Pricing of Products : Some observations

Money (Pink Floyd song)

Money (Pink Floyd song) (Photo credit: Wikipedia)

All Marketers Are Liars

All Marketers Are Liars (Photo credit: Wikipedia)

Pink Floyd Money Single

Pink Floyd Money Single (Photo credit: Wikipedia)

Stanford GSB school flag.

Stanford GSB school flag. (Photo credit: Wikipedia)

English: A business ideally is continually see...

English: A business ideally is continually seeking feedback from customers: are the products helpful? are their needs being met? Constructive criticism helps marketers adjust offerings to meet customer needs. Source of diagram: here (see public domain declaration at top). Questions: write me at my Wikipedia talk page (Photo credit: Wikipedia)

The thing is, many folks struggle with this process because although they understand their customer’s needs, they aren’t experienced with what to charge people for their work.

Below I’ve analyzed a few recent research studies that dive into pricing of products and services in the hope that you might better understand how to price your own goods.

1. Comparative Pricing: Not Always Optimal

competitor price comparison

One of the first techniques that many marketers attempt in forming a new pricing strategy is to directly compare their price with that of a competitor.

“Hey, my software is 30% less than this popular option, why not buy mine?”

The problem is, comparative pricing isn’t always as reliable as marketers think it is, and can effect costumer’s perceptions of the product in a few different ways.

Consider this scenario: Buying Aspirin…


You walk into a drugstore and see the familiar sign inviting you to compare the price of the store’s brand of aspirin to a national brand.

What do you do?

According to Itamar Simonson, you may not go for the cheapest.

Instead, you may choose the major brand because you perceive it as the less risky choice. Or you may not buy anything at all.

This new research from a Stanford marketing study has shown that asking consumers to directly compare prices may have unintended effects.

Simonson found comparative pricing isn’t always favorable because “it can change the behavior of consumers in very fundamental ways.”

Consumers may decide not to buy at all or to minimize what they perceive as a heightened risk instead of following the advice that the marketer had in mind.

This study analyzes the effect of implicit and explicit comparisons to arrive to this conclusion.

Implicit comparisons occur when a customer takes the initiative to compare two or more products.

Conversely, explicit comparisons are those that are specifically stated or brought up by the marketer or advertiser.

To test the effects of comparative advertising, Simonson & Dholakia set up two trials.

The first involved selling CDs on eBay.

The researchers listed (for sale) a number of top-selling albums in CD format, such as “The Wall” by Pink Floyd (hey, not too bad of taste either ;)).

The cost of the CD’s put up for sale always started at $1.99.

They then “framed” these auctions in two very distinct ways.

The first way had the CD ‘flanked’ with two additional copies (of the same CD) that had a starting bid of $0.99.

The second had the original CD flanked with two copies starting at $6.99.

The results seemed clear: The CDs flanked with the more expensive options ($6.99) consistently ended up fetching higher prices than the CDs next to the $o.99 offerings.

“We didn’t tell people to make a comparison; they did it on their own,” said Simonson.

“And when people make these kinds of comparisons on their own, they are very influential.”

In order to test the effects of explicitly telling the consumers to compare, the researchers re-did the experiment with the same settings, only this time they outright asked consumers to compare the $1.99 CD with the other offerings.

The results of this showed that when explicitly stated to compare, prices of the adjacent CDs became statistically irrelevant to what the bids were on the middle disc.

Additionally, buyers became much more cautious and risk adverse in their purchasing of the CDs:

“The mere fact that we had asked them to make a comparison caused them to fear that they were being tricked in some way,” said Simonson.

The results were that people became more timid in every aspect imaginable: fewer bids, longer time on their first bid, and less of a likelihood to participate in multiple auctions.

“Marketers need to be aware that comparative selling, although it can be very powerful, is not without its risks.”

Think about that the next time you directly compare your offering to your competitors.

Instead, you might better benefit from highlighting unique strengths and placing an emphasis on time saved over money saved…

2. Selling Time Over Money

“It’s Miller Time.”

