The Psychology Of Pricing - Part 6 - RD269

I'm happy to announce that this week is, in fact, the final part of my Psychology of Pricing series, where I share research-proven tactics to make the most out of the prices you display. If you haven't listened to the previous parts in this series, I suggest you go back and do so before continuing with this one. I'll still be here once you're done.

These pricing tactics are great to use in your design business. But the real gem here is they can make you look like a pricing guru to your clients. Imagine improving their conversion rate simply by manipulating the way you display their prices. They'll be throwing money at you.

As in the previous episodes. All of these tactics I'm sharing come from Nick Kolenda. Specifically, an article on his website nickkolenda.com titled appropriately enough The Psychology of Pricing.

The Psychology Of Pricing - Part 6

In the previous five parts of this series, I shared various ways to manipulate how a price is displayed to improve sale conversions. In this last part of the series, I'm going to share how to use discounts properly.

According to Nick, if not used properly, discounts can actually harm your business. In fact, some people suggest you should never use discounts. That may be a bit extreme. Discounts can prove useful if you know how to use them properly.

But how can offering a discount backfire?

For one, if you offer discounts too frequently, customers will become more price-conscious and wait for the next discount.

Offering discounts can also lower the reference price of a product. I've talked about reference prices in previous parts of this series and how they create the bar by which consumers judge other prices. Offering a discount can lower the reference price, causing people to purchase less in the future when the price seems too high.

So reducing the frequency and depth of discounts helps. But there are a few other tactics you can put to use that will help you as well.

Tactic 46: Follow the "Rule of 100."

In a previous episode, I shared how people can perceive different magnitudes for the same price, depending on the context.

For example, changing the words that appear next to a price from "High Performance" to "Low Maintenance" can reduce the magnitude of the price, making it appear smaller.

Discounts are no different. When offering a discount, you want to maximize the perceived size of the discount so that people feel like they are getting a better deal.

Consider a pair of pants selling for $50. Which discount seems like a better deal: 20% off or $10 off? If you do the math, you'll see that the discounts are the same. But at first glance, 20% off has the advantage by seemingly being larger than $10 off.

That's where the "Rule of 100" comes in. If the price you are discounting is under $100, you should always offer the discount as a percentage. Saving 10% off a $20 item sounds much better than saving $2 off a $20 item. Don't you agree?

However, as soon as the price you are discounting goes above $100, you should switch to an absolute price discount instead of a percentage. So for a $250 item, offering $25 off creates a higher perceived magnitude than offering 10% off.

Tactic 47: Mention the Increase From the Discounted Price.

This tactic also relies on magnitude. When a price is reduced, the emphasis is placed on the decrease—Now, 20% Off.

However, a way to once again increase the perceived magnitude of the discount is by reversing the way you announce it. Instead of saying "Now 20% Off," try something like "Was 25% higher." It will make it more persuasive because it shows a higher numeral.

Tactic 48: Provide a Reason for the Discount.

To maximize the effectiveness of a discount, explain why you are offering it.

For example, stores may offer a discount because of inventory surplus. Or maybe it's to clear out outdated stock. Clothing retailers do this all the time. When the new season's fashions arrive, the previous season's inventory goes on sale.

Or perhaps you can say you are passing on a discount you received from the supplier. Wal-Mart does this all the time with their Rollback pricing. It conveys the message that the cost savings they are receiving are being passed on to the customer.

If you offer print brokering as one of your design services, you may be able to increase orders by passing on any discount your printer offers you.

By providing a reason for the discount, you reinforce that this is a temporary or provisional thing. This will make it less likely for people to latch onto the discounted price as a reference price. And make it more likely to pounce on the discount before it's gone.

Tactic 49: Offer Discounts in Round Numbers.

I don't even know why this one is on the list. If you recall, specific prices, such as $21.87, seem smaller than rounded prices. Keeping that in mind, you should follow the opposite approach for discounts by using round numbers since they appear larger.

Using round numbers as discounts also makes it easier for customers to calculate the discount.

As I said, I don't know why this one is on the list. I don't think I've ever seen someone offer a non-rounded discount. Have you ever seen a store advertise something like "Save $8.67"? No, it's either save $8 or $9.

I can say about this tactic that you should try to ensure that discounts are easy to compute. You don't want to confuse people by offering a 23% discount on a price of $37.89. If they need to take out their calculator to figure out how much they are saving, you are missing the point.

