Only few consumers choose a product according to purely rational criteria. Whether consciously or unconsciously, emotional factors often play an important role. Such emotional effects are triggered, above all, by the price of a product. Neuromarketing,pricing psychologyand behavioural pricinghave been indicating this for some time.
As a retailer or manufacturer, you have numerous options for applying these psychological effects in your price management. Using the 4-P modelof pricing psychology, we introduce these effects and show you how you can use them specifically to promote sales.
The 4-P model of pricing psychology
In his book Pricing Psychology, Markus Kopetzkydivides the cause-effect chain between price decision and financial result into four components, which together form the 4-P model of pricing psychology: Parameters, processes, phenomena and profits. The model provides an excellent frame of reference to explain customer reactions to price representations. In today’s article you will firstly read which parameters can be used in price communication. The other three components will be presented in future articles.
Parameters: Which price design parameters are available for the design of price information?
Kopetzkydifferentiates between price display and price payment within the price design parameters. The price display can in turn be divided into price presentation parameters and price environment parameters. For price payment, on the other hand, payment parameters can be defined.
Price presentation parameters
As Kopetzkystates, the price presentation parameters represent the design of the price for the customer. It has been proven, for example, that truncated prices, or prices that end with a “9” and are just below a rounded single value (1.99 euros), a value in the tens (29 euros) or in the hundreds (199 euros), and also ascending (123 euros), descending (321 euros) or constant numeric sequences (222 euros)have significant price perception effects on the customer.
Setting a reference value also influences consumer price perception: Consumers prefer “1 euro per day” as opposed to “365 euros per year”, for example, when displaying prices per time unit. Also a higher quantity indication (“6 bottles for 3 euros”, instead of “1 bottle for 0.50 euros”) more likely leads to a purchase. Psychological effects on price perception can also be achieved by so-called price bundling. Here, a certain product is offered together with a selection of other items in a package and also at a lower price. From a psychological point of view, this strategy is effective, as consumers perceive several small prices as a greater loss than the sum of the small prices. So-called price partitioning is effective, however, if prices for the actual product and for additional costs (such as shipping costs, service and transaction fees) are shown separately. In this constellation, consumers tend to value ancillary costs with a lower gravity or perceive them independently from the price of the main product.
Price environment parameters
With the term price environment parameters, Kopetzky is implying the context of the price. The purchase probability increases, for example, if a price reduction is indicated without actually reducing the price. Another possibility to influence the price environment is the so-called decoy product. By adding another product alternative, the price perception of existing items will change. Kopetzkycites an example in which demand shifted from product A (price $14.95) to product B (price $18.95) after product C ($34.95) was introduced. He also writes that customers find a price increase fairer if the company discloses reasons for this decision, thereby preventing consumers from speculating about unfair motives of the company.
Also included within the price design parameters are the payment parameters.According to Kopetzky, they refer to the design of the concrete payment process. This usually consists of the three phases of purchase, payment and consumption. The sequence of these three phases, however, is often interchangeable. When buying a consumer good, the customer first concludes a purchase contract, then pays the agreed purchase price, before finally using the product for several years. With a financed holiday, on the other hand, a customer books their journey, travels on the holiday and only pays the credit afterwards for the trip.
The position of the paymentinfluences consumer behaviour with regard to purchasing decisions and consumer intensity. If payment precedes consumption, the subjective price perception decreases over increasing time, up to the moment of consumption. – also known as the depreciation effect. At an identical total price, higher and less frequent payments stand opposed to lower but more regular payments. Two studies in the context of fitness studios show that a monthly fee payment corresponds to more regular studio visits than among customers who pay their membership fees annually.
Conclusion: Companies have a broad portfolio of price design parameters available, which are being further expanded and researched. To support a focused price setting, these parameters are divided into the three independent dimensions of price presentation, price environment and payment parameters.
Intelligent software solutions for profitable pricing
Developing a perfect pricing strategyis a challenging task for retailers and manufacturers alike. On the one hand there are psychological effects that you want to use for sales promotion, but on the other you have to achieve a sufficient margin. This is exactly where we support you with our reliable, self-learning software solution blackbee. blackbee allows you to adapt your own prices to the market and thus tap into valuable potential.
Would you like to know more about how blackbeeworks? Contact us now– we look forward to hearing from you!