Submitted by sylvia.wong@up…
on Tue, 10/05/2021 - 05:41
Sub Topics
Welcome to Topic 9: Psychology of Pricing.
Pricing is one of the most important decisions in business, and there is a lot that goes into pricing a product, service or experience. Various internal and external factors must be considered before finalising a pricing strategy, and this can be a challenging task for business owners and marketers. A carefully planned pricing strategy is needed to do the following:
Maximise revenue and profit
Meet or exceed customer expectations
Drive customer satisfaction
Generate positive word-of-mouth.
Understanding supply and demand along with how much it costs to produce and deliver a product or service is a sound starting point (variable and fixed costs). However, understanding the true value that a product or service represents for the customer is even more important.
Often it is a delicate balance between maximising customers’ willingness to pay and not outpricing yourself out of a competitive market. Psychological pricing is a subset of pricing strategies that directly influence customers' purchasing decisions.
In this topic, you will learn about:
Pricing strategies and decisions
Psychological pricing.
These relate to the Subject Learning Outcomes:
Discuss how consumers make decisions that impact on their buying behaviour.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Task: Summarise a minimum of five (5) key takeouts in relation to pricing decisions and the psychology of pricing. Submit your notes to your reflective journal. You can access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
Task: Record some notes about the videos in your reflective journal.
Read and watch the following content.
Pricing strategies and decisions
There are a number of ways to look at setting prices for products, services or experiences. So many, in fact, that business owners and marketing managers find it challenging at times. Lamb et al. (2016) indicate that 74% of new product launches in the Asia Pacific region fail due to ill-conceived pricing strategies.
Given most businesses operate in a highly competitive price environment, there is often little room to improve margins. In many instances, products do not achieve the desired profit margins, often a result of poor pricing tactics. Many successful businesses incorporate marketing and pricing strategies into their innovation process to determine the product's true value to the firm and the customer (Lamb et al. 2016).
According to Lamb et al. (2016, p. 239), “consumers are interested in getting a ‘reasonable price’, which means ‘perceived reasonable value’ at the time of exchange”. Given that pricing is more than just paying money and time, firms must understand what real value a product represents to the customer. This information will help businesses get the value proposition right and reveal the key benefits the customer is seeking in exchange. The value proposition and price need to be aligned to make products and services profitable. Lamb et al. (2016) found that when a high-quality product price is set too low, consumers may perceive the product as inferior, damaged or old stock. This poor perception of the product typically results in the product not selling.
Cognitive biases
Marketers are using customers’ cognitive biases to their advantage. “Cognitive biases are patterns of thinking that lead to a perceptual distortion of information, inaccurate judgement or illogical interpretation” (Lamb et al. 2016, p. 241). For example, Apple is often criticised for using cognitive biases because they price their base Apple model at a high price, and then the next model is only minimally higher. This practice deceives the customer into thinking that the more expensive higher-level model must be of better value.
Price anchoring
Price anchoring “is the practice of first showing a high price for an item, so that customers expectations for the value of that item will shift upwards” (Lamb et al. 2016, pp. 249). For example, real estate agents often use price anchoring by presenting a rundown house at a high price and then comparing it to a well-kept and designed home in a nearby area (the one they really want to sell) at only a small price premium, which then makes customers believe the well-kept home presents much better value.
SMART pricing objectives
Marketers need SMART (specific, measurable, attainable, realistic, timebound) pricing objectives in today’s highly competitive marketplace. Pricing objectives can be broadly categorised as shown in the table:
Pricing objective
Description
Profit-orientated
Focused on profit maximisation and return on investment covering all fixed and variable costs plus achieving a particular profit margin.
Sales-orientated
Based on unit or dollar sales or market share goals and may lead to the adoption of low-cost pricing objectives to break into a new market and achieve market share goals.
Status quo
Based on meeting the average market rate and competitor prices. Status quo pricing is also about maintaining existing pricing and is often the simplest strategy, provided it yields a good return on investment.
Setting prices
When setting pricing, businesses need to understand the cost to produce and deliver the good or service to market and project demand. Marketers need to determine whether the demand is elastic or inelastic. In some instances, marketers ignore demand factors and base their pricing decisions purely on cost. This strategy is not favourable as it does not consider any perceived value and willingness to pay. Costs are important to understand and determine the price floor but not necessarily to price a good or service to achieve the price ceiling. Other pricing determinants include the product's:
Life cycle
Distribution strategy
Competition
Promotions strategy.
These are ultimately determined at every purchase decision (Lamb et al. 2016).
Setting the right prices is a four-step process:
Establish pricing goals
Estimate demand, costs and profits
Choose a price strategy to help determine a base price
Fine-tune the base price with pricing tactics
Price Strategy
A price strategy is a basic long-term framework which establishes the initial price for a product and the intended direction for price movements over the product life cycle
(Lamb et al. 2016, p. 248)
The price strategy can be considered as an extension of the pricing objectives. Lamb et al. (2016) identify these as being based on the following factors:
The main product-based pricing strategies that marketers consider include price skimming, penetration pricing or loss leader pricing. Competition-based pricing strategies are often based on status quo or going rate pricing by aligning prices to average market rates or the price leader rate. Value-based pricing strategies include value pricing, premium and freemium pricing. In addition, there is also the cost-based pricing approach which, as mentioned above, often does not maximise profit opportunities.
