A picture of money with a clock behind it, demonstrating that psychological pricing can be time sensitive.

How to Align Markdowns with Psychological Pricing and Marketing 

Patricia Montenegro

Have you ever looked around a store and noticed that most prices end in nine? Or wondered how retailers decide if their promotion will be BOGO or 25 percent off? These pricing strategies deal with psychological pricing. That’s right, pricing is even more complex than just calculating margins and measuring price elasticity; psychological pricing is designed to appeal to a customer’s emotions. 

Some psychological pricing strategies can have a bigger impact on shoppers than others. They are also a way to ensure markdowns and promotions are effective. In fact, many purchasing behaviors come down to the psychological triggers that drive a shopper’s decision-making process. In this blog post, we’ll cover six psychological pricing strategies.  

Create Urgency

By holding a sale that has no end date, shoppers will not be drawn to buy because they’ll assume they have time. On the other hand, if you have a limited time sale or a flash sale where you tell your consumers a specific end date, consumers will be motivated to buy sooner. Shoppers have developed FOMO (or “fear of missing out”), and this is exactly why discounts work.

Selling a limited quantity of items in your promotions creates a sense of urgency. Not only is there an end date, but your customers are also aware that items can sell out if they aren’t quick enough. When using limited quantity promotions, there actually must be a limited quantity to avoid being deceptive.

Don’t Follow a Pattern

The last thing you want to do is condition your consumers to only shop during sales. If your markdown and sale patterns become obvious to your consumer, they will wait for those markdowns and hold off on shopping until a promotion rolls around. For example, if your consumers catch on to the jean sale you have every May, they might only purchase jeans when they go on sale.

Keep your consumers on their toes. Offer various sales sporadically throughout the year so they don’t know what to expect or when. Instead of consumers waiting around to purchase certain items during their respective sale, they will begin to purchase them when they need them or when a targeted marketing campaign sparks their interest. 

Type of Discounts

Different discounts can help a retailer achieve specific goals. For example, if you want to see your cart abandonment rate decrease, free shipping is a great way to increase conversions online. Free shipping with a minimum threshold can also help increase average order value.

Another promotion that works well is offering a free gift with purchase. This can provide additional value to a customer. And again, like free shipping, a free gift can be used to increase average order value if it has a threshold.

BOGO sales are very helpful to getting rid of excess inventory. Buy one, get one free is a popular psychological pricing strategy that is very effective. This is essentially utilizing innate human greed by focusing on making a purchase to get the free item.

Greed also plays a role when it comes to percent discounts. A study led by Akshay Rao of the University of Minnesota’s Carlson School of Management found shoppers preferred to pay the same price and receive 50% more for free than save 33% – which boils down to the same price per product. They tested it out by selling hand lotion with a bonus pack and just the hand lotion at a 33% discount. The results: 73% more hand lotion was sold with a bonus pack than with a discount. 

A picture of blocks of letter to depict how wording goes into psychological pricing.Wording

The way you phrase sales and advertisements can drive psychological triggers. Also, keep in mind that the way different customers react to discounts can vary between product categories. The word choice between “get” and “save” can lead to different outcomes. When retailers state “get $ off,” it emphasizes a gain, while “save $” emphasizes avoiding a loss. In general, “get $ off” will motivate people to buy more.

Another psychological pricing strategy is to consider dropping the dollar sign when writing a price. The dollar sign is an obvious reminder we are spending money, but it is also a psychological trigger that reminds us of the pain of paying for something.

Researchers at Cornell University tested which price sold more: “$20.00,” “Twenty dollars,” or “20.00.” When they sold items at the price at “20.00,” it led to an 8 percent increase in revenue. Through an online channel, if you are an international company that needs to specify dollars, euros, etc, you can get a similar effect by writing the currency sign in much smaller font than the price.

A picture of money with a clock behind it, demonstrating that psychological pricing can be time sensitive.The Psychological Pricing Power of Nine

$9.99, $10.99, $19.99; we’ve seen these prices at most retail stores, and we’ve heard of its mysterious power dozens of time. There is a reason why we see it so often. Through an experiment jointly conducted by MIT and the University of Chicago, prices ending in nine were able to outsell the same product at a lower price. They tested selling women’s clothing priced at $35 and $39. They found that prices ending in nine outperformed the lower prices by an average of 24 percent.  

The price ending in nine was only beat once. When a sales price read “was $60, now only $45” outperformed “$49.” But when the study tested both slashed sales prices and number nine was included:

  • “was $60, now only $45” 
  • “was $60, now only $49” 

the price choice of “was $60, now only $49” outperformed the lower price.

Conclusion

Retailers can utilize psychological pricing to appeal to customer emotions. These six psychological pricing strategies can influence your customers’ decision-making process. Before you can decide on which psychological pricing strategy to run with, you have to ensure your products are competitively priced and your promotions are optimized. Quad can help retailers and brands with pricing to ensure psychological pricing strategies have the foundation for success.

Quad Analytix provides powerful retail intelligence, automation, and analytics to help you make data-driven decisions around assortment, promotions, pricing, and more. Want to get results out of big data? Learn more at: www.quadanalytix.com 

Patricia Montenegro

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