Psychological pricing is a strategic approach used by businesses to influence consumer perceptions and behaviour by leveraging psychological principles in setting prices. This technique taps into the subconscious of consumers, impacting their perception of a product’s value and influencing their purchasing decisions.

One of the common tactics in psychological pricing is charm pricing, where prices are set just below a round number, like pricing a product at $9.99 instead of $10. This strategy capitalises on the left-digit effect, where consumers perceive the price as significantly lower than it actually is, even though the difference is marginal. It creates an illusion of a bargain and stimulates a higher likelihood of purchase.

Another method is bundling, where multiple products or services are packaged together. Consumers often perceive bundled deals as offering greater value compared to individual items, encouraging them to make a purchase even if they might not have considered buying the items separately.

Moreover, decoy pricing involves introducing a third, less attractive option to make the other options seem more appealing. By strategically placing a less desirable but similarly priced option, businesses guide consumers towards the more profitable choices.

Psychological pricing leverages the psychology of numbers, perception of value, and consumer behaviour to maximise sales and profits. It plays on consumers’ emotions, subconscious biases, and decision-making processes to create a perception of value that aligns with their preferences.

However, while effective, it’s essential for businesses to maintain transparency and ethical standards in their pricing strategies to build and retain consumer trust in the long run.

About the writer: Ken McWilliams is the founder of Revenue Management Institute. Ken has established and led revenue management functions across tier one FMCG organisations and now consults as an expert in value creation within consumer goods and services industries.