Black Friday, seasonal sales, and post-holiday blow-outs: Throughout the year, marketers rely on deals and discounts to get rid of inventory and boost sales. And your shoppers rush to fill their real and virtual carts with the best deals they can find.
You may be spending time and money to drive more traffic to your deals and discounts, but traffic doesn’t necessarily lead to sales. Instead, you need to optimize the shopping experience so that browsers convert to buyers.
One way of converting more shoppers is to incorporate pricing psychology into your testing strategy. And that’s what I’m going to explore in today’s post.
Note: If you are considering testing pricing psychology tactics during the holiday season, be aware that there are risks for skewed results. Make sure you are testing responsibly!
What is pricing psychology?
Every business leader knows the power of pricing. You make calculated decisions on how to price your products:
- You consider the cost of goods.
- You analyze competitor pricing.
- You judge the supply and demand for a product.
Internally, your company has likely experimented with pricing and markdowns for the holiday season to find a process that works.
In fact, you probably know a lot more about pricing psychology than you think. When you price an item at $9.99 instead of $10, for example, you have implemented a pricing psychology tactic called charm pricing.
Despite your customers only being a penny richer, they see it as a better deal because the dollar digit on the left will seem lower by comparison.
When you position a high-ticket item so it is the first thing the customer sees, you are using a pricing psychology tactic called anchoring.
“The order in which you display prices influences your prospects’ perception of their value. People can be primed to perceive prices as higher or lower by being exposed to other numbers, even if those priming numbers are unrelated and irrelevant.”
– Chris Goward, WiderFunnel CEO and author of “You Should Test That!
Because this high-ticket item is the first thing the customer sees, they compare all prices and products to that item to determine value. This influences greater spending.
When you consider charging a small fee for shipping, versus including it in your retail prices, you are considering another pricing psychology tactic called unbundling.
The idea is that, because the customer sees the lower cost of the product, they are more likely to buy even with the added shipping costs.
In his round-up of psychological pricing tactics, psychology and marketing expert and blogger, Nick Kolenda, outlines many of the pricing psychology tactics that you could test.
Pricing psychology is all about perception.
If you want to communicate why your prices are above or below your competitor’s prices…
If you want to demonstrate to your customer that your offering is worth the cost…
If you want to increase up-sells, cross-sells, or just plain sell…
…consider how you are framing your prices and merchandise on your product pages.
Pricing psychology tactics work especially well if your company struggles to compete with other e-commerce websites in terms of price.
Framing is an important part of a company’s pricing strategy and can be leveraged in your testing to create a lift in sales.
WiderFunnel’s optimization experts use the LIFT Model® to determine the quality of the shopping experience through the 6 points of conversion: clarity, relevance, distraction, anxiety, urgency, and value proposition.
WiderFunnel’s LIFT Model.
Framing within these conversion factors can help make pricing more enticing for customers. For example:
- Urgency: A sale can create a sense of urgency by being time-bound (flash sales) or in terms of limited product quantities (while supplies last).
- Clarity: It needs to be clear visually to a shopper that a sale is a good deal.
- Relevance: You can time a sale so that it is most relevant to a customer’s budget cycle. For example, a smaller discount before Christmas can be more effective in moving merchandise than deeper discounts in January, because it is aligned with when people are buying.
- Distraction: Complicated pricing or pricing structures can be a distraction for your customer because they are too complex to calculate.
- Anxiety: An overload of product information or options can lead to analysis paralysis, where it is difficult for a customer to decide on the best product for them.
- Value proposition: The right emphasis on product qualities, features, or benefits can justify pricing through the product’s value proposition.
Our team of experts put two pricing psychology tactics to the test in recent experiments for two of our e-commerce clients. Here’s what happened:
Test #1: Are dollar-off discounts or percentage-off discounts more motivating for online shoppers?
In his book, Contagious: Why Things Catch On, marketing professor, Jonah Berger, explains how our perception of numbers affects how we understand a discount price. He called this theory, “The Rule of 100.”