Tactic 50: Give Two Discounts in Ascending Order

This is useful for those occasions when more than one discount is applied. Say, for example, a store offering 20% off all purchases, including already discounted items.

A 1979 study showed that offering two combined discounts is often preferred to a single lump sum discount. Saving 20% off an already discounted item by 10% seems like a better deal than if the item was marked at 30% off.

Whenever possible, arrange these discounts in ascending order. So 10% off, then 30% off. a 2019 study showed that this creates an ascending momentum, making the total discount seem larger.

Tactic 51: Offer Discounts Towards The End Of The Month.

Remember that Pain of Paying thing? Well, as your budget gets smaller, paying for things becomes more painful. You're more likely to buy a product and be more satisfied with your purchase when you have more money in your budget.

Offering discounts towards the end of the month, as monthly budgets are nearing exhaustion, is more effective because people seek ways to save money.

Bonus Tip: If you have clients who offer free trials, you may suggest they do so at the beginning of the month. Because people have a full budget at the beginning of the month, the offer of a free trial will seem more appealing to them.

Of course, this assumes the consumer uses a monthly budget. You should always consider the target customer and plan your promotions accordingly.

Tactic 52: Arrange Discounts in Tiered Amounts.

Suppose you or your client launch a promotion where customers save $50 when they spend $200. In this scenario, people need to spend $200 – which might be difficult for some people to imagine.

To make this discount more enticing, you need to strengthen the mental imagery of spending $200. How? By offering tiered discounts. Such as...

• $50 off when you spend $200
• $25 off when you spend $150
• $10 off when you spend $50
• $5 off when you spend $30

A customer might struggle to imagine spending the full $200 to get the biggest discount. However, spending $30 to get $5 off is easy to imagine.

And this is the brilliance of this tactic. Once a client can imagine spending $30, it becomes much easier to imagine spending $50. Then it becomes easier to imagine spending $150 and finally $200.

You provide a sequence of images that transform that highest threshold into a feasible reality by offering tiers.

This is the same reason the three-tiered pricing system works so well. When clients compare the first price in your three tiers to the second, they realize how much more value the second tier is, even if it's higher than they originally wanted to spend. And once they are entertaining that second tier, the third one doesn't seem like a big stretch, and they may go for it.

This tactic might also be used to sell bigger retainer agreements. For example, if you normally charge $100/hour for your design services, you could sell retainer agreements such as this.

• $70/hour if they buy 20 hours per month. Total $1400
• $80/hour if they buy 10 hours per month. Total $800
• $95/hour if they buy 5 hours per month. Total $475

Tactic 53: End Discounts Gradually.

Traditionally, marketers use two types of pricing strategies: Hi-Lo Pricing, such as putting a $99 product on sale for $79 for a week and then putting the price back to $99 once the sale is over. Alternatively, some use EDLP or the Everyday Low Pricing method. They take a $99 product and list it permanently at $89.

A 2010 study found benefits in a new strategy: Steadily decreasing discounts (SDD for short).

Instead of dropping a price and then putting it back. This SDD strategy suggests you drop a price and gradually increase it until you're back at the original price.

So a $99 product might be discounted to $79 for one week, then $89 for an additional week before returning the price to its original price of $99 on the third week.

The researchers found positive outcomes on multiple metrics. This new SDD strategy led to.

• Higher revenue
• Higher willingness to pay
• Greater likelihood of visiting a store.

During a 30-week trial, the researchers alternated between the three strategies and found that the SDD method produced the highest overall profit margin.

With the SDD method, consumers learned that they had to get to the store early if they wanted the best deal. However, if they could not make it on time, there was still a chance for them to save money before the price returned to full.

Tactic 54: Don't Discount Premium Products.

Remember at the beginning of this episode when I said that discounts could be harmful. This is especially true when you discount premium (AKA expensive) products.

It's harmful because people may choose to hold off on purchasing until there's a new discount when the discount ends. Or worse, they may choose to shop at a competitor.

When a discount is retracted on a premium product, demand shifts towards lower-priced products, however, when a discount is retracted on lower-priced products, the demand remains the same.

This boils down to that if you are competing on price, it's ok to give discounts. But if you're competing on quality, you should avoid discounts that emphasize price and focus on the attributes and quality of the product.

Have you used any of the tactics I've shared in this series?

Let me know by leaving a comment for this episode.