Setting high prices without impeding sales is the neuromarketing aim of all retailers. Here I describe a simple technique to reach that goal via the use of “psychological” prices.
The linear relationship between sales volume and price is a basic selling principle. If customers act rationally, sales volume is expected to decrease as prices increase. Conversely, sales volume should increase when prices decrease. This idea is correct in theory. Indeed, this relationship is commonly found; especially as far as Fast-Moving Consumer Goods (FMCG) are concerned. This is because their prices usually show little elasticity. That does not mean that the above-mentioned negative relationship is true in every context. There are situations where price drops do not cause an increase in sales volume. And others where a price increase does not genuinely lead to sales’ decrease. We could just as well conclude that businesses and retailers suffer from missed opportunities to raise their profits!
Psychological prices are certainly the most popular and used neuromarketing technique. Scientific studies show that consumers’ brains tend to focus on the first digits of prices. For instance, a product priced at £7.99 will appear as less expensive as the same product priced at £8.00; despite the 1 pence difference being minimal. This is because our brain tends to focus on the “7” digit for the first price, and on the “8” digit for the second one.
Offering a product priced at £7.99 instead of £8.00 can potentially help you enjoy a higher sales volume. This will also substantially compensate for the 1-pence loss per product. Indeed, your customers will perceive the £7.99 product as less expensive, and thus more affordable.
Following this rationale, a product priced at £7.00 will be perceived as roughly as expensive as a £7.99 product. In both cases, the price’s first digit is the same (“7”). Pricing your product at £7.00 in this situation should not lead you to enjoy as many sales as you could expect. The price decrease from £7.99 to £7.00 will be perceived by your customers’ brain as less important than it really is. Consequently, you may rather suffer from a profit loss of 99 cents per product (12%). This loss may, eventually, be hard to compensate for with an increase of sales; hence, a missed opportunity to raise your profits.
A DOUBLE-EDGED SWORD
Please note, however, that psychological prices are a double-edged sword. Prices ending in 9 unconsciously refer to low-quality products. I would, thus, advise against using 9 as an ending for good-quality products. For instance, a high-end restaurant should use round numbers, such as £18, without decimals or options ending with 9. Conversely, a fast-food or casual restaurant would be advised to set its prices according to the psychological prices’ principle (£11.95 for a vegetarian pizza).
In a future blog article, I will emphasise the importance of customers’ psychology and the framing of prices for their potential to increase prices and profits.
ABOUT THE AUTHOR:
A former academic and behavioural sciences expert, Dr Morgan David is the founder and director of ANALYTICA, a consultancy agency based in the UK and in France. ANALYTICA uses the way our brain works to design better products and better services in the realm of neuromarketing, webmarketing, customer experience, sales strategy and pricing tactics. ANALYTICA created CogniSales, a neuromarketing sales service, and CogniMenu, the first new-generation menu engineering service.