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Psychological Pricing: A Complete List Of Pricing Strategies

Finding the right pricing strategy to sell your products can be challenging and complex process. As a result, many businesses rush into pricing with little thought, only making sure to cover their costs and adding in a small amount of profit.

However, when it comes to successful and sustainable business growth, just covering your costs won’t cut it anymore. Fortunately, psychological pricing strategies offer a solution to increase product sales and help grow your business.

But what exactly is psychological pricing? How does it work? What are the advantages and disadvantages of psychological pricing? And which pricing strategies are worth considering?

psychological pricing strategies

In this guide, we’ve shone a spotlight on the psychology of pricing to help you understand the role your pricing strategy should play in your company.

We also weigh up the pros and cons of 11 psychological pricing strategies with real life examples that you can consider implementing to increase your sales and grow your business.

What is psychological pricing?

Price skimming
Penetration pricing
Partioned pricing
Anchor pricing
Charm pricing
Rounded pricing
Social proof pricing
Bundle pricing
Differential pricing
Placement and size of price
Premium pricing

Does psychological pricing still have a place today?

What is psychological pricing?

psychological pricing

Psychological pricing is the idea that certain prices or the way prices are displayed can influence a customer’s decision-making process during a purchase. Such pricing strategies are a simple and cost-effective way to increase sales without reducing your product prices. 

These pricing strategies tend to play to the emotional side of our brain rather than our rational brain. No price is ever really high cost or low cost without having something to compare the cost to – it’s all about perceived customer value. 

Despite this, many articles on the web state that such methods only work to decrease the perceived cost of products to attract a wider group of customers and increase sales.

However, pricing psychology can also be used to increase the perceived customer value of your products, enabling you to increase your prices and profit margins accordingly.

Here are 11 psychological pricing strategies to consider for your business. We’ve also discussed the advantages and disadvantages of each, so that you can decide if a certain strategy makes practical sense for your business and products.

Price skimming strategy

price skimming

Price skimming is a strategy often used when a new product is in its initial release. The process behind the strategy is that the product is launched at a high price and then lowered over time to attract a wider pool of customers.

Price skimming works because the first (and most expensive) price attracts customers known as early adopters. These are the people who will happily pay steeper prices for a cutting-edge product – whether the price accurately reflects the value or not. 

This psychological pricing strategy is effective because you’re playing to the emotions and feelings of early adopters. They must have the latest products or technology first – a symbol of status and belonging.

As the price decreases over time, the net of prospective customers widens. This allows the company to attract more price-sensitive customers while still profiting.

Generally speaking, price skimming is most effective when customers aren’t considered to be price-sensitive (e.g. in the cosmetics industry) or when they are attracted by innovation (e.g. within the electronics industry).

Advantages of price skimming 

  • High return on investment

    Charging higher prices during a new product launch can help reimburse huge investments made for the research and development of the product.

  • Segment the market to your advantage

    Price skimming can help you to earn the biggest possible profits from different groups of customers. High prices don’t deter early adopters, while lowering the price allows you to target price-sensitive customer groups.

  • Early adopters act as product testers

    Early adopters are so keen to have the latest product that they may give valuable feedback to allow you to improve your product for wider release. They can also act as brand advocates for your company.

  • Creates and maintains brand image

    Price skimming gives the illusion that your product is a high-quality must-have for early adopters, helping to create a prestigious brand image that holds up as competitors enter the market.

Disadvantages of price skimming

  • The demand needs to be consistent

    Lowering your prices over time is only likely to work if you have consistent demand for the product you’re selling from more price-sensitive customer groups. Technology-based products are a great fit for this strategy – just look at Apple.

  • May not be able to maintain the high price for a long period

    If you’ve poured tons of money into the research and development of your product, it’s unlikely you’ll be able to sustain the high price for a long time as competitors enter the market or if you do not have enough interested customers on first launch.

