much product as others in the country.

We discussed decoy pricing.

We sell a premium product. Left to their own devices, retailers stick our product in the same section as our much cheaper competitors. This actually leads to an increase in sales...for our competitors!

I figured this out by standing in the isle of one of my retailers for 4 hours and watching how people shopped. They would pick up my product, compare it to my competitors, then buy the competing product instead.

Our higher price was pushing people into the cheaper product. And since this is a grocery item, and grocery stores are where price and utility reign supreme, we were struggling.

So we created our own product displays and got our product away from the competition where it could not be compared to other product prices. (I had to teach everything I know about decoy pricing to these retailers in order for them to make the change. It wasn't an easy sell)

Doubled our sales instantly.

This CEO decided to spread the info around to the retailers I don't service, and see if he can get them to make changes in product placement and specifically explain how we are unintentionally becoming decoys for our competition. Said he would report back if it successfully increases sales our not (it will)

Lessons here:

You can overcome pricing difficulties (challenging consumer's sensitivity to price) if there is less ability to price compare.

You can unintentionally sink your own ship with the pricing around you.

You can't trust others to place product in a way that favors your brand. (my mom & pop retailers are out-selling one of the largest grocery chains in the world (Kroger) because I am aware of how pricing effects sales and have adjusted my strategy to compensate)

Understanding how your customers shop is essential. Don't be afraid to stand around looking like a weirdo in a grocery store for 4 hours if that gives you the info you need!

 

[MidwestLandlord]

Thanks to everyone that commented, liked, sent reps my way, and made me feel like this thread was worth my time. Giving value gives me the warm fuzzies haha

Much appreciated all.

Would love to hear about anyone taking this info, using it, and improving their business!

Just a reminder though, I am not telling anyone how to price.

Some of these are advanced concepts and some are possibly applicable to B&M only.

More tools to have in your fastlane toolbox, but pricing is not the toolbox itself, ok?

 

[SquatchMan]

Thanks for the reps!

Ever notice that the cheaper vodka is also in plastic bottles and not glass?

Is that to lower cost, or to manipulate your perception of its value and get you to buy the more expensive vodka?

Damn you're good. I knew about three tier pricing, but not the quality aspect. To answer your hypothetical question, my guess is both.

McDonalds does a similar thing now that I think about it. They use paper containers for the small fry and cardboard for the medium and large.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

$50
$60
$150

Those are my current prices on my website.

Now I'm sitting here wondering how many sales I may have stopped.

Time for my a$$ to make some changes.

Keep in mind the point of this thread though.

I am NOT giving hard and fast rules. I have broken the "rules" I list here many, many times. Your prices MAY be just fine.

The point is to get y'all to SEE this. To be aware that it exists, and to know your competitors ARE using it.

To think creatively.

To think of pricing with a more flexible mindset.

At the very least, probably gonna make y'all smarter consumers haha.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MidwestLandlord]

Penetration Pricing

In my industry, this is called "scorch the earth" pricing haha

Very common.

You go into a market with a new product or service, and you set the price LOW to intentionally build sales volume, brand reputation, brand awareness, and especially in the case of 'repeatable sales' B&M...change spending habits.

You then either gradually, or not-so gradually, raise the price to get the margin you want.

This pricing strategy has been mentioned numerous times in the various threads on ecom by the heavy-hitters in the ecom space on this forum.

Simple strategy, but the downside if done incorrectly is that your stuff will be seen as poor quality.

I've most often done this when backed by major, multi-national brands with multi-million dollar advertising budgets and strong brand reputations. Customers then see the low price as temporary, a good deal, a special, a discount, and NOT a reflection of product quality.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Fox]

Amazing response - I sent 199 rep points

 

[MidwestLandlord]

Tax Adjusted Pricing

Simple strategy. Usually breaks the "end in 9" rule.

This is where you either put the sales tax in the listed price, or...

...you adjust the price point so that the after tax amount is a specific price.

This can be very helpful when selling things for cash.

Example:

I operate in a municipality where the sales tax on a $1.89 item brings it to $2.01 after tax. At that low price point, most customers pay cash.

I sell thousands of this product a week, and the extra cent after tax was a PITA for my customers and my cashiers. Lots of complaints from both. Lots of chaos over a penny.

So I took the tag price to $1.88...making it $2.00 even after tax.

The improved operational efficiency at the point of sale, the improved customer service by not asking for this penny, and the stress I saved my employees more than makes up for the lost penny in revenue.