Based on his research, he found that:
- A percentage discount off an item under $100 off will always look larger than the dollar discount. For example: 25% off of $75 appears larger than $18.75 off of $75
A dollar discount off an item over $100 dollars will always look larger than a percentage discount. For example: $93.75 off of $375 appears larger than 25% off of $375
Jonah Berger’s The Rule of 100 dictates when you should use a percentage or a dollar discount depending on whether the original price is over or under $100.
The shopper perceives the discount to be larger in these contexts because the number representing the discount will be larger depending on whether the original price is below or above $100.
In reality, the markdowns are exactly the same amount, whether you present them in a percentage or a dollar value.
“The Rule of 100 is all about controlling perception. Research has shown that users can misattribute a larger numerical value to a larger discount, and favor one discount over another despite them being mathematically the same.
For example, on a $20 T-shirt, a discount of 25% off may be perceived as greater than $5 off because 25 is greater than 5. This won’t make much of a difference with the average person, but on such a large scale the idea has promise.”
– Michael St. Laurent, Director of Experimentation Strategy and Product Development Lead, Widerfunnel
Let’s see how this works in practice.
Your merchandiser wants to move your fall jackets because you are nearing the the holiday season.
She realizes by the inventory levels that she likely over-ordered, since the weather was unusually warm for this time of year. So, she decides to mark down the entire jacket category by 25%. She also marks down other inventory categories with a mix of both percentage and dollar discounts.
Your merchandiser is facing an overstock of Fall jackets. What can you do to make the 25% off sale more enticing?
On your website, prices are updated automatically from the inventory system. She expects these sale items to sell through during the holiday sale season because there isn’t much stock left.
She’s the expert on the inventory―that’s why you hired her―but you want to make sure that the sale prices motivate online shoppers to buy. You want to maintain a good margin, but you also don’t want to be left with excess inventory when sales slow down in January.
You should consider pricing through the eyes of your customer. You should consider pricing psychology.
We put this situation to the test.
One of our clients is a large retailer of sporting goods and apparel. As with any retailer, sales and discounts make up a large portion of their online sales. One recurring question they’ve had is whether or not a discount is more effective displayed in a “% off” format or a “$ off” format.
Before running this test, discounts on the website would change from one format to another, based on the specific sale or promotion. This resulted in a variety of different discount types on the site.
We asked the question: Will displaying price as entirely % off or $ off be more effective in encouraging visitors to purchase?
“We couldn’t change the prices but we could control the perception. Since this client had thousands of products―targeting all of their sale items is actually affecting a huge portion of web visitors and could provide serious impact for the client.”
The WiderFunnel team wanted to magnify the perception of value in the shopper’s eyes, without making any changes to the discounts themselves.
The test was fairly simple.
In the Control, all of the markdowns were displayed as a percentage off the original price.
The Control displayed percentage off discounts on their product pages.
In Variation A all of the markdowns were displayed in dollars off the original price.
In Variation A, we wanted to know if $ off was a more compelling offer.
In Variation B, we wanted to get creative. All of the markdowns were displayed in either percentage or dollars off the original price, according to The Rule of 100. The displayed discount changed based on the product’s original price and which method of discount would show a larger number.
Variation B incorporated an algorithm that switched between a percentage or dollar-off discount based on whether the product was price above or below $100.
Remember: We did not change the discounts. We just changed the way they were being perceived.
So what happened in the test?
After three weeks, Variation B confirmed The Rule of 100, and our own hypothesis. Success!
As suspected, Variation B seemed to have the most positive effect on user motivation and resulted in a 2.29% revenue per visitor increase over the Control, and also slightly outperformed Variation A.
A result like this can mean a number of great things for any retailer:
- Discounted items can be moved earlier in the season to avoid inventory issues
- Greater perceived discounts can increase motivation and conversion rates
- Seeing higher margin on items by not waiting for them to be discounted even further
After seeing the results, our client implemented the winning script on their website so that the presentation of markdowns was consistent with Jonah Berger’s The Rule of 100.
While the changes would be logistically challenging for them to implement internally, the WiderFunnel script made the change automatic.
The merchandising team didn’t have to change their internal processes for determining markdowns in percentages or a dollar figure.