Example of a price skimming strategy

One good example of a price skimming strategy in place is from Apple. As a tech product company, Apple has plenty of diehard fans that have to be the first to get their hands on new products first. Remember the Apple store queues hitting the news?

Over time, Apple is able to attract a wider pool of customers by lowering its prices. These customers are interested in technology but are more price-sensitive or less enthused about needing the latest must-have products first time around.

price skimming example

Apple has never made maximum sales its end goal – it has always been about focusing on maximum profit in the short-term. Before each generation of Apple products is released, it has already stirred the psychological pricing pot by creating curiosity and setting expectations. Consider how the iPhone X is currently being marketed.

Because of the buzz that Apple consistently builds, the brand has also increased in perceived customer value over time. This creates a far more high-end image of Apple in the minds of its customers, and it can increase its prices with every generation of products.

Penetration pricing strategy

penetration pricing

In contrast to price skimming, a penetration pricing strategy refers to starting out with a low price to “penetrate” the market and promote a large number of sales shortly after the product launch.

Penetration pricing is about setting the lowest price possible for your product in the market. This strategy sets the expectation that the price is low enough to disrupt the purchasing habits of customers, with the objective being to get a higher market share.

An appropriate time to use the penetration pricing strategy is if the product demand is highly price elastic. In other words, the customer demand for a product needs to be highly responsive to a change in price. 

The psychology behind this pricing strategy is that it plays to price-sensitive customers. Certain groups of customers will always preference price above all else, and so this psychological pricing strategy plays to these emotions.

Advantages of penetration pricing strategy

  • Take your competitors by surprise

    Penetration pricing can result in fast adoption from a wide pool of customers. This can help you achieve high market penetration rates (successful selling in a particular market) and take your competition by surprise, offering no time for them to react.

  • Discourage competitors from entering the same market

    As price penetration strategies are about penetrating the market with the lowest price possible, you’re more likely to discourage others from entering the same market. Low prices act as a barrier to entry.

  • Cost control and cost reduction pressures

    The low price creates cost control and removes cost reduction pressures from the word go. This creates greater efficiency, as you are not worrying about lowering your prices.

  • Expand into international markets with more success

You may find that a pricing penetration strategy helps you to expand into a new country with more success and allows you to disrupt your local competition. Be mindful if you decide to do this for the short-term to create buzz though, as it can go wrong.

Disadvantages of penetration pricing

  • Long-term price expectations

    As penetration pricing strategies work due to using the lowest price possible, it is difficult to eventually raise prices. Your customers have chosen to buy from your business due to price – change this and they may change where they buy from.

  • Creates preconceptions about brand and business

    Keep in mind that the low price is highly likely to create preconceptions about your brand and business and you may have a hard time changing these perceptions should you wish to change the price.

  • Customers may not be loyal for very long

    Pricing penetration concentrates on price only. As a result, you will only attract those who are swayed by price and are not loyal to your brand. The moment a competitor defeats your price, you may find you lose a significant number of customers.

  • Low profit margins may not be sustainable

    Unless you have plans to sell thousands of products at low cost, you may find that low profit margins are not sustainable long enough for a pricing penetration strategy to be effective.

Example of penetration pricing

One example of a penetration pricing strategy in action is from a Danish cider brand called Mokai. The brand used the strategy to enter the East African market after careful analysis and consideration.

Mokai used the penetration pricing strategy to take out competition and sway customers to choose its cider. This worked. Thanks to psychological pricing, Mokai was able to increase market share and sales. 

penetration pricing example

However, where the problem started was the volume of new sales did not equate to high profit. The price was simply too low. When the brand stopped the introductory pricing strategy, it also lost its customers.

What can we learn from Mokai?

Try not to use the penetration pricing strategy for a short-term phase to introduce a product to market if it is not a sustainable price that will lead to sustainable profit margins, or you’ll end up losing out.

