## 2. Use Price Anchoring

When you’re offering more than one product, their relative prices can greatly distort the perceived value of each individual product. When people are faced with multiple choices, they often make surprising decisions, so here's what the research shows about how to price multiple products effectively.

### How to Make an iPad Seem Cheap

When Steve Jobs first introduced the iPad back in 2010, he gave a masterclass in an important technique called price anchoring.

Remember that before his presentation, nobody had ever bought an iPad before, and nobody had a clue how much it should cost. So it was up to Jobs to set expectations.

“What should we price it at?” he asked the audience. “If you listen to the pundits, we’re going to price it at under $1,000, which is code for$999.”

Having established that $999 figure in our minds, he then made the big announcement that iPad pricing would start at “just$499.” It felt like a deal. We were getting an iPad for half price.

The launch, of course, was a huge success, and since then, Apple has gone on to sell 225 million iPads. That’s not all down to a single presentation, of course, but setting those expectations certainly helped.

The important point is that if Jobs hadn’t given us that “price anchor” of $999, we’d have found our own, and it may not have been to Apple’s advantage. We might have compared the iPad to an iPhone, for example, making the$499 seem expensive in comparison.

So be aware that your customers are making comparisons all the time. You can take control of those comparisons by positioning your product next to something more expensive. If you don’t, your customers will probably find comparisons of their own, and you may not like them.

## 3. Understand the Effect of Consumer Choice

In a TED talk a few years ago, behavioral economist Dan Ariely talked about a mysterious advertisement he’d noticed in The Economist.

The magazine was offering three subscription options:

1. Web only: $59 2. Print only:$125
3. Print and web: $125 Option 2 seems ridiculous, doesn’t it? Who would choose to pay$125 for the “print only” option, when they could get print and web for the same price?

He ran a test with his students at MIT, asking them which option they’d choose, and the results were roughly what you’d expect, with nobody choosing option 2:

• 16% chose web only.
• 0% chose print only.
• 84% chose print and web.

But when he took option 2 out of the equation and ran the experiment again with only two choices instead of three, something interesting happened:

• 68% chose web only.
• 32% chose print and web.

With only two options to choose from, people were attracted to the cheaper option. The nonsensical middle option had served a purpose after all. It made the more expensive “print and web” option seem like a better deal.

In your business, try running experiments as Ariely did with his students. Offer your customers different combinations of pricing options, and track the effect on sales. As the Economist example shows, the logic behind consumer choice isn’t always obvious. Even offering an option that nobody wants can sometimes have a positive impact on your revenue.

But in case you’re now tempted to start cramming in lots of new subscription options, be careful. “Option overload” can put a real damper on sales.

Have you ever spent ten minutes standing in the supermarket aisle, gazing at 24 different types of jam and finding yourself unable to pick one? Don’t worry: you’re not alone. In fact, you were suffering from a common complaint: option overload. You had too many choices, and you couldn’t perceive the difference between them, so you did nothing.

Researchers have studied this very phenomenon, believe it or not. They gave shoppers 24 different flavors of jam to sample, and found that only 3% of them went on to make a purchase. But when they reduced the number of flavors to six, suddenly the purchase rate jumped to 30%.

So if you want your customers to make a decision, offer three or four clear options, not nine or ten.

## 4. Profit From Numerical Quirks

We all know that $19.99 seems significantly cheaper than$20, even though it’s only a one-cent difference. But there are more numerical quirks to be aware of. Here we’ll take it one step further, and look at some less well-known ways to set your prices based on the way our brains process numbers.

### The Rule of Nine

First of all, does that $19.99 trick really work? Yes, it does. Researchers at MIT and University of Chicago had a national mail-order company mail different versions of their clothing catalog to randomly chosen customers. In one, the prices all ended in nine, and in the other two, the prices were raised or lowered by$5. So, for example, the same dress would be $39 in one catalog,$44 in the second catalog, and $34 in the third. The results were astonishing: the catalog with the prices ending in nine resulted in 40% higher sales than both of the others. The fascinating thing is that the$39 dress not only outsold the $44 dress; it also outsold the$34 dress. Remember, it’s the same dress in each catalog.

It seems we’re so culturally attuned to prices ending in nine that we respond to them, even when it means the product is more expensive. The "nine" price outperformed both its cheaper and more expensive competitors not only at $39, but also at$49, $59 and$79.

Bottom line: it works. Make your prices end in nine.

There’s just one exception. Companies selling more high-end items often avoid prices ending in nine. They want to come across as exclusive, and appeal to customers who don’t need to hunt for bargains. If you want to buy a Gucci bracelet, for example, it’ll set you back an even $10,900. You won’t see any 99-cent tricks here. It’s the same at a high-end restaurant, where your filet mignon will almost always cost$40, not $39.99. ### Say it Out Loud But what about those other quirks I mentioned? First, think about the number of syllables in the price you’re quoting. In a 2012 paper, researchers found that “consumers non-consciously perceive that there is a positive relationship between syllabic length and numerical magnitude.” Translation? If a price takes longer to say out loud, people think of it as more expensive. That’s why on the car commercials on TV, they always say “from ten nine nine nine” instead of “from ten thousand nine hundred and ninety-nine dollars”. It’s exactly the same price, but five syllables sounds cheaper than 13. So when you’re writing prices on your website or marketing materials, imagine your customers saying the price out loud. If you write a price as “$1,599”, for example, people will say, “one thousand, five hundred and ninety-nine” in their heads. Remove the comma, so that it’s “$1599”, and they’re more likely to read it as “fifteen ninety-nine”. You might just make some more sales as a result. ### Other Quirks Here are a few more surprising research results to consider: One piece of research at Cornell found that diners in a restaurant spent more money when given a menu with no dollar signs on the prices (for example, when the price of a steak was written as “32” instead of “$32”). Deleting dollar signs from your website could confuse people, though, so be aware of the context!

Another study found that if you want people to pay attention to a sale price, you should write it in a small font. This probably runs counter to your instincts, and is certainly the opposite of most marketing practices, but the research found that “in our minds, physical magnitude is related to numerical magnitude.” In other words, a bigger font makes us think it’s a bigger number.

And still on the subject of sales, try to make the math as easy as possible. Reducing a price from $10 to$8 is actually a better idea than reducing it to $7.97. With the$8 price, we can instantly calculate the $2 saving; when it’s$7.97, it takes our brains that bit longer to process. So we see $8 as the better deal, even though of course$7.97 is cheaper.

## Next Steps

So now you’ve learned what the research says about the psychology of pricing. You’ve learned how to reframe the value of your products and services, how to use price anchoring, and how the choices people are given can affect their buying decisions. You've also seen examples of how the human brain responds to numbers in sometimes surprising ways.

The next step is to put all of this into practice in your business. Don’t be afraid to experiment here. While major price changes should of course be carefully thought through, you can easily make minor tweaks without alienating your customers. And you can present them as special sales or promotions, to run for a limited time, so that you can always go back to your initial pricing if things don’t work out as you’d planned.

For web-based businesses, it’s even easier. You can easily vary the prices, bundles and offers on your website, and track which ones perform the best. And of course with some of the strategies, like price anchoring and reframing the value, you can even keep your prices the same, and just vary how you communicate them.

So why not get started? Make a plan for how you can start using these insights into consumer psychology to boost your business’s bottom line.

## Resources

Graphic Credit: Brain designed by Blake Ferguson from the Noun Project.