Enticing Customers Through Psychological Pricing - Meenal Dhotre, Faculty Member, Vishwakarma Institute of Management, Pune.

The author can be reached at meenald_vim@yahoo.co.in - Manoj Nayak MBA student at VIM, Batch 2007-09. Homogeneity in technology and features is making product differentiation difficult and many companies attempt to differentiate their offers based on non-functional product attributes such as image and lifestyle. Mere low pricing does not attract customers anymore; hence, marketers are coming up with more creative techniques which deal with customers' psychology. Psychological pricing, though not new, is certainly one of the widely-used pricing gimmicks by today's marketers. What is Price? Price is one of the marketing variablespopularly known as the 4 `P's of the marketing mix. For years, price has been overriding other marketing mix elements. Till recently, many companies used the `pricing weapon' aggressively with little space left for other marketing tools in their arsenal. Pricing strategies are critical for the success of any company. Even today, price remains the most sensitive element for both sellers and buyers. However, marketers have realized that price alone cannot sell the products. Hence, it has become more challenging for them to use the pricing weapon effectively. Price is perceived by different people in different ways. It is the compensation paid for the product both goods and services. Price once paid leads to legal transfer of ownership of the product. In simple words, price is "what you pay for what you get". Another view is `price is the consideration'. Anything that involves transfer of ownership without a price may be termed as a gift, charity, donation or something in which the law cannot interfere as it is not an agreement enforceable by law. Pricing is an important factor that helps placement of a product and determine the target market. Pricing a product is one of the important ways to tell people about it. Some products may be competitively priced where the price drives the sales. Pricing a product at a rate higher than the others in the market tells the people that the product is for a select few. Such a pricing strategy is applied to products that may be considered to be `premium'. High prices are also a feature of `cult brands', such as Harley Davidson motorcycles. On the other hand, some products are priced low to beat the competition in the sales volume race. Thus, pricing strategy is often used as a tool to project or position the image of a product. The customer's perception of the product largely depends on how the company communicates the image of the product as well as sets its price. This article discusses psychological pricing strategy in detail. This is adopted by many companies, particularly those dealing in fast-moving consumer goods (FMCG). This pricing strategy is also seen these days in consumer durables. Psychological Pricing Psychological pricing is a market-based approach to pricing wherein prices are set to a level that is perceived as attractive by consumers. This method is designed to encourage purchases that are based on emotional rather than rational response. For example, to promote the idea of value and status for the customers who believe price is an indicator of quality, high prices are
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set. Or just below the round figure, e.g., Rs. 19.99 to suggest the price is in the lower range than the consumer expected. Psychological pricing is a marketing practice based on the theory that certain prices have a psychological impact. According to a 1997 study published in the Marketing Bulletin, approximately 60% of prices in advertising material ended in the digit 9, 30% ended in the digit 5, 7% ended in the digit 0 and the remaining seven digits combined accounted for only slightly over 3% of the prices evaluated. In the UK, before the withdrawal of the half penny coin in 1984, prices often ended in 99 pence. The theory is that this drives demand greater than would be expected if consumers were perfectly rational. Understanding the psychology underlying the way consumers arrive at their perceptions, make judgments and finally invoke a choice is critical to effective pricing strategies. Marketers must therefore examine some of the more important psychological processes that influence consumers' reactions to price. When consumers are exposed to a price, they assign a meaning to it by placing it into a category like `expensive', `a deal', `just right', `cheap', `overpriced' or even `fair/reasonable'. Marketers often try to get around consumers' psychological barrier to price through psychological pricing. For example, they put on a price tag of Rs. 295 instead of Rs. 300, or a tag of Rs. 9,900 instead of Rs. 10,000. Such retail prices are often expressed as `odd prices' a little less than a round number, e.g. 9.99 or 6.95 (but not necessarily mathematically odd; it could also be 2.98). Godrej had priced its popular model of computer chair at Rs. 1,900 plus duties and taxes. In order to psychologically appeal to the consumers, the company had separated the duties and taxes and pegged the price at Rs. 1,900. This way, it had made it appear that the price is well below the Rs. 2,000 brand, although including duties and taxes the total cost to the customer would exceed Rs. 2,000. This strategy is also used by many airlines to appeal psychologically the consumers. Psychological Pricing: Past and Present Scenarios Many companies today use psychological pricing. Exactly how psychological pricing came into common use is not clear, though it is known that the practice arose during the late 19th century. This began way back when branded goods were not preferred by the masses. Psychological pricing is said to have originated based on the following concept: A typical customer would ask for the product over the counter, say a box of lead pencils. The shop keeper then quotes the price at Rs.10/-. The customer then says, "Sir I am your regular customer, can I get it for Rs. 9 and 90 paise?" The shopkeeper says there is not much he is earning out of the deal, and ultimately sells it at the price offered by the customer. The shopkeeper then realized that the discount is just 10 paise and the customer keeps coming back only to his shop. The Rs. 9 and 90 paise price looks like an offer price to the customer though the difference is only 10 paise. This, in turn, was communicated to the wholesalers and they passed on this feedback to the manufacturers. This is how it all started. The manufacturers then tried this trick themselves by using such pricing method for selling their products door-to-door at offer prices which were only marginally lower than that in the market. Door-to-door selling became less popular in due course, and the psychological pricing idea too faded into the background for some
