What Is a Psychological Pricing Strategy?
Simply put, it's a strategic way to price your products or services to influence people when making a buying decision.
It isn’t clear how psychological pricing came into common use, but we do know that the practice arose sometime during the late 19th century with newspaper pricing competition.
Companies big and small sometimes have teams dedicated to pricing products—and in some cases, a psychological pricing strategy is built in from the ground floor as part of their brand marketing.
Here, we'll take a look at how Apple has used pricing as a part of their overall marketing and product strategy to land them in the high-end hardware market.
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Psychological Pricing the Apple Way
Apple has maintained a price point that hovers around $1000 (and with the new Apple Watch some $20,000) for practically their entire product line.
And, even with that in mind, buyers will flock to every product release making them perhaps the first company ever to be worth $1 trillion.
So what gives? How do they get away with it?
It's because Apple has always planned to be aggressive with their pricing strategies. It goes back to the psychological phenomenon that if something is expensive, it must be good—we'll get into that later.
This echoes the thoughts of Steve Jobs, whose strategy for Apple has four pillars:
- Offer a small number of products
- Focus on high end products and consumers
- Give priority to profits over market share
- Create a halo effect that makes people starve for new Apple products
In this case (depending on who you talk to) that holds true—Apple products are pretty great—but in reality they're just selling laptops, phones, mp3 players and now watches. By the way, I absolutely adore Apple products, so I’m not trying to downplay their quality in any way.
Tim Cook (CEO) said in an interview in regards to iPhone “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience.”
And, with that in mind—it has paid off for them, tremendously.
Apple rarely (if ever) offers discounts on their products. The most you’ll see is generally a student discount, and even still, it’s usually only $100 or so off a $1000+ product.
That pricing strategy is applied across all retail locations, and even resellers. You just won’t find a brand new, unopened Apple product (besides an online marketplace like eBay) for anything less than what they sell it for at their stores.
Let’s take a closer look at some examples of Apple’s pricing strategy. See if there is anything you can learn from Apple and apply it to your business.
The Left Digit Effect Helps You Sell More
There’s a reason why businesses like Apple will price a laptop at $1299.99 and not a flat $1300. That $0.01 actually makes a surprising difference in the amount of sales that can be made.
Instead of charging $1300, charging $1299 for the product makes the price appear to be in the “$1200” range rather than the “$1300” range.
Thus, as a consumer—we perceive the price to be lower than it actually is. We think of it as a bargain at that price. Many studies have shown that generally, consumers prefer to pay less for products and often associate prices ending in a nine with discounts and bargains.
This works because of something called the left-digit-effect. The majority of people read left to right. Apple incorporates this into the entirety of their product line.
You won’t find an Apple product selling for a round number—they’ll always be priced with the “teen ranges” or "$999" model in mind.
Smart, strategic—and definitely on purpose.
Key takeaway: Try using odd pricing on a new product you’re launching. Consider using two different price points—one with odd pricing, and another with flat pricing to test which one works for you.
Comparison Pricing Is a Clever Pricing Tactic
Comparison pricing isn’t just another word for marking items down to compare one price to another, no—it’s a marketing technique in which the price of one offer is directly contrasted with the price of another offer.
Here’s an example of what that might look like from Apple’s position:
Apple is selling two MacBook Airs. One is $899 for an 11” MacBook Air, and the other is $999 for a 13”. Therefore, the 13” option is $100 more, which means we presume it to be better quality. And, in most cases it usually is.
But, which one sells more? In Apple’s case, we really don’t know. But with almost the exact same pricing strategy—Williams-Sonoma was able to move the needle quite significantly on one of their products.
In a study published by The Wall Street Journal, we learn that Williams-Sonoma had a $275 bread maker in their catalog that wasn’t performing too well.
When they introduced a similar bread maker for $429—which was only marginally better—and placed it next to the $275 bread maker in a print ad, sales for the $275 bread maker skyrocketed and almost doubled.
"The lesson learned here: When you’re launching a new product or service in the market, consider leveraging relative pricing. Create a tiered product strategy like Williams-Sonoma or try offering a discount for a longer commitment (for example, 25% off if you make a yearlong commitment). Remember that people don’t make decisions in a vacuum and price your product in a way that takes advantage of that."
In the Williams-Sonoma example, consumers may have said, "I don't know much about bread machines, but if I can buy the $275 model that's almost as good as the $415 model, then I must be getting a good deal."
Anchoring is what's happening here. Anchoring refers to the tendency to rely heavily on the first piece of information offered—and then weighing their purchasing decision based on that.
Key takeaway: Try positioning your product collections with comparison pricing in mind. Try to introduce a more “premium” version of your product and see if your normal product sells more.
If It's Expensive, It Must Be Good
If that doesn’t sum up the Apple pricing strategy, I don’t know what does.
Think back a few years ago when you saw friends and family using Apple products. Chances are you thought they were crazy for spending so much money on something like a laptop or desktop computer—but now it seems like everyone is using a Macbook. There's a reason behind that too—and it isn't just Apple's marketing strategies.
When you are paying more for something, you appreciate it more. Now—when you compare a $20,000 Apple Watch to another smartwatch product like the $99 Pebble Smartwatch (I realize these products are vastly different in terms of design, but they serve the same purpose), the Apple Watch must be brilliant. Right?
After all, if it were not extraordinarily better they wouldn’t charge so much for it, would they?
Consumers equate price with quality. This was studied through diners at a New York restaurant.
The group of people all ate the same food at an Italian buffet, but some were charged $4 and the others $8. Those who paid $8 found the meal to be much better, and enjoyed the food much more than those who paid $4.
The conclusion? Expensive = good.
Bonus: Be sure to read about how Kanye West APC's $120 plain white shirt sold out almost instantly to see how this strategy is applied to bigger clothing brands.
Key takeaway: Pricing strategies can be applied to almost any business. If you are selling a t-shirt for $100 it might sell just as much as one that’s the exact same selling for $20.
Now that we’ve taken a look at how psychological pricing works, it’s up to you to implement them into your pricing strategy.
Be sure to test out different pricing for new or current products that you’re selling.
If you found this to be useful, please let us know in the comments below and be sure to share it with your entrepreneurial friends and family!
About The Author
Tucker Schreiber is an ecommerce entrepreneur and content crafter at Shopify. He writes to inspire, educate, and inform readers on all things commerce.