Here’s another scenario where we implemented pricing psychology tactics in our testing:
Test #2: How does the visual presentation of sale prices affect online buyers’ perception?
This may or may not surprise you, but how you present a sale visually on your website can make that sale price extra enticing to online shoppers.
Did you know? Consumers generally relate visual difference to numerical size. The online shopper looks at the larger original price and then compares the difference both visually and numerically against the sale price.
In theory, this could include size, font, color, position, and boldness of the original and sale price on the website.
Let’s see how this works in practice.
You want to offer a promo code to online shoppers as a way of increasing customer purchases during Cyber Monday. The promo code is already live in your POS system, but you are considering the visual presentation of your sale prices.
Sale prices are typically presented on product pages in big, bold numbers to try to draw attention to the resulting sale price, but you wonder if another visual presentation would be more enticing.
After all, if you are going to offer the discount, you’d like to see a significant increase in sales. So, how can you increase your sales without offering a deeper discount?
We put this to the test.
For another client that sells specific industry courses online, our team tested a different pricing theory. When the original price is larger in font size than the reduced price, the online shopper perceives the discount to be larger.
The shopper relates the size difference to the discount magnitude in this pricing psychology tactic.
“The larger the perceived difference, the more likely you are to interpret that as a larger discount.”
– James Flory, Director of Strategy, Widerfunnel
We asked the question: Considering pricing psychology, will swapping and increasing the visual distinction of the sale price from the reference price result in more conversions.
In the Control, the price of the course package was reduced from $299 to $239.20 with the promo code. Even though the discount wasn’t stated specifically as a percentage, the promo code of Launch20 implied a 20% discount.
The sale price was highlighted over the original price through increased text size and bolded font.
The Control shows the sale price in a larger font than the original price.
In Variation A, the team wanted to visually emphasize the difference between the original price and the sale price. We increased the size of the original price and reduced the size of the sale price. We also changed the sale price to the color green.
Variation A demonstrates the pricing psychology tactic where the sale price is visually differentiated through size.
In Variation B, the team wanted to continue the same visual distinction between the original and the sale price, but they also introduced The Rule of 100 into the test. In front of the promo code, the customer could see that the promo code discount was equal to $59.80.
So what happened in the test?
After one month, both Variation A and Variation B saw an increase in the number of transactions against the Control variation. Variation B saw a transaction increase of 5.3%. Variation A was the winner with a transaction increase of 6.9%.
Greater differentiation between the original price and the sale price appears to signal a greater markdown to the shopper. In this test, making the sale price stand out in a green, smaller font emphasized the price reduction in visual form.
It is worth noting that our team was able to observe that the addition of the $ amount discount in Variation B actually hurt transactions by -1.5%. Displaying the dollar value discount may have been slightly distracting for shoppers.
Because this test was structured properly fractional factorial design ― Variation B was built off of Variation A, rather than the Control ― we could isolate the effect of the additional change in Variation B.
If we had simply combined both pricing psychology tactics into one variation, we would have seen a lift in sales of 5.3%, but we would not have known that we were missing out on an additional 1.5% lift.
Both variations confirmed the hypothesis that differentiating the sale price visually in terms of size and color affected conversions on the website.
Why you should test to see how your customers react to the pricing psychology tactics
Sale pricing is dependant on every business and product offering. If your company is at a disadvantage when competing on price, you may want to also consider your overall value proposition: Do the perceived benefits of buying your offering outweigh the perceived costs?
You should test communicating the features and benefits of your offering that will offset the costs in your shopper’s mind (including price). These valuable additions make the decision to buy from you that much easier.
For an example of how we refined a company’s value proposition to justify a higher product price, check out ‘A-ha!’ Moment #4 in 5 test results that made us say “A-ha!”
If your value proposition is strong, you can layer in tests that incorporate the principles of pricing psychology, to help you achieve even more sales lift.
You should make sure you understand how to frame your sale price before the increased traffic for the holiday season. After all, you want to catch shoppers when they feel the pressing need to buy! And pricing psychology can help you do it.
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