Last Saturday morning, I headed to the nearest Asian grocery store to buy a packet of noodles. Since I only have 10 minutes, I had to be quick. As I stepped into the shop, a humble looking coffee machine greeted me with a big, bold sign which says “Enjoy FREE coffee”. Who could resist free coffee?
Ariely (cited in Samson 2014) says consumers perceive free product as intrinsically more valuable and don’t see the cost of time. Absolutely correct. I spent another 20 minutes browsing through other sections while sipping my coffee and ended up with a grocery bill of $70.
At that moment, I realised ‘What a clever strategy’. The ‘Price of Free’ has enticed me to purchase more than what I needed.
Grocery stores use psychological pricing strategy to subconsciously influence purchasing decisions as they realise the industry has many alternative products and therefore consumers are more price sensitive.
Odd Pricing Effect @ Charm Prices
Casual observation in any supermarkets will show the widespread use of odd pricing in the marketplace. A survey in UK shows that 64% of retail prices end with 9 instead of a round number (Bray & Harris 2006, p.601).
Odd pricing policy involves pricing just below the nearest round number such as $2.99 (instead of $3.00) or $5.99 (instead of $6.00). According to Holdershaw, Gendall and Garland (1997, p.4), some studies have proven that demand was greater than expected at odd price points due to perceived lower prices by customers.
Brenner and Brenner (cited in Holdershaw, Gendall & Garland 1997, p.1), explains the rationale that customers are exposed to continuous flow of information and the brain captures the first digit of a number. The first digit of $2.99 will have strong anchoring effect in our brains as $2 rather than rounding it up to $3 which requires more cognitive effort (Galinsky 2004). In fact, some studies have shown customers like to round prices down and ignore right hand digits (Bray & Harris 2006, p.602).
More Psychological Pricing
Back at home after a busy morning, I was sitting in my favourite spot as I went through pile of magazines. Somehow, Masters’ catalogue caught my attention. It’s a simple yet informative catalogue which exhibits the use of various psychological pricing strategies. As I glanced through it, my innate bargain hunter’s instinct immediately turned on to scan for the cheapest vacuum. The handstick vacuum at $299 pops up as the obvious bargain when it was placed next to other more expensive vacuums.
Source: Masters’ Catalogue 21/04/2016 to 04/05/2016
Well, my confirmation bias tells me to search for facts to reaffirm my decision (Rajsic, Wilson & Pratt 2015). Displaying the original price of $499 is an excellent absolute and relative price comparison strategy. The $200 cash discount becomes a mood induction to make customers feel satisfied since no other models offer more than 40% discounts (Iacobucci 2013, p.117).
If I can get a vacuum with RRP $499 and it works almost as good as the $689 model, then it must be a good deal. The $689 model serves as a good referent price to influence consumer’s purchasing decision (Iacobucci 2013, p.118). That’s it. I’m buying the $299 one!
However, to some value seekers premium models such as the $689 and $888 are more attractive. With $200 more, the $888 model looks more appealing as it has more power and features. Pricing commonly acts as a cue to quality (Sharma & Garg 2016, p.32). Higher prices are associated with higher quality. Again the $689 model serves as a reference point, which seems useless but actually helps to influence purchasing decision and turns consumers from bargain hunters to value seekers.
The true identity of pricing strategy remains doubtful. Is it meant to be persuasive or manipulative? As an innocent consumer, I like to believe that I had the best deal in town on that day with my free coffee and the $299 vacuum.
Bray, JP, Harris, C 2006, ‘The Effect of 9-Ending Prices on Retail Sales: A Quantitative UK Based Field Study’, Journal of Marketing Management, vol.22, no.5/6, pp.601-617, retrieved 1 May 2016, Business Source Complete
Galinsky, AD 2004, ‘When to Make the First Offer in Negotiations’, Harvard Business School Publishing, retrieved 1 May 2016, http://hbswk.hbs.edu/archive/4302.html
Holdershaw, J, Gendall, P and Garland, R 1997, ‘The Widespread Use of Odd Pricing in the Retail Sector’, Marketing Bulletin, vol.8, pp.53-58, http://marketing-bulletin.massey.ac.nz/V8/MB_V8_N1_Holdershaw.pdf
Iacobucci, D 2013, ‘Marketing Management (MM4)’, South-Western, Cengage Learning, Mason, Ohio
Rajsic, J, Wilson, DE & Pratt, J 2015, ‘Confirmation Bias in Visual Search’, Journal of Experimental Psychology: Human Perception and Performance, vol.41, no.5, pp.1353-1364, doi:10.1037/xhp0000090
Samson, A 2014, ‘An Introduction to Behavioral Economics’, Behavioral Science Solutions Ltd, retrieved 1 May 2016, https://www.behavioraleconomics.com/introduction-to-be/
Sharma, K & Garg, S 2016, ‘An Investigation into Consumer Search and Evaluation Behaviour: Effect of Brand Name and Price Perceptions’, vol.20, no. 1, pp.24-36, doi:10.1177/0972262916628946