the pyschology of pricing

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Cambridge Product Management Network

The Psychology of PricingIan Lunn

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Ian Lunn

Following Computing degree started life working in IT consultancy – Logica and Hoskyns

Senior marketing, product management and consultancy roles at Cable & Wireless, Lucent, Vodafone and Orange

Head of marketing in ‘dot-com’ company

Wide experience across business and consumer markets in both small companies and large multi-nationals

Co-founded Product Focus 6 years ago

Over 20 years product management and marketing experience in Telecoms, IT and software

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Product Focus

Europe’s leading product management training and

consultancy business with a focus on Telecoms, IT and

Software

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The importance of pricing

It’s important beyond the obvious that it determines what

you get paid for your product or service

It also Determines the volume of sales

Is a tool to maximise profit

Can create up-sell and cross-sell opportunities

Creates a perception in the mind of your staff, potential

buyers and your competitors

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Mini-exercise

Imagine you’ve just been made redundant and

you’ve decided to go into business with your

friend who’s in the same situation (and who

happens to be sitting next to you)

You’ll be landscape gardeners

What’s the name of your business and how

much will you charge for a day of your time?

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Reference prices

Pricing a product launched into an existing category

(product area) is subject to ‘reference’ pricing limits

$50 $349

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Key constraints on pricing

Com

petitorsCus

tom

ers

Cost

Price

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Pricing strategies: value-based

Maximises the revenue from differentiated products

Price the product or product features relative to each

other based on the value the customer derives from their

use

Requires an excellent understanding of the target

customer and what they value

“ There are two fools in any market, one that does not charge enough and the other that

charges too much”

Russian proverb

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Influencing value-based price

Objective Value e.g. Time saved x hourly cost (10 hours at £100 = £1000)

£1000

Opportunity value

Cachet / desirability

Reduce ‘disliked’ activity

Uncertainty

Switching costs

Resistance to change

Perc

eiv

ed

Valu

e

+

-

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Example : energy saving light bulbs

£5.40Lifetime cost

Price to customer £0.60

Lifetime electricity cost £4.80

Standard light bulb

Reference points + uncertainty + resistance to change depress this resulting in a realistic market price

£3 - £5

Energy saving light bulbs

Lifetime cost - Objective value

Value (£5.40 x 8) £43.20

Lasts 8 times longer uses 1/6 electricity

£36.80

Less cost of electricity (£4.80 x 8/6) £6.40

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Psychology of pricing If there are no easy reference points …

Customers will look at proxies i.e. things that are similar

They will look at other products in your range – if they are

judged to be reasonably priced or expensive then they will

assume it will be true for a new product

They will subconsciously be influenced by anchor points

So try and set an expectation with your customers about

why your product is worth X

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Magic numbers

$199.99 seems a lot less than $219.99 ($20 difference)

$119.99 and $199.99 don’t seem that far apart ($80 difference).

‘Charmed’ prices end in 99, 98 or 95

Source : an extract from a Microsoft web page selling Windows 7 – April 2010

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How to present an offer

What do psychologists claim will be the most

successful promotions in these scenarios ?

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How to present offers

Potential purchasers are twice as likely to defer a decision to buy on which of these offers?

Mobile phone

Latest model,

touch screen,

music & video play,

5mpx camera

500 mins, 500 texts

£50 + £25/month

Mobile phone

Latest model, touch screen, music & video

play, 5mpx camera500 mins, 500

texts£50 +

£25/month

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Decoys to boost sales

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People love a bargain!

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