Partioned pricing strategy

partioned pricing

A partioned pricing strategy is one where the extra costs involved (such as shipping and handling fees or fuel surcharges or airline baggage) are kept separate from the price used on a product page. For most online shopping, this illusion is now accepted as the norm.

The opposite of a partioned price is an all-inclusive price. This makes it obvious to the online shopper exactly what he or she needs to pay right there and then; unlike partioned pricing, where the shopper will only see the final price right on the final checkout page.

A partioned pricing strategy creates the psychological illusion that the product is more cost-effective than it really is. Again, you’re playing to the price-sensitivity of potential customers.

However, with more customers becoming more price savvy and public policy changing, this psychological pricing strategy may do your brand more harm than good in the long run.

Advantages of partioned pricing

  • Create the illusion of a more affordable product or service

    It’s possible to draw in more prospects by playing to their price-sensitivity. While this may not be the right thing to do, it does work. Online holiday booking businesses are living proof of this, but we’d ask you to consider the future. 

Disadvantages of partioned pricing 

  • You may lose out on sales

    Put yourself in the shoes of your customers. Imagine you’d found a great product at an affordable price, and then at the very last minute all these hidden costs appear out of nowhere. How would you feel? It’s the same for your customers.

  • You may harm your business and brand

    The above annoyance is likely to contribute to a negative customer perception of your brand. The negativity influences customer attitude towards your brand. Some customers may even vent their frustration on social media.

  • Public policy is changing – transparency is on the rise

    A 2010 report from UK Office of Fair Trading concluded partioned pricing and drip pricing has the greatest potential to mislead customers.

    In 2012, the UK introduced new regulations prohibiting businesses from invoking surcharges for payment methods that customers use that exceed the costs of the payment method.

Example of partioned pricing

You don’t have to look too far to see a partioned pricing strategy in place. If you’ve ever tried to search for a low-cost holiday and flight bundle online, you will have probably seen partioned pricing strategies in place.

partioned pricing example

Many travel comparison websites will show the lowest price for a holiday and flight as you’re searching for a holiday you can afford. But, click through to purchasing and you’ll see several added fees that result in the total cost almost doubling in price. 

For example, when searching for an all-inclusive flight and hotel deal, OnTheBeach goes as far to separate flight and hotel pricing and potential/essential extras right until the final checkout page.

Anchor pricing strategy

anchor pricing

An anchor pricing strategy is when you use a price to give your customers a frame of reference for valuing your product. This allows you to guide your customers into choosing the exact product you want them to choose at the exact price you want them to buy.

Today, customers all around the world are influenced by different types of anchoring during their decision-making process. It’s one of the most effective psychological pricing strategies out there.

Anchoring can be achieved through prices, promotions and placement of your products as well as the product itself. In truth, any element on your page could potentially act as a pricing anchor to influence potential customer decision-making.

For example, let’s take two TVs. One is priced at £600 while another is only slightly bigger and is priced at £1,000. It’s reasonable to think that the £600 telly is a far better deal, but what if that was the exact product the retailer wanted you to go for in the first place?

You could also use the power of suggestion as a product anchor. Have you ever seen items labelled as “most popular”? This can have a really big psychological impact on a customer’s decision-making process when stuck between products.

Advantages of anchor pricing

  • Decision-making for your customers is simplified

    Anchoring your products helps to make your customers’ decision-making a much easier process. At the same time, you’re likely to have a greater influence over whether or not a customer buys from you – even online.

    Anchoring can also make customers feel more confident with their purchase. For example, take software being sold at three pricing tiers – the cheapest and most expensive act as an anchor – most customers will go for the one in the middle.

  • Increase your sales for specific products

    Using anchor pricing is a really clever way to market and sell specific products. There are so many different ways you can use the strategy to influence your sales.

    You can lead your site visitors to certain products over others by using an anchor to attract attention, help with decision-making and this is likely to lead to an increase in your total sales.

Disadvantages of anchor pricing 

  • Possibility of manipulation

    Anchor pricing is a form of manipulation and if you use such a strategy in a negative or dishonest way then you risk creating unhappy customers.