For a company selling beer, this type of slogan might come off as somewhat of an odd choice.

But according to new research which advocates the benefits of “selling time” over money, it may be a perfect choice.

“Because a person’s experience with a product tends to foster feelings of personal connection with it, referring to time typically leads to more favorable attitudes—and to more purchases.”

So says Jennifer Aaker, the General Atlantic Professor of Marketing at Stanford Graduate School of Business.

Why would selling experience (or time spent) with a product work so much better in some instances than discussing the products favorable price?

Aaker noted that many (around 48% of those analyzed) advertisements included a reference to time, noting that many marketers seem to innately understand the importance of time to a consumer.

Unfortunately, very little in the way of actual studies had been done to back this up.

In their first experiment addressing this, Aaker and her co-author Cassie Mogilner set up, of all things, a lemonade stand using two 6-year olds (so it would appear legitimate).

In this experiment, the lemonade sold could be purchased for $1-$3 (customer selected) and a sign was used to advertise the stand.

The 3 separate signs to advertise the lemonade were as follows:

  1. The first said, “Spend a little time and enjoy C&D’s lemonade”
  2. The second said, “Spend a little money and enjoy C&D’s lemonade”
  3. The third said, “Enjoy C&D’s lemonade” (neutral sign)

Even with this lemonade example the results were apparent.

The sign stressing time attracted twice as many people, who were willing to pay twice as much.

To further drive this point home, a second study done with college students (and iPods) was conducted.

This time, only two questions were asked:

  1. “How much money have you spent on your iPod?”
  2. “How much time have you spent on your iPod?”

Not surprisingly considering the last study, students asked about time demonstrated far more favorable opinions of their iPods than those asked about money.

The researchers thought that:

One explanation is that our relationship with time is much more personal than our relationship with money.

“Ultimately, time is a more scarce resource—once it’s gone, it’s gone—and therefore more meaningful to us,” says Mogilner.

“How we spend our time says so much more about who we are than does how we spend our money.”

Aaker and her colleague were not done yet, however.

Determined to test whether or not all references to money would lead to a more negative output (due to the participant being reminded of how much they spent on a product), they conducted a similar experiment at a concert.

This time, the “cost” was actually time, as the concert was free, but people had to “spend” time in line to get the good seats.

The two questions asked by the researchers in this scenario were:

  1. “How much time will you have spent to see the concert today?”
  2. “How much money will you have spent to see the concert today?”

The results?

Even in an instance like this, where time was the resource being spent, asking about time increased favorable opinions toward the concert.

Not only that, people who stood in line the longest, or the people who incurred the most “cost”, actually rated their satisfaction with the concert the highest.

“Even though waiting is presumably a bad thing, it somehow made people concentrate on the overall experience,” says Aaker.

So what’s the deal here?

Marketers need to start being aware of the meaning that their products bring to the lives of their customers before they start focusing their marketing efforts.

And one more thing to think about…

The study notes that the one exception seems to be any products consumers might buy for prestige value.

If you aren’t in the line of selling sports cars or tailored made suits, you most likely won’t have to deal with this, but the point remains:

“With such ‘prestige’ purchases, consumers feel that possessing the products reflect important aspects of themselves, and get more satisfaction from merely owning the product rather than spending time with it,” says Mogilner.

Factor these considerations of the important of time next time you go about pricing your product, and you’ll see that catering to consumer’s most precious resource, their time, can be more persuasive than even the most drastic of price reductions.

3. Effect of “Useless” Price Points

In addition to the above, you will find that the differences between your pricing points are going to greatly affect your customer’s perceived value of your product (and how they convince themselves of what to buy).

The video below, Dan Ariely describes the pricing situation encountered over on The Economist.

Dan realized that there were 3 very peculiar price points:

  1. A web-only subscription for $59
  2. A print-only subscription for $125
  3. A web + print subscription for $125

Daniel notes that this doesn’t make sense, as option 2 seems “useless” in that you’d be better off getting the print + web for the same price.

