Pricing Strategies : Psychological 1.3.3

Psychological pricing - occurs when a firm sets a price for the product in order to entice the customer into making a purchase by making it sound cheaper than it actually it is.

A common example of psychological pricing is when a firm charges £9.99 rather than £10.00

ADVANTAGES

1) Larger purchases
This practice encourages larger purchases. For instance, a customer comparing two products, £15 and the other at £18.99; may purchase the higher priced item because it "seems" fairly close. The theory behind psychological pricing suggests, in this case, that the buyer would perceive only roughly a £3 difference in the products rather than a nearly £4 difference.

2) Encourages impulse buys
Psychological pricing is intended to persuade irrational buyers who don't logic out the fact that there is just a one pence difference between £9.99 and £10. Given that premise, this technique also helps motivate impulse buys on sales items a merchandise displays in or near the check out. An emotional by is more likely to grab a candy bar from a display at 99p then she is at a £1 for instance.

DISADVANTAGES

1) Rational pricing
If customers are more rational than psychological pricing gives them credit for, then they will ignore fractional pricing and instead base their purchases on the value of the underlying products