    As an example, let’s say you had a product that you needed to shift as it wasn’t a popular item with your customers, and you decide to use the anchor of “customer favourite” to try and shift it.

    If the product doesn’t then live up to the expectations of the customer when he or she receives it, it may do your brand and business more harm than good. He or she may be more inclined to leave a negative review online.

    That said, it can be argued that all psychological pricing strategies are a form of manipulation in one way or another.

Example of anchor pricing 

A common example of anchor pricing can be seen in B2B software companies. Often, software companies will use price anchoring to influence which software package you end up going for, on a subconscious level or not.

For example, let’s take a look at BigCommerce. In the image above, you can see that there are different price tiers to target different customers. However, the high price and low price act as subconscious pricing anchors, to draw you into choosing the middle package.

anchor pricing example

What’s more, BigCommerce uses an additional anchor of “most popular” and draws the eye in with a contrasting colour palette. This is done to try and influence your decision-making.

Why does this type of anchoring work? 

Let’s say you’re hunting for a good eCommerce platform and BigCommerce has been recommended to you. You enter the pricing page with a budget of $50 per month in mind. 

You see the pro plan priced at $249 – five times your budget – and you have no intention of following through with this. Then, you see the $79 monthly plan and it seems much more affordable, so you purchase it, even though it’s above what you had in mind.

Your subconscious price reference is five times your budget and the $29 increase in your budget seems much smaller in comparison. Choosing a price in the middle can also create feelings of confidence and safety in your customer decision-making processes.

Charm pricing strategy

charm pricing

Charm pricing is one of the most common pricing strategies. Surveys suggest around 60-70% of retail shelf prices end in nine, while online statistics aren’t known. 

A charm pricing strategy is when you take a rounded price and market it with an odd number just below the full price. Charm pricing can also be known as .99 pricing.

For example, let’s say you have a £50.00 product that you market at £49.99. Although there is just one penny difference, the idea is that the charm price makes the product appear ten pounds cheaper to customers considering making a purchase.

Charm pricing one of the most popular pricing strategies out there, with some studies even concluding that it’s so over-used today that it may have become ineffective

Find out how to reduce business costs and increase profit margins elsewhere in your business.

Advantages of charm pricing

  • It makes the product seem more cost-effective

    If a product is marketed as ending with .99, then it makes the item appear as if it were ten pounds cheaper, even though it is only one penny cheaper.

  • It’s popular

    Charm pricing is one such psychological pricing strategy that has stood the test of time. While this may also be its downfall today, it clearly has a psychological impact on customers and their likelihood of purchasing certain items.

Disadvantages of charm pricing

  • It may not actually be that effective outside the USA

    The few studies that have looked at the effectiveness of charm pricing strategies have mostly focused on the USA market and these have been carried mostly in fashion retail – it’s not set in stone that this is effective for other markets.

    In fact, a UK-based study found that rounded prices may actually be more effective than prices ending in nine.

  • Everyone does it. You’re less likely to stand out through charm pricing

    Are you swayed by prices that end in 99p? I’m definitely not anymore. I actually find it refreshing when companies use rounded prices – it feels more honest and transparent. Find out what resonates best with your audience and go with that.

Example of charm pricing 

You don’t have to look too far to see charm pricing strategies in place. In fact, we’d almost stake our morning cuppa on you having seen it in place before. Almost... coffee is essential for the soul!

charm pricing example

Plenty of online (and offline) clothing stores use .99 pricing to encourage their target customers to make a purchase from their store.

Generally speaking, you’re more likely to find charm pricing on cheap every day products (e.g. cleaning products) rather than luxury items – it’s all about the perception you want to create.

Rounded pricing strategy

rounded pricing

How does the roundedness of prices affect customer perceptions and product evaluations?

Depending on the context of the purchase, rounded prices can increase the likelihood of a customer making a purchase from your online business.