He follows up with an interesting study that examines what would happen if he took out the middle price:

His findings?

The price in the middle, while seemingly “useless” in that it didn’t provide any value (since the print + web was the same price) was actually useful in that it helped get costumers to turn from “bargain hunters” to “value seekers”.

What was happening was that customers began to compare the middle option to the latter option (since their prices were similar) and this comparison made option 3 look like an excellent deal.

Without the middle option, we can see that the price points set by the economist had too much contrast: when the middle option was taken away, people looked at the two prices and tried to convince themselves that they didn’t need the “upgrade”.

Essentially, they became “bargain hunters” rather than “value seekers” which are the kind of customers you really want.

With appropriate pricing in place, you can offer customers options that fit their budget, while at the same time influencing “on the fence” customers that your more premium offerings give enough benefit that their extra price is justified.

4. The Power of Number 9

Head over to practically any store around (online or brick and mortar) and you’ll see prices that end in “9″ everywhere.

We’ve all heard of the reasons why it’s used (to make the price look lower), but does it really work? Are people really going to be effected by a $99 price point versus paying $100?

As it turns out, this tactic does indeed work, and has been dubbed the use of “charm prices.”

In his book Priceless, William Poundstone dissects 8 different studies on the use of charm prices, and found that, on average, they increased sales by 24% versus their nearby, ’rounded’ price points.

In fact, in an experiment tested by MIT and the University of Chicago, a standard women’s clothing item was tested at the prices of $34, $39, and $44.

To the researchers surprise, the item sold best at $39, even more than the cheaper $34 price.

One has to wonder… is there anything that can outsell number 9?

Researchers have found that sale prices, that emphasize the original price, do seem to beat out number 9 when split tested.

In the image below, the price point on the left won:

So, apparently 9 can be defeated with a sale price…

Not so fast!

The number 9 still comes out on top when it is used in cohesion with a sales price.

In another split test, the sale prices was used ending in ’9′, and it ended up performing best of all:

And there you have it.

Given similar circumstances, given even a less expensive option, it seems that the power of 9 still takes hold; remember that when setting pricing of your own.

5. The Price Perception: Context Matters

In a pricing experiment conducted by Richard Thaler, two scenarios were tested for a relatively mundane exercise: buying a friend a beer on the beach.

In the first scenario, the participant was asked by a friend if he wanted a beer, and it was specified that the beer was going to be bought by the local rundown grocery store.

In the second scenario, the beer was going to be purchased by the nearby posh hotel.

Keep in mind the interior of the hotel had nothing to do with the results, the beer was to be imbibed on the beach.

Thaler concluded that it simply strikes people as being unfair that they should pay the same for both places, even though the beer itself is exactly the same.

One might also recall the case study from Robert Cialdini’s ‘Influence’, where is discusses how a local jeweler managed to sell out of turquoise jewelry because it was accidentally priced at double its initial price, instead of half (which is the price she had intended).

The inflated price now made the jewelry irresistible to buyers, who had before ignored the color over all others (which was the initial reason for the intended price cut).

Now that the price had been raised, the context of turquoise jewelry had a “high value” in the buyer’s minds, even without an explanation!

When it comes to price, priming is also heavily influential: a $60 dinner doesn’t sound so bad when anchored next to a $300 dinner.

Similarly, the best way to sell a $3,000 suite is to put it next to a $10,000 suite!

Even if you don’t intend to make a large sales volume from premium items, their presence alone can help the anchoring effect take hold and increase conversions on the product you are really aiming to sell en masse.

Over To You

Which of these research studies was the most surprising to you?

How do you think you will be able to implement some of their findings into your own business?

Thanks for reading!

About the Author: Gregory Ciotti is the founder of Sparring Mind, the blog that takes psychology + content marketing and makes them play nice together. Download his free e-Book on ‘Conversion Psychology’ if you’d like more information!

Image Credit: Images for the “Number 9″ example above are from ConversionXL

  1. This is a must-read and condenses everything nicely for the reader. There are pricing lessons applicable to virtually every market.