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time. But with growing competition in the retail market, this strategy has made a strong come back. This pricing strategy targets the `psyche' of the customers, where they look for products at prices lower than the market price. The company that brought this strategy into the Indian market in a big way was `Bata'. Hence, many times this pricing strategy is also known as `Bata Pricing'. It was quite difficult for Bata to penetrate the Indian market, where local brands from the unorganized sector at low prices dominated the market. After many years of presence in the Indian market, after careful study and review, Bata India Ltd. implemented the psychological pricing strategy. Bata launched products at very odd prices, never tried by any other company in India before. Bata priced its footwear at prices such as Rs. 49.95, Rs. 99.95, Rs. 124.95 and so on. These prices had a psychological impact on prospective buyers as they fell short of an amount that might have looked like a high price. Also, the price was devised to communicate to customers that Bata values even their five paise. Bata shopkeepers would religiously return the five paise in those days, when small denomination coins were still in wide circulation. It was this price tag that drew instant jokes, sarcastic comments and sometimes even arguments over consumer rights. With small change having lost its value, Bata now prices its products ending with Rs. 9 such as Rs.169, Rs. 249, Rs. 699, Rs. 1399, etc. The basic principle however, continues to remain the same. Pricing based on the principle that buyers are more sensitive to prices that end in certain digits is referred to as `odd pricing' or `odd-even pricing' (Refer Exhibit 1). With the success of the innovators, other companies followed suit. In recent times, the companies that rejuvenated this strategy were undoubtedly the telecom companies. Idea, Airtel, Vodafone, Tata Teleservices, Reliance communications and BSNL have all used it sometime or the other. Their post-paid monthly rentals vary from 99 to 999. Similarly, call charges may be 49 paise or 99 paise. This has also spread to other sectors like automobiles, airlines, consumer durables, electronics, apparels, etc. The impact was so strong and the increase in response so high that the online shopping portals too adopted this pricing strategy. eBay, Indiaplaza, rediff shopping and indiatimes shopping are all recent adopters of this pricing strategy. This trend spread further and was taken up by retailers where shops like `49 and 99', emerged. Many 99 cent shops have come up in the US. (Refer Exhibit 2).

How Does it Work? Psychological pricing approach is suitable when purchases are based more on feelings or emotional factors. It is applicable in situations where customers are likely to look for a deal, or when price serves as a surrogate indicator of quality. Psychological pricing means setting prices that have special appeal to target customers. Some people think that there are whole ranges of prices that potential customers see as being the same. Therefore, price cuts within these ranges do not increase the quantity sold. But just below these ranges, customers may buy more. Then at even lower prices, the quantity demanded stays the same againand so on. Most consumers draw a price, brand-price range while purchasing and as far as possible do not want to go beyond it. They often operate in this price range and not at a price point that is predetermined to the last pie. So when they buy at Rs. 99 instead of 100, the saving of one rupee is not what matters. What is most satisfying is that the item was available within their price range. While 99 is two-digit number, 100 is a three-digit number. The consumer feels quite comfortable with the thought that he has stayed within a two-digit price range. There is a scientific reason why the customers' purchase of products is priced in this manner, even though they know that the difference is negligible. Look at Rs. 99.95 Look at Rs. 100.00 The brain rounds up the figure of 99.95 to 99 rather than 100. Research indicates that consumers do not consider a price too high when it varies within the band that they are looking for, but they react adversely the moment it crosses the band. Any price that suggests being in a lower price band confers an advantage to the seller, as it plays on the psychology of the buyer. It is a fact that in many cases, a small marginal difference in price does create the impression of a much larger difference. Another point is that it gives a good feeling to the consumers if they receive back some change after a purchase. This strategy makes the product seem more affordable. This strategy, in fact, provides another advantage to the seller. Supposing that based on costs and profit expectations, the product is to be priced at, say Rs. 9800. The seller can price it at Rs. 9,900 or even Rs. 9,999 and still remain below the price band accepted by the consumer. This way he can make additional profit. Psychological Pricing as a Quality Indicator Consumers may infer something about a brand's value or image from its price. When customers choose brands because their prices send a message, they are responding to a psychological or image-pricing strategy. Marketers set artificially high prices to communicate a status or high quality image. This pricing method is appropriate for perfumes, jewelry, luxury automobiles, liquor, readymade garments, etc. Cult brands are often highly priced. John C Groth and Stephen W. McDaniel found that marketers use prestige pricing and consumers associate a higher price with higher quality. Acer and Sony adopted this method of pricing for their range of Ferrari and Vaio Lifestyle notebook PCs. Apple adopts this