In 2015, Wadwa & Zhang investigated how the roundedness of a price affects customer perceptions and product evaluations as well as what moderations and mediates this relationship. 

They coined the term “rounded price effect” for their findings. In their fifth and final experiment, they reported a mediation of the effect through a proposed sense of “feeling right” when customers were evaluating the product.

Since rounded numbers are used more regularly in everyday life, it’s thought that rounded numbers increase the reliance on emotional evaluation of the subject. In other words, rounded prices lead customers to rely more on their feelings when evaluating products.

How can you apply this in your business?

According to Wadwa & Zhang, if customers are in an emotional purchase context (buying a product for personal pleasure) then products are more positively evaluated when the price is rounded; but if buying for a business or school, non-rounded prices may be more well-received.

Advantages of price rounding

  • Hedonistic brands and products likely to benefit

    As Wadwa & Zhang’s study concluded, emotional context may play an important role when it comes to using appropriate rounding and make a customer purchasing a product for hedonistic reasons feel more positive about their purchase.

  • May increase trust from customers

    Think about the cultural norms of where you are selling. Appropriate rounding may create more trust from your customers where using odd numbers is not the norm.

    For example, in the United Kingdom, most prices end with a rounded number or .99. Ending your prices with .43 or .15 is far less popular and may impact buying behaviour if you’re selling products in the UK.

Disadvantages of rounded pricing

  • Minimal evidence it has a significant impact

    The effect of appropriate rounding may not be as large as first thought. In 2018, a group of academics replicated Wadwa & Zhang’s original study and did not find the same results.

Example of price rounding

It’s common to find rounded pricing being used more when the product itself is seen as high cost or a more luxurious item. In comparison, charm pricing (or odd pricing) is normally used when trying to showcase a product as being low cost and affordable. 

For instance, look towards high-end luxury fashion brands. Alexander McQueen or Versace are good examples of rounded pricing strategies in place. On Net-a-Porter, a high fashion retailer, you’ll find plenty of these examples to reflect the quality of the items.

rounded pricing example

As Zhang and Wadwha’s study confirmed, rounded numbers are processed by relying on customer feelings rather than cognition. For luxury items, rounded prices may be processed more effectively and efficiently as they’re driven by feelings of “do I want this item?” rather than asking, “is this good value for money?”.

Social proof pricing strategy

social proof pricing

Most of you are likely to be aware that being able to provide social proof for your business and products is pretty key nowadays. Nevertheless, it’s still vitally important and can have a psychological impact over whether or not new customers buy from you.

A social proof pricing strategy is when you utilise any social proof in favour of your products and place this around or in close proximity to your prices. For example, a link to read specific product reviews can be a powerful way to use social proof pricing.

You could also look at implementing a customer rating score for each of your products or enable your customer account users to “favourite” items and save them to their wish list (or something similar) and then showcase the number of times a product has been favourited.

If you’ve invested in influencers (e.g. bloggers) you could also quote and link through to their sponsored blog posts on a product page. Be wary of going overboard with this though, as providing too much social proof may have the opposite effect you want.

Why does social proof pricing work?

To put it simply, social proof can impact how a potential customer sees your brand and influence their purchasing behaviour. The psychological pricing strategy builds more trust in your company and, as a result, increases perceived value from potential customers.

The end result of social proof pricing strategies is mostly increased trust, increased brand equity and increased sales. However, this does require your social proof to be positive and believable from the eyes of your customers.

Advantages of social proof pricing

  • Increased sales

    We all know social proof pricing strategies work. Customer reviews have become fundamental to the growth of online businesses – especially ones new to the market.

  • Increased trust and perception of brand/business

    Social proof can increase trust in your website. This increased trust can impact the perceived value of your brand and business in the eyes of your customers and potential customers, leading to more brand equity. 

Disadvantages of social proof pricing

  • Negative social proof and decreased sales as a result

    Social proof is a great way to influence and build trust with new customers, but what happens when someone leaves a negative review? Or when multiple negative reviews accumulate for a product? Negative social proof can decrease your sales.