Lamb et al. 2016 (pp. 248-249) describe price skimming and penetration strategies as shown in this table:
Strategy
Description
Price skimming
“is a pricing policy whereby an organisation charges a high introductory price often coupled with heavy promotion”.
Penetration pricing
“is a pricing policy whereby an organisation charges a relatively low price for a product initially as a way to reach the mass market”.
Marketers may consider other pricing strategies, including dynamic pricing (often seen in transport and hotel industries), bundles and package pricing, and geographic pricing. The articles outlined in the following activity describe the different strategies in more detail. It should be noted that some pricing decisions are subject to government regulation, which will be discussed in more detail in the topic ‘Ethics and Social Responsibility’.
Marketing managers usually set a base price, a general price level at which the firm aims to sell a product or service. This base price is correlated with the pricing policies, price skimming (above market), status quo (at the market) and penetration pricing (below market). The base price is often finetuned for unique demand situations or promotions and includes discounts and other special pricing tactics. Discounts are often distinguished into quantity discount, cumulative discount, non-cumulative discount and cash discount (Lamb et al. 2016).
Learning task 1: Pricing strategies and decisions
Watch the following three (3) videos and read the following two (2) articles to further expand your understanding of pricing strategies and decisions marketers must make.
The knowledge about the psychology of pricing comes from research studies that analyse consumer behaviour. Consumers rarely know what a product or service should cost. Psychological pricing is considered a subset of pricing strategies and is generally used to influence customers' purchasing decisions. The objective is to meet a consumer’s psychological needs, which may be related to saving money; the excitement of getting a good deal or bargain; or investing in a high-quality item that presents value for money.
When prices are presented in a certain way, it can spark a subconscious response. Marketers have been conducting experiments on the psychology of pricing for many years. Many pricing tactics are inexpensive and easy to implement and are often used in addition to the overarching pricing strategies (base-price) to increase effectiveness (Lamb et al. 2016).
Consumers want to know if they are getting the best of something successfully. The ‘best’ could be the best quality, the best price point or the best service. A well-known tactic is charm pricing, where firms reduce the price by 1 cent to read 12.99, which the human brain perceives as 12 instead of 13 because we tend to judge prices from the left digit. Examples of odd-numbered prices include $99.95 or $49.95. On the other hand, even-numbered prices are often used to emphasise quality. For example, a good watch costs $1,000.00 or a fancy bottle of perfume, $200.00.
Retailers often reduce the recommended selling price by a certain percentage and highlight the item for sale. Companies do that to use the original price as an anchor so that consumers feel they have saved money. In addition, firms often use artificial time constraints such as ‘one day only’, ‘early bird sale’, or ‘only a few hours left’, to create a sense of urgency. Other tactics include innumeracy, for example, ‘buy one and get one free’ or ‘get 50% off the second item’. Research has also shown that consumers perceive $12 as less than $12.00, and marketers are therefore very conscious of how prices appear. Other research has revealed that consumers like flat or all-inclusive rates or bundles even if they cost more (Lamb et al. 2016; Shopify 2021).
Interestingly, recent research has found that consumers prefer dealing with round numbers and usually associate rounded numbers with higher quality, which goes against the common practice of using $0.99 (Lamb et al. 2016).
Learning task 2: Psychological pricing tactics
Watch the following videos to further enhance your understanding of the various psychological pricing tactics that marketers use to entice consumers to make purchases.
Task: Identify the most common pricing tactics from each of the videos and explain how these tactics influence purchase decisions. Submit your answers to your reflective journal.
There are numerous pricing strategies and pricing can influence consumers perceptions of products, services and experience. Hence, it is important to understand pricing strategies, particularly psychological pricing, in order to maximise revenue, understand customer expectations, increase customer satisfaction and generate positive word of mouth. Remember to look out for examples of psychological pricing in your everyday shopping experiences.
Knowledge check
Complete the following two (2) tasks. Click the arrows to navigate between the tasks.
Key takeouts
Congratulations, we made it to the end of the topic. Some key takeouts from Topic 9:
There are so many ways to look at setting prices for products, services or experiences. However, most importantly, firms need to start with the pricing objectives before setting the pricing strategies, both of which will depend on the actual market, key target audiences, the competition, average market prices, brand and much more.
The value proposition plays a key role, and the base price needs to align with the value proposition for a product to succeed in a highly competitive market environment.
Psychological pricing is considered a subset of pricing strategies and is generally used to influence customers' purchasing decisions.
Marketers use several psychological pricing techniques, including charm pricing, decoy pricing, price anchoring, odd-even pricing and prestige pricing.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your seminar.
The following learning tasks will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
For this learning task, your lecturer will assign you to a breakout room where each student will add a question to a shared Microsoft Word document. Your questions should be a lingering question you have about psychological pricing.
You will discuss each question as a group, sharing relevant industry examples and academic articles. A summary of the discussion and answers will be captured by the student who posted the question. Be ready to share the summary with your lecturer during the seminar.
