Thanks to the declining economy, the price is one of the major concerns for consumers today. For most businesses, setting the right price can have a powerful effect on the success of your sales and bottom line. That said, marketers, for the longest time, have been using psychology pricing to help improve sales.

What is psychological pricing?

You’ve probably seen products retailing at $9.90 or 19.99. Do such prices move more sales than items reading $10 or $20?  According to various researches, such pricing runs more sales. This is a marketing technique whereby marketers encourage consumers to respond to emotional levels instead of logical ones. The psychological pricing theory is based on the various hypothesis.

Charm pricing

This theory assumes that consumers facing uncertainty in decision making base the value of a product on the gains or losses offered rather than the actual value gained. Simply put, consumers base their choices on losses, no matter how little, more than what they stand to gain.

Based on this criterion, consumers think that something that is a few cents under a dollar is beneficial compared to the reference price. For many consumers the reference price for a product selling at $9.90 is $10, thereby establishing the charm pricing as a better deal.

The judgment of numerical differences is based on the first digit

Pricing a product at $9.90 instead of $10 has proven to appeal to more customers, even though the difference is quite small. The logic behind this pricing strategy is that consumers put more of their attention on the first digit on a product’s price tag compared to the last.

People anchor value on the first digit. For instance, if people are given two prices, $2.99 and $4.00 and asked to estimate the difference without actual calculation, more people are likely to perceive that the difference is $2, instead of the practical closer difference which is $1. Hence, shaving a few cents to change the price from $10.00 to $9.90 can make a huge difference in sales.

Consumers ignore the least significant digits instead of doing proper rounding off.

Humans tend to ignore things that appear less significant to them. For instance, they perceive a dollar more important and cents as less significant. This is why they focus on the dollar amount and don't notice that the 90c is essentially another dollar. Consumers subconsciously tend to ignore the cents, even though they see them.

For instance, consumers associate spending $9.90 to $9 rather than $10 even though in essence, the amount is almost equivalent to $10. As a result, they end up thinking that the product is cheaper than it is.

According to Keith Coulter, an associate professor of marketing at the Graduate School of Management, this effect can be enhanced by printing the cents smaller like $999.

Lowest possible price

Fractional prices, as opposed to whole prices, indicate to consumers that the product is marked at the lowest reasonable cost.

To differentiate a product

Another reason why marketers use the fractional pricing is to put a product in a different category to attract more attention. This theory is based on an item’s price point to other competitively priced items. For instance, if a prospective client has a price point of $100 in mind for the kind of product they need, they will perceive any item priced below $100 to be cheaper.

However, if the item is more than $100, it automatically seems more expensive, and they would require more persuasion to buy.

Hence, to improve sells, you will need to keep the price of your product below a common price point so that it falls in the less expensive category in the client’s mind. Even if the difference is just a few pennies, it can make a huge difference.

The goal of psychological pricing is to upsurge demand by creating a delusion of improved value for the end user. There is also evidence that consumers presume odd or fractional prices to be lower than they are and something that is priced at $9.90 instead of $10 will sell more.

However, it is crucial that you test out different prices as opposed to guessing. The price that brings the most sales is the price that you should adopt for your item.