As a CEO, CFO, or Founder, you know that pricing your product is one of the most important—and challenging—decisions you have to make. On the one hand, you want to charge enough to cover your costs and make a profit. On the other hand, you don’t want to price yourself out of the market. So how do you strike the perfect balance? The answer may be more straightforward than you think: by understanding the psychology of pricing.
The Anchoring Effect
One of the most important psychological principles in pricing is the anchoring effect. This is the tendency for people to rely too heavily on the first piece of information they receive (the “anchor”) when making decisions. For example, if you’re trying to decide whether to buy a car for $20,000 or $30,000, the $20,000 option will seem like a much better deal—even if it’s not.
As a business owner, you can use this principle to your advantage by deliberately setting a high anchor price—say $99 instead of $9.99—that makes your product seem like a better value even though it’s not any cheaper. Of course, this only works if your product is worth more than the anchor price; if not, customers will see right through your ploy, and you’ll lose sales.
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The Decoy Effect
Another interesting phenomenon at play in pricing is known as the decoy effect. This occurs when people are presented with two similar options but differ in one fundamental way—say, two different subscription plans for a streaming service where one plan is slightly more expensive but also includes a free month of access to premium content. Even though the more expensive plan isn’t necessarily any better value than the cheaper one, people tend to perceive it as such and are more likely to choose it over the less expensive option.
You can use the decoy effect to your advantage by deliberately creating an offer that’s not necessarily any better than your other options, but that makes those options seem less appealing by comparison. For example, let’s say you’re selling three different subscription plans for your streaming service: basic ($9/month), standard ($14/month), and premium ($19/month). You could create a fourth “decoy” plan that’s slightly more expensive than premium but doesn’t include anything extra—say, $21/month—to make premium seem like a better deal by comparison.
Conclusion
Pricing your product is one of the most important decisions you must make as a business owner—but it doesn’t have to be as tricky as it seems. By Anchoring your prices and using Decoys, you can nudge customers toward choosing the best option for your business while still feeling like they’re getting a good deal. Of course, none of these techniques will work if your product isn’t worth what you’re charging; however, using psychology to price your product can be a powerful tool in your arsenal.