Your lecturer will provide further instructions about this process during your scheduled seminar. If you are unable to attend the seminar, you can complete this activity and add your question to your reflective journal and share it with the lecturer.
For this learning task, your lecturer will assign you to a breakout room where you will work in your assessment groups to find and share real-life examples of psychological pricing. If you are unable to attend the seminar, you must get in touch with your assessment group to find out the research you can undertake individually.
Find examples of effective psychological pricing strategies across several different industries and product categories, including but not limited to:
Decoy pricing
Price anchoring
Odd-even pricing
Charm pricing
Prestige pricing.
Welcome to your post-seminar learning tasks for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if these are to be completed during your consultation session. Click on each of the following headings to read more about the requirements for each of your post-seminar learning tasks.
There are discussion forum activities for this topic, which will enhance your knowledge and give you the opportunity to interact with your peers. You can access the activities by clicking on the following links. You can also navigate to the forum by clicking on 'MKT101 Subject Forum' in the navigation bar for this subject.
This week you should reflect on how your group is progressing and whether you’re reaching the milestones set in your group contract. Ensure that you are communicating effectively and have shared drafts of the work done so far. If you’re not meeting weekly, now is the time to start. You can reflect on what you’ve done so far, what was a challenge and what is needed moving forward. Remember your group can have a consultation with the lecturer. Continue to reach out for support.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
Australian Government 2021, Develop a pricing strategy, https://business.gov.au/products-and-services/develop-a-pricing-strategy
Berman, A 2020, How products are priced – the art of pricing psychology, streaming video, YouTube, https://www.youtube.com/watch?v=lPYD-NWnpHU
Boachie, P 2016, 5 Strategies of ‘psychological pricing’, Entrepreneur Media, https://www.entrepreneur.com/article/279464
Campbell, P 2020, Complete guide to psychological pricing, ProfitWell, https://www.profitwell.com/recur/all/psychological-pricing
Collins, A 2021, Psychological pricing: What your prices really say to customers, Shopify Blog, https://www.shopify.com.au/blog/psychological-pricing
Decker, A 2021, The Ultimate guide to pricing strategies, Hubspot, https://blog.hubspot.com/sales/pricing-strategy
Faith, DO & Agwu, EM 2014, ‘A Review of the effect of pricing strategies on the purchase of consumer goods’, International Journal of Research in Management, Science & Technology, 2(2):88-102.
Fatma, S 2019, ‘Influence of pricing on consumer decision making with reference to electronics industry’, International Journal of Management Research & Review, 9(10):10-22.
Fuchs, J 2020, Psychological pricing and the big-time boost it offers businesses, Hubspot, https://blog.hubspot.com/sales/psychology-of-price
Half as Interesting 2018, Why literally (almost) every price ends in 99 cents, streaming video, YouTube, https://www.youtube.com/watch?v=s6FkJplgR8c
Judo, P 2020, How McDonald’s, Apple and Starbucks trick you into spending more!, streaming video, YouTube, https://www.youtube.com/watch?v=dJIhfESkPtg
Lamb, CW, Hair, JF, McDaniel, C, Summers, J & Gardiner, M 2016, MKTG, 3rd Asia Pacific edn., Cengage Learning.
Logically Answered 2020, How products are priced – the psychology of pricing, streaming video, YouTube, https://www.youtube.com/watch?v=KYqvqScg_j8
Lok, D 2019, 7 Pricing strategies – how to price a product, streaming video, YouTube, https://www.youtube.com/watch?v=qutavZTkFeY
Luttrell, A 2015, Price psychology and online marketing, streaming video, YouTube, https://www.youtube.com/watch?v=c_yOcEXqnZs
Luttrell, A 2018, Smart marketing with price psychology: Introduction, streaming video, YouTube, https://www.youtube.com/watch?v=s3ygfRepZgY
Management by Dr. Mitul Dhimar, Different pricing methods / Different types of pricing strategies / service marketing, streaming video, YouTube, https://www.youtube.com/watch?v=PeyCVpijO-0
Marketing Business Network Videos 2019, What is psychological pricing? streaming video, YouTube, https://www.youtube.com/watch?v=HPxb-5TiaEg
Marketing Fundamentals for Professionals, Topic 12.3 Demand based pricing – price bundling, captive pricing, streaming video, YouTube, https://www.youtube.com/watch?v=cZ-NO3m27TA
MBN Videos 2019, What is psychological pricing?, streaming video, YouTube, https://www.youtube.com/watch?v=HPxb-5TiaEg
Netsuite 2021, Psychological pricing and how to incorporate it into your business, streaming video, YouTube, https://www.youtube.com/watch?v=nG30RN3baO4
O’Brien, M 2021, 5 Psychological pricing tactics that attract customers, NetSuite Brainyard, https://www.netsuite.com/portal/business-benchmark-brainyard/industries/articles/cfo-central/psychological-pricing.shtml
The Futur 2018, How to talk about price or budget using price bracketing, streaming video, YouTube, https://www.youtube.com/watch?v=87CPZdh6FIc