    Thanks for sharing Gregory.


  2. Great article! I did read “Influence” by Robert Cialdini and found it amazingly insightful. Also “Essentially, they became “bargain hunters” rather than “value seekers” which are the kind of customers you really want.”
    Did you mean “they became ‘value seekers’ instead of ‘bargain hunters’”?

  3. For my own company I don’t have set price points since every job is really a custom quote.

    But I have to definately agree with “useless” price points. I used to work at retail and for example a 2 year extended warranty was 199.99 and a 4 year was 349.99.

    Our managers would tell us to give them the prices: 2 years for 299.99 and 4 years for 349.99. If those were the real prices, NO ONE would ever get the 2 year because it didn’t have as much value. Of course, what they did at the store was illegal but pricing your services in a certain way forces your client to choose the bigger one since they change from savings mode to value mode.

    • Thanks for your input Amie, I have to agree, you don’t want to be shady about it, it’s more about getting people to upgrade ethically, not through trickery.

  4. Just love this blog. Thanks for the great post, its very very useful.


  5. Your first point has made a big impression on me. That’s some interesting stuff right there.

  6. This is one of the best blogs I’ve ever read. Thanks Josh and Neil.

  7. Thanks Josh & Neil,

    Indeed this is very thoughtful. Sometimes, by small observations and tweaks we can make a big impact on sales. Every customer ( infect person ) more or less follows some patterns and beliefs. If we monitor it closely there could be hundreds of possibilities to get them close. Nice research and explanation about the price, seriously! I have seen the practical effects of “useless” price in my business, it really matters.

  8. Great context, superb references and a timely (for) article on price phychology, Thanks.

  9. Thanks for a great post. It helped a lot just to confirm my one-week-old price strategy for a subscription service for tea. The Spanish market where I launch this is very price sensitive right now (due to our current situation) and I learned something while doing my price check with potential audience. Another psychological aspect. Media and information has created a feeling of “we can’t afford any extras, we are in a crisis” that is in the air and this also impacts the way people judge the price. Can’t measure it, just notice that it’s different now then a few years back even if the economy of this specific audience has not changed – its just in the air and it of course impact peoples buying behavior.

  10. possibly the best article I’ve read on the blog here after a few months of being subscribed. Really interesting and insightful stuff that I can actually put to use on our ecommerce site.

  11. Very interesting post – I will ensure that I implement the number 9 into all of my sales strategies including discounted rates. Thanks Greg!

  12. Very interesting especially the useless price points part. Read and Noted.

  13. One of the most interesting posts that I have read here. Thank you.

    Basically, our past experiences (some evolutionary) influence the way we act. I wonder how long it will take before behavior changes. And will the coming digital generation behave significantly different than us?

  14. If you liked the Dan Ariel video, I highly recommend his book “Predictably Irrational”

  15. This article is fantastic. One of the most interesting post I’ve read for awhile.

    The points mentioned in this post can be applied to almost every product in every market. It’s nice to see a validation these theories with a compilation of experiments and results like this.

    Another similar story to the jewelry one is that once, a special sponge was put on the market for 99 cents. It did not sell itself well at all. However, the company was later bought and they sold the product for $5.99. It then sold like crazy! – It’s a good example of perceived value. For example, in this case, since the price was so low, customers probably thought the product did not work; however, when the price was increased they probably thought that it MUST work and be a good product because of the price tag.

    It think it’s really important to revise our pricing and not just ignore it. It’s a big “decision maker” for customers.

    Big thanks Gregory for sharing!

  16. Interesting stuff – I have added a “stop searching and use the time you saved to plan the fun” to my site as a result of point 1. Will be interesting to watch the stats!

  17. What a great read!

    It got me thinkIng – could point 5 conflict with point 1 on some level? In a way, by putting a cheaper price next to a more expensive price you’re kind of doing the price comparison thing and potentially introducing doubt about the value of not products. I’d love to see some studies on that.

