This shouldn’t come as a surprise, but we humans aren’t always rational creatures. Sometimes we make choices based on sound reasoning and logic, and sometimes based on our emotions and our “gut feeling”.
When pricers set prices assuming an “economic” model customer (using rational choice theory), they risk missing out on the best pricing strategies.
Shoppers don’t always carefully consider the quality of a product, its relationship to other products on the market, or the correlation between its price and its actual value. Sometimes they make purchasing decisions based on whether a product is made to look like a great deal, or whether it seems like it might sell out quickly.
This unpredictability can complicate the work of setting prices in eCommerce stores. Fortunately for eCommerce marketers, there are several psychological “tricks”–we prefer to think of them as good strategies–that can make customers more receptive to certain prices.
Here are some of our favorite strategies:
Research has shown that the composition of choices in a set affects consumer’s preferences. If a shopper is deciding between Widget A (higher price) and Widget B (lower price), they may prefer the lower-priced option. However, if you introduce Widget C at the highest price, then Widget A might look more appealing because it’s no longer the highest-priced option. It feels like a good compromise to the consumer. However, if there are too many items in a set, this effect can be minimized as the difference between options is less obvious.
The Decoy Effect is similar to the Compromise Effect, but involves adding a third option to a set that is clearly undesirable and pushes consumers strongly toward one of the two previous options. The decoy option compares to the other options not only in price, but also in some aspect of product quality. So if Widget C from the above example is priced higher than both other options, but smaller than Widget A, that makes Widget A look much more appealing. If Widget C is priced in between A and B, but is smaller than Widget B, then Widget B seems like a great deal.
For certain products, the Skimming Effect can drive sales. It’s generally used when a company releases a new product that’s in demand and has little competition at first. In the early stages of the product’s release, it can command a high price among consumers who want it the most. As more competition enters the market and those early adopters have already been satisfied, the company can gradually lower the price to capture more and more additional market segments. Experts recommend using this strategy for higher-priced items like electronics. The name comes from the practice of skimming the cream (the highest-paying customers) off of milk until only skim milk is left.
Bundling is a familiar strategy that can be very successful when used well (like the iconic Happy Meal). But according to Forbes, customers must have the option to buy all products in a bundle separately, or they’re less likely to choose a bundle. Customers like the element of choice, so just seeing a bundle option can make them feel constrained. But if they see the separate options and then the slight savings available by buying a bundle, they might be nudged to spend more than they planned.
This tactic refers to people’s tendency to latch on to the first piece of information they see. For example, the first item that pops up in a search result informs how they perceive the rest of the list. The first price attached to an item colors how they judge that item’s value. This can come into play when items are discounted, as the initial price of the item makes the discount feel like a great deal, regardless of how it relates to the item’s actual value. A pair of pants marked down from $150 to $125 looks like a great deal, because the $150 price tag is what sticks in the customer’s mind as the value of the pants, even if a shopper only planned to spend $100 on pants.
FOMO (Fear of Missing Out) is a hot term these days, and while it can refer to the pain of seeing other people’s exciting experiences on Instagram, it can also refer to a customer’s anxiety about missing out on a hot product. By making it seem as if a product is in danger of selling out, you might inspire customers to buy it no matter the price. The Scarcity Effect can be seen when marketers label an item as “limited supply” or “only X left at this price. Customers who might normally hem and haw over the price or do a lot of comparison shopping may just go ahead and quickly commit to a purchase to avoid missing out.
As much as we like to think of ourselves as individuals, most people are capable of being influenced by the behavior of others around them. Marketers can use this tendency to their advantage by making use of the Herding Effect. By emphasizing how many other people are viewing or have just purchased an item, you can make the item seem more appealing to shoppers regardless of its actual appeal to them. This strategy combines nicely with the Scarcity Effect to encourage purchasing decisions. If a customer sees that 10 people just bought this item AND there are only 2 left, they’re inspired to go ahead and buy the hot item before it’s too late.
Setting the right prices is a complex process, especially in the ever-changing eCommerce landscape. At Price Edge, we want to help make your eCommerce pricing effortless, accurate, and effective. Our proprietary AI-engine integrates seamlessly into your online store to enable the best price strategies, both in day-to-day pricing and long-term marketing strategies. Contact us today to learn more about our pricing solutions and how we can help you reach your eCommerce goals.