In the first part of our series on pricing psychology, you have already learned which price design parameters you can use for price setting. Today we will show you which processes customers use to perceive, evaluate and record prices and how you, as an online retailer or manufacturer, can take advantage of these processes.
Processes: Which psychological processes determine the perception and evaluation of price information from the customer’s point of view?
Consumers process price information by recording it, evaluating it and remembering it for later mental access. Markus Kopetzkydivides this psychological process in his book Pricing Psychologyinto the sensory recording, evaluation and storage of price information.
Price information perception
Encoding of digit sequences
The popularity of truncated prices, according to Kopetzky, leads, among other things, back to the cognitive processing of numerical sequences. When comparing two numbers, consumers proceed digit by digit from left to right and then interrupt the comparison as soon as a number deviates. The break in this evaluation leads to prices ending with a “9” tending to be underestimated. Conversely, consumers rate the variation of a price from 2.99 euros to 3.00 euros over-proportionately high, whereas they do not perceive any change at all from 3.59 euros to 3.60 euros – the so-called “left digit effect“. If prices only differ in the right-hand digits – the “right digit effect” – then customers only focus on these figures. As an example, they take the difference between 222 euros and 211 euros as greater than between 199 euros and 188 euros, although the relative difference in the first case is actually smaller.
Also relevant to price perception, according to Kopetzky, is psychophysics. This is dedicated to the connection between external physical stimuli and subjective perception. Weber’s law defines this connection more precisely, whereby the greater the starting level of a stimulus, the greater must be the change of the stimulus in order to be perceived. Adapted to price setting, this means that an absolute change in a high price is perceived weaker than an absolute equal change in a lower price.
Another concept of price perception is the “pain” that customers feel in the payment process – the “pain of paying“. It was found that this payment pain is dependent on the selected means of payment. Depending on the transparency of the payment made, a price paid feels differently in intensity. Cash payments are characterised by high transparency and a correspondingly intensive price perception, whereas direct debits or cashless payments are not very transparent and are therefore hardly even noticed.
Customers often recognise in individual digits and significant number sequences certain pricing images, which are connected to an individual meaning. Kopetzkywrites that customers who (unconsciously) perceive their date of birth in the price, as an example, judge this price as more attractive and show a higher willingness to buy. Even lucky or unlucky numbers, such as 13, can unconsciously influence the customer’s price perception. The same applies to price endings that consumers associate with certain messages. According to Kopetzky, customers expect products to be reduced if prices are truncated (for example 99.99 euros). With rounded prices (for example 100 euros) customers assume a higher quality or that the price is negotiable.
Price information evaluation
Comparative price evaluation
Consumers also find it difficult to evaluate prices according to their absolute level. Instead, they compare price information with a consciously or unconsciously determined yardstick, such as the last price paid or a recommended retail price. These comparative measures are referred to as reference prices. A distinction is made here between the internal reference price, which has arisen from price experience from past purchases, or price expectations for future purchases. In contrast, the external reference price will be communicated to the customer by the seller in the form of recommended retail prices, the previous retail price, the price of comparable products of the same category or the price presented for the same product by other retailers.
Loss and risk aversion
Losses will be perceived more negatively than gains will be felt positively – this effect is termed loss aversion. If a price exceeds or falls below an internal or external reference price, customers will rate the difference as a loss or a gain, whereby price overshoots are rated more negatively than price undercuts score positively. Behind this realisation are Daniel Kahnemanand Amos Tvarsky, who developed a value function according to the prospect theory. Using this theory, the two psychologists found that people behave in a risk-reducing manner in the event of potential losses. What they already own, they don’t want to lose again. This realisation recommends, from the customer point of view, to bundle prices where possible. If a discount is available for a product, then this discount should be shown separately and not integrated into the original discount. In addition, customers also avoid extreme product options (extreme aversion). This means that they rarely choose the cheapest product because they assume that its quality is lower than that of the others. But they also don’t choose the most expensive, because it probably contains unnecessary and insignificant features. Ultimately, they tend towards a middle option with medium advantages and disadvantages – the compromise effect.
Cues and primes
The attention and activation of mentally stored information by customers can be influenced with the help of targeted stimuli. These stimuli are called “cues” or “primes”. Cues are prompts that influence the cognitive thought processes of consumers. In complex decision-making situations containing uncertainty, consumers use simplifying heuristics to arrive at a decision. Also, customers base their decision on little available information. In the first example Kopetzkymentions the level of the price. If the quality of the product cannot easily be judged, customers tend to use the following heuristics: the higher the price, the better the product. This heuristic leads to customers actually expecting the quality of performance to be better, and ultimately perceive this performance as better. The price acts as cue for the evaluation of the price-performance relationship. Primesact as stimuli “in the background” and are unconsciously perceived by consumers and then considered – a process called “priming”. As an analogy, imagine a pair of glasses put onto customers so that they perceive and evaluate information from a particular perspective.
Price information storage
Price knowledge and storage
Customers collect price information on the basis of observations and purchasing experiences and then store it to memory for later access. Price information is stored either explicitly or implicitly to memory. According to Kopetzky, the explicit price knowledge is made up of price information (e.g. exact, numerical price data), which is deliberately stored to memory and retrieved again later. Implicit price knowledge includes all the price information that has been unconsciously memorised, but still enables customers to evaluate the price of a product without being explicitly able to name a comparison price. The concept of the internal reference price is closely linked to implicit pricing knowledge.
Depreciation and reminder effects
Price perception and price knowledge change over time. Two effects have an impact on this development: the depreciation effect and the memory effect. The depreciation effect means that consumers perceive prices most strongly at the time of payment. This price perception decreases over time, or is mentally “written off”, so to speak. According to Kopetzky, periodic payments such as subscriptions lead to frequent price reminders – and price perception tends to increase here compared to one-off buying situations.
Summary: Price information processing takes place in the three stages of recording, evaluation and storage. It thus forms the link between price setting on the part of the company and behavioural phenomena on the consumer side. Not only the quantitative level of prices is decisive, but above all the qualitative design, for example through final-digit nines or price thresholds.
Add more dynamism to your pricing
For online retailers, a correct pricing is a risky process. They have to regularly price their products so they are attractive to their customers and yet still offer sufficient margin. A late or inadequate adjustment of your own prices throws away important turnover and profit potentials. The right repricing software offers significant support in this aim. Using blackbee allows retailers and manufacturers to reprice even the largest of product ranges each day.
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