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approach for pricing its high-end PowerBook laptop computers. This pricing method requires the creation of strong brand image through promotion programs that reinforce the brand's quality and image of total exclusiveness. Price perceptions are significantly influenced by the brand's perceived quality and extent of advertising. Paul W Farris and David J Reibstein studied the relationships among relative price, relative quality and relative advertising. They observed that brands with high relative advertising but with average product quality were able to charge premium prices more successfully than brands that were relatively unknown; and brands with both high relative advertising and high relative product quality could charge the highest prices. Different Forms of Psychological Pricing Psychological pricing is used in a variety of forms and is not restricted to mere odd or fractional pricing. Some common forms of psychological pricing are briefly explained below. Comparison Pricing or Reference Pricing Strategy Reference price is the price against which buyers compare the actual selling price of a product, thus facilitating their evaluation process. In some cases, the seller himself provides an external reference price, a higher price with which the consumer can compare the selling price to evaluate the deal. Typically, the seller labels the external reference price as the `regular price' or the `original price'. When consumers view the `sale price' and compare it with the provided external reference price, their perception of the value of the deal will likely increase (Refer Exhibit 3). Consumers may also rely on an internal reference price to judge a price offering by accessing price information stored in their memoryperhaps the last price that they paid or what they expect to pay. Retailers often use reference pricing strategy by fixing a moderate price for a product version that will be displayed next to a higher-priced model of the same brand or a competing brand. This strategy is based on "isolation effect" which suggests that a choice looks more attractive next to high-priced alternative than it does in isolation. Reference pricing is also used by catalogue retailers to convey the idea that they offer bargain prices. The catalogue may show "reference price", "store price" and sometimes "sale price". Prestige Pricing For many products, consumers use price to infer quality, especially when it is difficult to determine quality by inspection. Certain products are demanded in part because of their high prices. Perfumes, furs and gems are among them. These products are high-status goods and cult brands. Marketers often charge prestige prices for such items to portray an image of high quality, e.g., Mercedez Benz cars.

Odd-Even Pricing Odd-even pricing is setting prices that end in certain numbers, either odd or even; but odd is more common. For example, products selling below Rs. 50 often end in the number 5 or the number 9 - such as 49 or 49.95. At higher levels, prices are often kept a rupee or two below the threshold point, such as Rs. 99 rather than Rs.100. Some marketers use this method, because they think consumers react better to such pricesperhaps seeing them as `substantially' lower than the next highest even price. Marketers using this approach seem to assume that they have a rather jagged demand curvethat slightly higher prices will substantially reduce the quantity demanded. Although not documented, many marketers believe that odd pricing got its start as a way to prevent sales clerks from just pocketing money. Because the price was odd, the clerk would have to open the cash register for change, which required that the sale be rung up on the register. Another view is that odd pricing would make the consumers perceive that the price has been precisely calculated and arrived at, leading to an odd result. A rounded-up price, will give an impression that the seller has marked the price upwards so as to make more profit. The main finding from research on the odd-pricing approach is that odd prices signal to consumers that the prices are low. However, odd prices can also suggest low quality. Some consumers may perceive higher value because of the low price (especially if quality is less important to them than price), whereas others may infer lower value on the basis of the low quality image that the odd price suggests (especially if price is less important to them than quality). Another view, which is not supported by adequate research findings, is that customers looking for a bargain perceive prices ending in odd numbers to be lower. Also, even prices favor exclusive or upscale product image and consumers view such products as being of premium quality. Percentage Discount Strategy Another very common pricing strategy is to offer percentage discount on the rack price. There are several types of percentage discounts (Refer Exhibit 4). Conditional percentage discount means that the discount has some conditions attached to it, such as a minimum level of purchase or that it is different for different items. Other forms of percentage discounts are _ being applicable only for a specific period or a particular day; being applicable only to certain stocks or until stocks last, etc. Conclusion Psychological pricing has worked for years now. Products priced with this strategy win an edge over competitors. This strategy works for commodity goods the best as the frequency of purchase is high. We all fall prey to it knowingly or unknowingly. This strategy is used today by a large number of companies. However, overuse and lack of innovativeness can lead to this strategy losing its effectiveness and popularity. Customers may become immune to this kind of psychological pricing. Marketers have to thus look for innovative ways of pricing to get more customers. They need to be more creative while devising psychological pricing. Otherwise, they may not be able to entice the customers' psyche anymore.
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