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Credit: William Poundstone’s book Priceless: The Myth of Fair Value (and How to Take Advantage of It) on the subject of pricing is a title we highly recommend. We borrowed a few of his ideas for this post. Please read his book for more detail!
Social science (the study of real-world human psychology) is a pretty fascinating field of study. People do a lot of strange things and a lot of us have tendencies and biases we're not even aware of. This fairly new field of research gives us quite a bit of insight into the psychology behind the average consumer as well.
There is no part of inventory management that's more subject to mind games than pricing. The way you set your prices dictates a lot about the consumer’s behavior— whether they realize it or not. Here are 3 helpful tips when it comes to pricing your inventory to sell.
1. Never underestimate the power of 9.
It's difficult to walk into any retail store in the US and not see the number 9 at the end of a price. This is what's known as “charm” pricing, and it sticks around for a reason: it works! In fact, researchers at the University of Chicago and MIT actually did a study on the effect of charm pricing.
They took a standard clothing item and set the prices to $34, $39, and $44. As it turns out, the item sold best at $39. It sold even better than the cheaper $34 price!
Simpler, “rounded” pricing may seem like a more customer friendly approach, But it could end up deterring a customer out of a sale rather than enticing them into it. Also, this illustrates that using 9 is even better than using 4. In other words, you may be able to price something higher and make more sales!
2. Emphasize the original price
In this same study, the researchers found that sale prices which emphasize the original price, appear to do even better! In other words, $34 sold even better than $39 did when the $34 price tag disclosed the fact that the original price was $48 and the $39 tag did not.
However, $39 still won out when the same disclosure was made on that price tag. In other words, the 9 still won, all things being equal. However, both price points did better when the original price was disclosed on the tag. To recap:
- "$48 — now $34" did better than just $39
- "$48 — now $39" did better than everything!
The lesson here is to emphasize the original price and how much of a discount you are giving. It may not be much, but just letting the customer know they're not paying full price is a step in the right direction.
3. Leave a big gap
When a customer is deciding on the right price, context matters. Any good restaurateur will tell you that the best way to sell a $100 bottle of wine is to list it next to a $250 bottle of wine. The principle here is there should be a very large difference between your highest-priced item and your second-highest priced item.
For a liquor store, this may mean investing $1,000 in a very expensive bottle of whiskey. That bottle may never actually sell, but it sure makes the $100 bottles look a lot better. Plus, let's say the unthinkable happens and you actually do sell the $1,000 bottle of whiskey. Congratulations! You just sold a premium item at a huge markup.
Context matters. If a customer walks into a rundown local grocery store and buys a bottle of beer, they don’t expect to pay the same price as they would for that same bottle of beer at a luxury hotel bar.
The “fair value” of an item is a mirage. It's an illusion that is based on the context. Your customers do not look at your prices in a vacuum. They look at your prices within the context of everything else in your store and within the context of the store itself, not to mention other stores they’re familiar with, e-commerce options, and even anecdotes or reviews from other people.
Brands like Gucci and Hermes, for instance, carry a small handful of obscenely expensive items to make everything else seem like a bargain by comparison. Jars of peanut butter have been getting smaller and smaller to keep the price the “same”. Haagen-Dazs actually switched to ounces instead of metric for measuring its slightly smaller containers so that it could still compete effectively on pricing. Gillette once held a virtual monopoly on the shaving market, but is now priced to compete with the likes of Dollar Shave Club. The cost of producing and shipping the razors didn't change at all. What changed was the context of the market.
It's a tried-and-true strategy that has been used in retail for decades, if not centuries. So look around and take advantage of your context! You may be missing out on more than you realize.
One way to find out is by using reliable inventory management software. That will help automate acquiring the insights you need to measure the impact of your pricing strategy. Right now, Shopventory offers a 30-day full-featured free trial of our service with no credit card required. Shopventory is even backed by a 30-day money back guarantee. That means you get a total of 60 days risk-free!
You can start a trial today and join the thriving community of thousands of merchants all over the world who use Shopventory to optimize their inventory while pricing their products with confidence!
For more detailed insight on pricing strategy, we strongly recommend William Poundstone’s book Priceless: The Myth of Fair Value (and How to Take Advantage of It).
Some of the ideas in this post were inspired by Mr. Poundstone and he deserves full credit.