    Also, does anyone know of any studies relating to the use of ’9′ in decimal prices? For example, $34.99 over $34.95? Or even $34.39 over $34.35?

    Thanks again for the great read.

  18. Thanks for an excellent post. I assume the Power of Number 9 is the reason Apple forces developers to price their apps with ’9′ at the end. I wonder, though – does $9.99 sell better than $4.99? Or with slightly higher prices – would $19.99 sell better than $14.99?

  19. There’s a reason why the phrase “time is money” exists. To many consumers, saving time is better than saving money because time is a little bit more personal and precious. You can always save elsewhere, but once time is lost it’s gone forever.

  20. Hi Gregory
    Interesting and useful, thank you.
    There was research carried out at Cornell University in New York a few years ago looking at Price Precision, in real estate, if you can find a copy, I think you’d find it useful!
    I looked for a link to it, but it’s still not generally available, here’s the synopsis:
    Does the roundness or precision of prices bias magnitude judgements? If so, do these biased judgements affect buyer behaviour? Results from five studies suggest that buyers underestimate the magnitudes of precise prices. We term this the precision effect. The first three studies are laboratory experiments designed to test the existence of the precision effect and examine the underlying psychological processes.

  21. Sorry – I just helped a spammer! You have to pay for the above article. Thought it was weird they didn’t post a URL but cited the synopsis word for word. Minus 10 points to me 😦

    As you were.

  22. Great article.

    I must however say that 5 tops 9 in SA since our currency has phased out cents.

  23. I love Dan Ariely’s stuff, I’ve studied it in great detail. In eCommerce we see the power of the comparative price i.e. RRP or full price vs sale price – Amazon do a good job of adding urgency to that by highlighting low stock levels (even if there are dozens of other sellers with that product in stock), plus having time limited offers. The secret sales sites do this well with one off sales.

  24. Very good compilation. Pricing is such a strategic part of any business strategy and on the internet it amplifies itself multifolds.
    With ample distractions and comparisons, a great value proposition wins. This value proposition can be perceived or real- but either which ways- it leads to a (mostly) satisfactory purchase and a happy consumer.
    We are at a stage where we have decided on some price points for The Whiz Times ( : Introducing real life to kids in their language through news and immersive content) and we are keeping a few of these points in mind. The site and all its content is free for now though.

  25. Good article. Thanks a lot for your research. It helps new comers a lot.

  26. Great article
    Great information.

  27. Great article Gregory, some useful insights.

  28. Absolutely loved this information!

    It is invaluable whether you are selling jewellery or selling a home.

    I’m sure you’ve seen the signs ‘If you lived here, you’d be home by now.’

    Thank you for sharing!

  29. I would love to see something on the number 7 as a number of internet marketers have split-tested and found that prices like $7, $17, $47 $77 $97 you t get the idea will dramatically outdraw anything else including $9.99 $19 $49 or $49.99 etc.

    I found the studies on time interesting and surprising

  30. Amazing article. The Dan Ariely video was fascinating.

    Thank you!

  31. Great article but it could stand to be edited for some problematic English mistakes.

  32. All our payment gateway clients should check their strategies against this article. We may become regular readers of Kissmetrics!

    Kind regards,
    The eWAY Team

  33. Very insightful article, thank you! We actually have website packages (fixed price noted on our website and also do custom quotes), we have found that the power of 9 really does work after A/B testing. We also had a comparison chart and thanks to Google Analytics user behavioral flow, we decided to remove it after it was negatively affecting the user flow on our website (most people closed the website after seeing our comparison chart). Once removed, we saw sales increase exponentially. We also had an estimate form (based on answers user would receive an estimate of costs for services), we found this to be negative to the user as it added too many unneeded complexities and choices, most users don’t even understand what they want/need and require hand holding. Needless to say, it was also removed.

    @BoomerMary, I have found that 7 has negative connotations when it comes to pricing (my own experience). There seems to be too much superstition and gambling aspects behind 7, from a psychological standpoint. Perhaps it differs with industries, but in my field it certainly has a negative effect.

