🧠 Psychology in pricing comparisons

When comparing prices, we process them in one of two ways – either by looking at each number digit-by-digit (without rounding) or we round the number in our mind.

When the original and discount prices are listed side-by-side, we compare the prices through the first method, we compare digit-by-digit. This creates comparative pricing and can useful, especially when utilising psychological pricing (e.g. $9.97) as it often leads to us having a lower perception of price.

Consumers’ price evaluations are influenced by the left-digit bias, wherein consumers judge the difference between $4.00 and $2.99 to be larger than that between $4.01 and $3.00, even though the numeric differences are identical.

HOWEVER, a 2015 study for that rounded numbers (e.g., $100) are more fluently processed and encourage reliance on consumers' feelings, compared to non-rounded numbers (e.g., $99.99), which are less fluently processed, and encourage reliance on cognition. This means that rounded numbers "feel right" because the purchase is being driven by feelings and the price is processed quickly.

Similar principles are covered in “Thinking, Fast and Slow” by Kahneman, which is well worth a read.

So which is the right method for you?

It depends on your offer and your audience. As a rule of thumb, if your market is highly competitive and price-sensitive yet relatively low price, have discount prices listed next to each other. This works great in retail and fast moving consumer goods (FMCG). If you offer emotionally-driven purchases or impulse purchases in a less competitive market, then having rounded prices will likely help. If you offer a high-touch or highly rational product or service, such as financial advice or health insurance, then left-digital biases will help you and you will likely benefit from implementing psychological pricing.

However, all of these are only related to a general rule. The reality is that seemingly small differences between offers and/or audiences can make significant changes to how you should price. Unless you devote hundreds of hours to learning pricing psychology, your best bet would be to consult with a professional who can help identify what drives your pricing and who can help you implement the right pricing strategy for you.

Psychology in pricing is one thing, but remember that lessons rarely exist in a silo. Knowing that people react differently, rationally or emotionally, in different circumstances applies directly to how you should market your products. While every product and service has a slightly different mix of emotion or logic, they also go through stages at different speeds depending on what you sell and who your audience is, you will be well placed to remember that your marketing should reflect where your customer is in their purchasing journey.

I shared this in my Work Smart Wednesday newsletter. Want the full set of related insights? You can read them here: https://worksmartwednesday.substack.com/p/work-smart-wednesday-october-11-2023

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