Simple Pricing Strategies to Improve Revenue

Let’s face it – humans are emotional creatures. Especially when it comes to spending money. There are a variety of successful pricing models when it comes to on line or in-store shopping. As a seller you want to make a fair margin on your sales and on the buying side you want to feel like you are getting fair value for your money. It is possible to do both.

It helps to understand the psychology within the buyer/seller transaction. Below are several pricing strategies and why they work. These strategies leverage cognitive biases and emotional elements that affect decision-making. Here are some effective pricing strategies based on these principles.

1. Charm Pricing
   • Application. Consumers focus on the left most digits when looking at pricing. A price of $19.97 is perceived as less than $20 because the focus is more on the left-most digits.
   • Impact on Revenue: This small reduction in price can disproportionally increase the perception of the value of a deal, without sacrificing much margin.
2. Anchoring
   • Application: People rely on the first piece of information they receive (the "anchor"). Display a high-priced item first to make subsequent options seem more affordable by comparison. Presenting a $200 product first makes a $100 option feel like a bargain.
   • Impact on Revenue: It increases the likelihood of consumers selecting mid-tier or premium products, boosting average transaction value.
3. Decoy Pricing (Asymmetric Dominance)
   • Application: When given three options, consumers migrate to the middle option if one of the extreme options is a clear bad deal. Introduce a third "decoy" option that is priced slightly higher than the highest option but offers significantly less value, making the previously highest-priced option more attractive.
   • Impact on Revenue: Encourages customers to pick the premium option, increasing overall sales revenue.
4. Bundling
   • Application: Bundling makes the buyer feel like they are getting more for less. Offer several products together at a price lower than their combined individual prices. Bundle a $10 shampoo and a $5 conditioner for $12 instead of $15.
   • Impact on Revenue: Increases the perceived value, leading to more sales and higher revenue, while encouraging customers to buy more items than they originally intended.
5. Scarcity and Urgency Pricing
   • Application: Fear of missing out (FOMO) drives action. Limited-time offers or stock scarcity can trigger this urgency. Time-sensitive discounts or limited-quantity deals, such as "Only 5 left in stock” are examples.
   • Impact on Revenue: Encourages impulsive buying and can lead to increased immediate sales and higher conversion rates.
6. Reference Pricing
   • Application: Consumers judge the value of a product based on the price they believe is standard for that type of product. Display the original price alongside the discounted price (e.g., Sale $50, Now $30), or highlight similar, more expensive products.
   • Impact on Revenue: Increases the perception of a deal, encouraging more purchases and potentially leading customers to spend more.
7. Tiered Pricing
   • Application: Offering different pricing tiers gives customers a sense of control and allows them to self-segment based on their willingness to pay. Provide escalating pricing plans, i.e., basic, premium, and deluxe. Provide distinct features and benefits at each level.
   • Impact on Revenue: This encourages consumers to choose higher-priced options that better suit their needs, increasing average transaction value.

These don’t include every possible pricing strategy, but they do cover the ones that are fairly common. If you are a seller, try some of these out and see what kind of results you get. And if you are a buyer, this might just give you enough information to avoid emotion-driven decision making and ensure you are getting the value you deserve when shopping “smarter”.

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