  34. The key takeaways for me:
    1. pricing options to encourage ‘value seeking’ — offered only for their psych effect. The drive towards “simplicity” in pricing need be balanced with the useful ‘value seeker’ consequence of presenting options.

    2. emphasize consideration of the time spent with product, as it gets to matter of higher time, higher experience, perception of higher value.

    So it comes down to value, doesn’t it? Moving away from ‘bargain’ mentality to cultivate fans of the great value you deliver through your products.

  35. great post, from a great perspective… thx for share

  36. Thanks Josh. Great insight

  37. Good evening, Gregory.
    A most useful and – for the services my partner and I offer – timely.

    We are introducing a new service and because there is nothing against which it can be compared, we were struggling to know how to set the pricing. Every client will have to have a custom price as their circumstances differ widely. I appreciate that the issue of value is one we have to emphasise – I think we have tended to under-estimate the full complexity and uniqueness of what our combined experiences bring to the table and therefore the offer we make. This needs to be factored into the price.

    But the ‘useless’ price is one which we really hadn’t thought about before. And in our situation, would be so easy to do ethically. Likewise, placing the preferred option against a more costly offer would be possible and ethical.

    You have certainly helped us with this matter.

    Kind regards,

  38. Thanks Josh. Great insight

  39. Thanks for the beautiful insights Greg!
    I really love Study #3 most and I just knew that my mind was tricked on several items I bought before hahaha

  40. I have been looking a long time for this kind of stuff but I have a question. In the Internet I see a lot of prices ending in 7 like in 47, 97 and 147 dollars. What can you say about that?

  41. This is the best website for anyone who desires to find out about this topic. You notice so much its nearly onerous to argue with you (not that I truly would want…HaHa). You undoubtedly put a brand new spin on a subject thats been wrote about for years. Nice stuff, simply nice!

  42. Fascinating read, this is great!

  43. I’m always impressed by the quality of your blogs, thanks for creating value and sharing.

  44. Your blog is great! I have to say I was actually quite surprised by number 9 theory, because It doesnt work on me 🙂 I always thought rather than using 9, we should be using a number 6 or lower. but now I will use 9, nothing better than backed up by proper research. Keep up the good work!

  45. Excellent stuff! Was asked by a friend if an item he was selling should be set for $199 or $200 and I couldn’t help but direct him here. He hasn’t asked questions since.

  46. Thanks for sharing such a fantastic article with us.

    • Why do you waste your time posting this on every single KISSmetrics blog article?

      Spamming blogs won’t build a business….

  47. All the 5 psychological are very informative and its easy understand through your article.


  48. Most people would charge me for giving me all those great tips. Many thanks, january sale is coming 🙂

  49. The topic was very interesting and I like the information you used. The writing style was also rather nice, except for a few petty grammar errors. All in all, a wonderful article, Greg! Congratulations on a job well done!

  50. Stephen McLardieJan 16, 2013 at 10:57 pm

    I think your point on the Thaler (Beach and Beer) experiment unwittingly leaves readers with perhaps the wrong conclusion.

    What Thaler found was that people were prepared to pay MORE for the beer purchased from the hotel than from the run down grocery store, even though the product and beach drinking experience would be the same.
    In terms of fairness, and what was seen as a fair price from the fancy hotel, was seen as price gouging if it came from the grocery store.

    Otherwise, excellent article.

  51. great post, from a great perspective… thx for share

  52. I just a small business and pricing the product is the biggest challenge.

  53. Thank you for what is literally a wealth of pricing strategy and philosophy that should be required reading for every marketing student, including me. I will pass it along.

  54. A must read for everyone who likes the psychology of pricing.

    Thanks for these useful strategies!

  55. That number 9 is a great tip. I’m coming up with prices for my services and decided to do a quick Google search. At some point, the number 7 was huge. May still be but i’m not 100% sure…

    Great article. Thanks for sharing

  56. Price anchoring works amazingly as long as your anchor price isn’t a discount or extremely low, then you are asking for trouble 🙂

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