    The best way to minimise the number of lost sales you may experience is to have a plan of action to respond to negative (and positive) social proof.

    Respond empathetically and in an honest way. This shows to any potential customer that your business is hands-on in dealing with any complaints or negative feedback and can help to drive more sales.

Example of social proof pricing

Feel Unique is a cosmetics retailer that sells hundreds of different cosmetic brands. A big part of buying makeup online is trust that the product will work – so social proof becomes an integral part of the pricing strategy.

social proof pricing example

Here, you can clearly see that social proof has been used to provide trust to new potential customers deliberating over an INIKA vegan cosmetic product.

It should be noted that this clearly isn’t the only pricing strategy in use on product page. From the psychological pricing strategies discussed in this article, what other elements can you see in place?

Bundle pricing strategy

bundle pricing

Bundle pricing (sometimes known as bundling) occurs when products or services are grouped and sold together at a more attractive price then when sold separately.

Bundling provides an opportunity to increase company revenue by extracting “consumer surplus” from heterogeneous customers. This type of pricing strategy is used across many different industries as it is thought to be an efficient way of selling more items in one go. 

What’s the psychology behind bundle pricing and why does it work?

Put simply, bundle pricing can present the illusion of a good deal or actually be a better deal for the customer. On a subconscious level, it can encourage a customer to spend more because they believe they are getting more for their money.

Advantages of bundle pricing

  • Sell multiple products at once (and increase unit sales volume)

    Price bundling can boost unit sales volume as it enables you to sell multiple items at once. Selling more at once also means a greater initial return on the cost of acquiring a new customer.

  • Increase profit margins

    Bundling products together under once price can lower the cost of goods sold, which presents you with the opportunity to increase your profit margins.

  • Increase efficiency (and reduce marketing and distribution costs)

    Price and product bundling can increase the efficiency of your business as you are selling multiple products at once. This can also reduce your marketing and distribution costs – all products can be marketed and sent in one box together.

    At the same time as reducing your costs, price bundling may offer new marketing opportunities and increased exposure to new potential customers or referral sources.

  • Customer convenience and greater satisfaction

    People buy products to solve problems and fulfil needs. If your customer has multiple needs, then price and product bundling can increase convenience for your customers and lead to greater customer satisfaction.

    In general, most customers perceive a bundle price to cost less than purchasing each product individually – even if they don’t check – which can lead to an increase in product bundle sales.

  • May attract a larger range of customers for your business

    Price bundling has the power to attract a wider range of potential customers. As outlined above, bundled pricing can help to attract customers seeking convenience. But it doesn’t just stop there.

    Bundled pricing can also attract shoppers seeking a deal, those seeking a discount and those customers looking for products that complement each other. 

Disadvantages of price bundling 

  • No guarantee customers will preference bundles over individual items

    As with any pricing strategy, there’s no guarantee that new customers will preference bundled products over buying items separately. You’ll need to do your research and it may be a case of consistent case of trial and error.

Example of price bundling

Bundled pricing is extremely prevalent in the eCommerce industry. This is particularly the case when it comes to selling electrical goods and technology. You’ll also find bundled pricing in the cosmetics industry.

bundle pricing example

For example, PHB Ethical Beauty sells make-up starter kits made up of multiple products sold at a lower price when bought together to encourage new customers to make the switch to vegan and mineral cosmetics. 

Placement and size of price

placement and size of pricing

The placement and size of pricing can have a big impact whether or not a customer follows through and purchases from your online business. There are lots of different studies that demonstrate how the placement of psychological pricing can impact decision-making.

For example, let’s say you’re running a sale.

Should you place your discounted price before or after the original sales price? Is this likely to have any actual psychological impact?

Surprisingly, yes.

A study by Biswas finds customers perceive a larger discount when the discounted price is positioned to the right of the original price. The only prerequisite to consider is that the discount should be moderate in size to support comprehension.