 

[c_morris]

In the grocery world, we use a lot of Multi-Unit Discounts (MUD's or Bonus Buys). They range is use and parameters:

Threshold: $3.99 ea OR Buy 3 or more and pay $2.99 ea (must buy at least 3 units to get the deal - moves more units)
Limit Pricing: $3.99 ea limit 6. $2.99 ea after limit (6 or less, get the deal. Each unit over 6 is charged full price - reduces investment)
Group Pricing: $3.99 ea OR Buy groups of 3 $2.99 ea (must buy in multiples of 3 to get the deal. If you buy 4, the 4th is charged at full price)
Split Pricing: 2/$5.00 or $2.50 ea (no deal, but sometimes customers believe they need to buy 2 to get the deal - this borders on unethical and we recently discontinued it's use)

We use metrics like item count/basket to set up our MUD's. If product A is purchased in groups of 2 in 60% of baskets and groups of 3 in 30% of baskets, we will set the multi to 3 to push the 60% that normally buy 2 into buying 3.

These methods are good tools to combat the likes of Costco. We don't have a lot of Club Size items to compete with them on so we set up Threshold pricing to give customers an equivalent deal where we can.

 

[MidwestLandlord]

Amazing response - I sent 199 rep points

Should've sent 200 points. That way @MidwestLandlord would register it in his brain as 100 points more.

Haha! You guys get it. Exactly how it works!

I was driving down I-25 through Denver yesterday.

The HOV driving lane fine, for not having multiple people in the car, is $250

$250

Think that's intentional? A nice, high, even number that sits right on a psychological price limit?

Would it have the same deterring effect at $249? $199?

 

[startinup]

Evenly rounded off pricing to indicate high-quality/luxury...

I've read that evenly rounded off prices (e.x. $2000) imply higher quality and non-rounded prices (e.x. $1999) imply higher value.

They also speak to different parts of the brain. Rounded prices are more likely to be bought emotionally (e.x. "I deserve something nice") and non-rounded prices are more likely to be bought logically (e.x. "I should save money").

---

If your customers are making emotional buying decisions, it's better to use rounded prices to imply high-quality.

If your customers are making logical buying decisions, it's better to use non-rounded prices to imply high-value.

---

Thanks for the Awesome thread @MidwestLandlord! I'd like to see your thoughts on this

 

[MidwestLandlord]

Yield Management Pricing

"Yield" in this case meaning, grossing a higher total revenue off the product by adjusting it's price around specific events.

Day-parts
Seasons
Holidays
Sporting/tourist events
Geographic locations (think beaches)

Examples:

I live near a tourist destination. Parking during the off season is $15, parking during tourist season is $50 (round numbers, gah!)

I've noticed some restaurants, thanks to the ease of changing prices with electronic menu boards, charging MORE for coffee in the mornings (day-part yield. High demand in morning, people will pay)

How much is a hot dog at a pro ball game versus a c-store?

How much is a lemonade off a cart at the beach in Miami versus a restaurant in town?

Etc...

Market Specific Pricing (price discrimination) and Yield Management Pricing often go hand-in-hand or are even basically the same thing.

 

[MidwestLandlord]

Interested.

I will. Probably Saturday, gotta catch a flight and travel the next 20 hours...bleh.

 

[MisterBHZ]

$50
$60
$150

Those are my current prices on my website.

Now I'm sitting here wondering how many sales I may have stopped.

Time for my a$$ to make some changes.

 

[MidwestLandlord]

Good thread.. but a bit too tactical maybe?

Probably. But that's how I am, so that's how I speak haha.

I think even more important lesson for Pricing is to learn how and why a Vodka company can launch a vodka that costs $50 or $80 and sell that and be a Premium product, rather than be competing in normal scale of pricing (9-15-20 bucks). The psychology and position behind this difference is huge lesson people need to learn. And it's interesting to see if a retail shop would carry that very Premium vodka and sell that...

But in any case, it's good to study the most Premium products and analyse why they can charge way way more than normal prices, than worry about $5 difference.

Price sensitivity is closely related to the type of product, and the marketing behind it.

In other words, a luxury item, or an item that seems "cool" in the market, will have a lower price sensitivity point for people effected by that marketing and/or reputation.

Meaning, people are buying the feeling, not just the product itself.

Read anything written by @SinisterLex ...this is where copy, and telling stories, comes into play for sure.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Scot]

As of posting this, this is your rep bank haha. Very appropriate.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[ddzc]

@Vigilante mentioned in this thread how he set the price for his new book, and mentioned price points in consumer psychology: Vigilante's Book "Vigilant Kids" Step by Step

I used to consult for a major fastfood chain, and was responsible for pricing with all new franchisee's in the USA. Figure I'd share the knowledge. Of course, I use all this in my B&M too. I assume most of this knowledge would also work for ecom, and I know for a fact they work with selling services as well.

Caution: Long post!

What is a price point?

A price point is just that, the retail price. However, a price point is much more than just the sale price, and there are several strategies you can use when pricing to create the effect you want.