What’s the psychology behind this pricing strategy?

Based on numerical cognition, it’s far easier for the human mind to subtract two numbers when the smaller number is positioned on the right. It really is that simple – crazy right? 

Another element that may enhance your psychological pricing strategy is to visually distinguish your price from a reference price by using a different colour or font, which then triggers what’s known as a fluency effect.

Your customers will misattribute the visual distinction (e.g. the change in font colour) to a greater numerical (pricing) distinction, which can increase the likelihood of more sales.

As well as this, placing your price horizontally further away from a reference price leads to a greater numerical distance being perceived.

Advantages of changing placement and size of pricing

  • Find out what works best for your business

    Testing out the placement and size of your pricing allows you to eventually find the solution that works best for your business to increase your sales. Be mindful of where you place your price though – you still want to build trust with customers.

    Remember to only test out one change at a time (no matter how minor) as if you change anything else then your results won’t be accurate, and you will have wasted your time.

Disadvantages of changing placement and size of pricing

  • Trial and error – the process takes time

    As you may have guessed, this psychological pricing strategy is a bit of a time thief. Plus, there’s also the worry that if your pricing strategy is already working okay, then you risk decreasing your sales – albeit on a temporary basis.

Example of changing placement and size of pricing 

As with charm pricing and other common pricing strategies, it’s likely that you’ll have come into contact with pricing strategies focused on placement and size. ASOS is a good example of this psychological pricing strategy in action.

placement and size pricing example

Despite ASOS going against the grain in terms of what studies have found (most likely, they will have optimised for what works best for their brand and customers) you can still see how they’ve played with the position, placement and colour of the discounted pricing. 

Differential pricing

differential pricing

A differential pricing strategy offers different prices for the same products to different segmented groups of your customers or potential customers. Such a strategy is also frequently referred to as discriminatory pricing or multiple pricing.

For instance, you may use personalised pricing, which is considered to be first degree discrimination; quantity discounts and surcharges as second degree and targeted pricing as third degree. 

Recently, differential pricing has risen in popularity, which may be due to an increase of such articles in Marketing Science between 2006-16. Such a trend may be explained by recent advances in information technology which can provide richer data on users.

But why do businesses adopt differential pricing strategies?

Advantages of differential pricing

  • Maximise company revenue

    A key advantage to differential pricing is being able to optimise company revenue. It’s widely accepted that a business will always want to sell its products or services to any customer for as much as he or she is willing to pay. Who wouldn’t?

    Although it can be difficult to implement, businesses that are able to segment their audience and take advantage of the ability to sell products at higher prices are likely to earn more revenue than maintaining a flat price for all customers.

  • Cover business costs

    Being able to establish differential pricing for different customer segments means that customers paying higher prices can help to cover the costs of making the products.

    This also enables price-sensitive customers to purchase products at more marginal prices, widening the reach of your products to multiple customer groups.

Disadvantages of differential pricing 

  • Profits on discounted strategies will drop

    If you choose to discount your products to a specific segment of your customers, then you won’t receive the full amount that you’d normally charge.

    For a permanently lowered price (for example, offering student rates), this results in continued lowered profits over time.

  • If you pause the strategy and raise prices, you may lose customers

    At the same time, if you’re running a temporary discount and then resume to standard prices, you may lose any new customers that you acquired during the period of the targeted lowered price.

    Keep in mind that this can lead to decreased brand equity and increased negative customer perceptions of your brand and business as a whole.

Example of differential pricing

Any fast fashion brand is likely to be a good example of differential pricing strategies in place. Most fast fashion resonate with students and offer student discounts – ASOS is just one of many examples.

differential pricing example

Another common example is the B2B (business-to-business) and wholesaling industry.

Here, it’s common to offer discounts for bulk purchases to encourage more sales, which is considered to be another form of differential pricing. 

Premium pricing strategy

premium pricing

A premium pricing strategy is when a product is sold at an intentionally higher price.

High-quality goods or luxurious items (such as high fashion, watches or electrical appliances) are typical examples of when such a strategy is likely to be in place.

Companies that charge an intentionally high price are often seeking to emphasise the high quality and high class of the products they sell. Sometimes prestige pricing is more commonly known as premium pricing or brand exclusivity pricing.

The psychology behind premium pricing is that the high price reflects high quality of the item being sold. Customers perceive expensive items to signal the quality of the product. Of course, the item may actually be very low cost to create – it’s all about perception.

Brand exclusivity pricing is an extension of premium pricing.

Customer perception of exclusive brand value can help enable effective use of prestige pricing. On top of this, there’s also a selection of marketing strategies that can help develop brand exclusivity.

Premium pricing strategies can be used to target niche customers that associate the quality of a product by its price tag. Customers who are most influenced by a premium price are often considered to care less about the actual quality of the item. 

Premium pricing can also support feelings of self-worth, status and contribute to a feeling like a customer belongs. Notice how these are all still considered to be benefits of the product despite the fact that they are emotions, feelings and perceptions from the customer.

In the majority of cases, premium pricing strategies work in tandem with good marketing. You can’t have one without the other. Such advertising doesn’t focus on differentiation or features – it focuses on the feelings or emotions associated with using the products.

Want some branding tips from Tamebay’s Chris Dawson? Give our eCommerce growth secrets article a read.

Advantages of premium pricing

  • Increase profit margins by a substantial amount

    The psychological pricing strategy allows you to increase profit margins for your products pretty heavily. As prestige pricing concerns itself with charging intentionally high prices, so too do your profit margins increase as result.

  • Create prestigious brand image

    Prestige pricing can create a high quality, prestigious brand image for your business and customers.

    As your brand reputation grows, so too can you keep raising your prices to reflect the newfound prestigious nature of your brand and maintain exclusivity. 

Disadvantages of premium pricing

  • Requires consistency across products

    If you want to make use of prestige pricing to grow your brand and business, then you’ll need to consider applying this across all products that you sell.

    Prestige pricing is all about influencing customer perception about your brand and products that you sell. If you can communicate value effectively then you can a build a successful brand, reduce customer churn and keep your customers coming back. 

Example of premium pricing

Free People is a good example of prestige pricing and brand exclusivity. The clothing brand gives the impression it has something to do with ethical production and consumption, but never provides any transparent information for its customers.

premium pricing example

The high price tags give the illusion of high-quality clothing. The brand name itself can create customer perceptions about Free People being a prestigious brand with ethics. 

Unfortunately, having personally received items from this brand several times, the quality does not seem to be reflective of the cost, which indicates prestige pricing may be in place.

But, if the perceived quality is not equal to its price, how is Free People still so successful? 

For prestige pricing to be a success, highly effective marketing strategies are essential to promote the products as must-have items. Free People has this nailed down.

Through its marketing efforts, the brand maintains a prestigious image and has created a loyal army of brand advocates who purchase the clothing for emotional reasons (i.e. a sense of belonging, self-worth and status).

Does psychological pricing still have a place today?

psychological pricing

Your pricing strategy forms an integral part of your marketing. It shapes the direction of everything that you do to increase your sales and grow your business.

No matter which psychological pricing strategy inspires you, how effective it is at increasing your sales and growing your business all comes down to the perceived customer value of your branding and marketing efforts. 

This is why so many successful online businesses take elements from different psychological pricing strategies but rely on pricing psychology as the only way to increase sales.

Instead, leading businesses combine elements from a variety of psychological pricing strategies with their own value proposition. Why?

Psychological pricing can lead to an increase in sales, but ultimately it is your unique value proposition that makes your business stand out and keeps customers coming back.

Seeking more knowledge and inspiration? Find out 50 of the most effective tips and best practices for growing your business.

Topics: Business Growth