1) Charm Pricing

Charm pricing (also called psychological pricing) is using the specific digits of the price to affect the consumer, and sales, in the way that you wish.

a. Ending pricing.
This is where the price ends in either a '9' or a '5'
Several studies have shown that ending prices in a '9' has resulted in increased sales volume of up to 60.7% compared to evenly priced products. This is why you see $19.99, instead of $20.00

Prices ending in '5' are less common, but have also shown to have positive impacts on sales in the +30% range, again compared to even prices. Obviously, the "best practice" is that if you can price it ending in '5', you can price it ending in '9' and increase your margin with no negative impact.

(Fun Fact: this is why gasoline is priced in the USA with tenths of a cent in the price. $2.299 seems cheaper than $2.30. Also, gas stations used to compete using lower tenths of a cent, like .498 per gallon instead of .499)

Example: A product with a $5 cost and you are after a 50% margin. An exact 50% margin would be $10.00. In this case you would price at $9.99 (seems much cheaper, no?)

b. Dollar Digit
Charm pricing also involves excluding odd numbers in the DOLLAR digit of your price. The theory is that consumers are turned off by odd prices in the dollar digit, and you should hit an even dollar whenever possible (far from a hard and fast rule though)

Example: Instead of pricing an item at $13.99 (an odd '3' in the price) you'd price at either $12.99 or $14.99

2) Price Limits ("that's too expensive!")
This of course depends on what you sell. However, there are several "limits" that consumers will be hesitant to purchase if your price crosses, and your price should be set below or above these limits to account for them.

Common limits are: .50, $1, $5, $7, $10, $13, $15, $20, (every $5 thereafter)
After that, major ones are at $50, $100, $500, $1000

Example: A product with a $6.50 cost and you are after a 50% margin. At margin, your price would be $13.00. $12.99 would work well here as it keeps you under the $13 limit, ends in '9' and has an even dollar digit. Another option if you feel the market would support it is to go to $14.99. This is just like the $12.99, but falls just under the next mental "that's too expensive!" price limit.

As a very soft rule: If they will pay $13.99 (odd dollar), they'd pay $14.99
If they'd pay $15.99 (odd dollar), they'd pay $16.99

3) Decoy Pricing (I use this OFTEN)

This is where you use 2-3 products at different prices, to intentionally drive sales for a certain product.

Example: I'll use Vodka, as Vodka is all pretty much the same...but has multiple price points.

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99

In this example ^^, most people will buy the cheaper option as it is below the $10 mental limit and is cheaper than the only other option. But what if the mid-tier has better margin and you want to sell more?

Cheap Vodka: $9.99
Mid-tier Vodka: $14.99
The good stuff: $19.99

With this example ^^, what mental effect will these prices have on the consumer? The first two Vodka's are exactly the same as the first example after-all...

The result will likely be that most people will purchase the mid-tier Vodka. Why?

1) The cheap Vodka now looks low quality compared to the other two. "I deserve better than that!"

2) The mid-tier Vodka is under a lower mental price barrier compared to the higher priced Vodka. "That's a good deal!"

3) The good stuff looks rather expensive, as it is above the mental price limits of the mid-tier Vodka and the cheap Vodka. "Ohhh that's too much...maybe after my next paycheck!"

You sell more of the product you want to sell, and the others are directing the consumer in the direction you want!

Keep in mind this all applies whether you are the one selecting brands to sell and pricing them (like me), or if you are the brand owner and need an MSRP, or are deciding on pricing compared to the competition for direct sales.

If there's any interest in this, I can cover other strategies I often use(d) like:

Skimming
High-low
Penetration pricing
Price discrimination
Yield management pricing

REP+

How ironic, I was just updating all of my pricing and came here to take a break and found this thread!

Solid advice! Thanks bud.

 

[ZF Lee]

Bump. Bump!!!
Reps+!
I used to think that prices were just costs + profit. Now I understand there's a bit of strategy behind it.
Seriously, all Fastlaners should read this thread, because all of us are going to offer something with a price on it to the market.
I think price setting can be a potential landmine. Do it wrong, and the Fastlane equation is screwed.
Thanks @MidwestLandlord. Your posts on retail should make you the go-to guy on TFLF for that.

 

[MidwestLandlord]

I was wondering how relevant this type of pricing is with items that are either a heavier investment, tend to require more thought -- i.e more central and less peripheral processing -- or are products that solve significant problems and happened to be looking at a page for google wifi:

Google Store - Pixel, Chromecast and more

Even they are employing these strategies... $129 for a single unit, +$170 to bring the price to "$299" for three.

Question answered.

You'll see it everywhere now.

Houses listed at $299,900

Cars listed at $49,900

Etc...