Psychological Pricing-“Buy One Get One” or “Buy 2 & Get 50% Off”?

Akshay Rao, Professor of Marketing from the University of Minnesota’s Carlson School of Management, found in a study that consumers prefer receiving something extra, instead of getting a discount. Even though the statements above mean the same thing, consumers tend to choose the first one. Because “buy one get one” offers to give them something they “apparently” didn’t pay for.

Psychological Pricing Sneaky Way 1: Innumeracy

Does “Buy One Get One” equal “Buy 2 & Get 50% off”?

1. Buy 1 shirt for $100 and get another free means getting 2 shirts at $100

2. Buy 2 shirts at $100 and get 50% discounts mean consumers get a $100 discount on the total price. They get 2 shirts for $100

A.K. Dewdney, author of 200% of Nothing describes this phenomenon as innumeracy. Innumeracy is when consumers don’t want to or are unable to understand basic mathematical ideas involving everyday life activities.

Consumers will gladly accept an extra item over a discount — even if both options give them the same number of things at the same price.

Psychological Pricing Sneaky Way 2: Reference Pricing

Roderick Swaab, Professor of Organization Behavior, taught us an interesting lesson during his lecture on negotiation.

Set up an anchor first! Anchor is as simple as the first number thrown in the mix. If you’re buying, mention a low price. If you’re selling, you should ask for a high price.

Harvard University says, “Anchoring creates a cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.” After anchoring is done, usually the negotiators settle closer to the first price asked.

Reference pricing builds on this principle. It anchors the asking price in one of the three following elements-

1. Comparing the price with prices of other goods
2. Justifying a higher price and then offering discounts on the higher price
3. Starting with a low left side number by ending with .90 or .99. For example, $1.99 as opposed to $2.00. This is the type of pricing most consumers refer to when they think of psychological pricing. I am not going to elaborate on this here.

1. Anchor in other products

The first one is a super-smart way of justifying prices. IKEA does it pretty well.

In the award-winning ad for IKEA by Memac Ogilvy & Mather, UAE ( Tagging Ogilvy & Mather Group UK), IKEA shows how affordable its products are. You can get a TV bench for just 3 coffees and 2 sugars!

By comparing with other products, the brand makes the consumer think. The consumer does the mental justification of buying that item. “Hey, I take 3 cups of coffee every day! I can easily get a TV bench.”

2. Anchor by justifying a higher price

Last year, I attended a webinar by Tony Robbins, Dean Graziosi, and Clickfunnel’s Russell Brunson.

During the hour-long webinar, they described the course they designed. It was a fascinating product with tons of benefits. In the last section, they shared the prices of individual modules. If I’d book them together, I’d get a hefty discount over the total price. In addition, I’d get some free goodies (Hello Innumeracy!).

This method is used by many content creators online. You show the prices of individual modules in a course and sum them up. Then you reveal that the course price with all modules is much lower than the sum.

And this works pretty well. I like this method of Psychological Pricing too as the consumers know exactly what they are getting.

Psychological Pricing Sneaky Way 3: Buyer’s remorse

Buyer’s remorse is the sense of regret after having made a purchase.

Guess what, there’s a way to flip it to encourage purchase. Buyer’s remorse can also be the regret after not making a purchase.

Imagine that you saw a beautiful jacket in a store. While you were deciding whether to buy, someone swooped in and picked it up. You’ll have the regret of not getting it sooner. At that very moment, a salesperson walks in and says “Sir, we may have another copy left in another branch. Do you want me to get that delivered to your home?”.

Isn’t it likely that you’ll say yes?

The salesperson may say something different to use your remorse as well. He can show you another jacket and mention that’s the last piece. You’ll be quicker to make a decision this time.

This method is more about using psychological pricing to justify a higher price. Let me share something I experienced this year —

I love Mangoes! This year, due to over-production, the prices were super low. I started purchasing for 1 week at a time. I continued this purchasing trend for 4 weeks. Then the prices started going up. I was sad and asked myself, “What if I bought in bulk!” And from then on, I started buying for 2 weeks in one go. Even though the prices went up by then.

Psychological Pricing Sneaky Way 4: Time-Limited Offer

I am guilty of using this as well. Limited time offers are great ways of bringing back consumers who have purchased earlier from you but haven’t repurchased. These offers also attract new consumers who are on the fence.

It’s as simple as a year-end sale that lasts till the stock lasts or goes on for a week. For online sellers, if someone visits your site but doesn’t purchase, you can set up automated re-targeting ads to offer limited-time prices to that potential buyer. Even the course I talked about above (Tony Robbins) offered me a limited-time offer.

Praveen Aggarwal, Interim Dean, Labovitz School of Business and Economics, and Rajiv Vaidyanathan, Ph.D., Professor of Marketing of the same school published a study showing the impact of time-limited offers. In time-limited offers, willingness to buy jumps by a whopping 27%!

Psychological Pricing Sneaky Way 5: Double or Triple Discounting

In recent years, we have seen the phenomenon of double discounting. For example, there can be a fixed sale of 20% on all items of a store. Then for Tuesday 12–3 PM, the store can offer an additional 10%. They can offer triple discounts for users who pay with Visa. This is fairly straightforward use.

Dr. Jane Cai of Drexel University researched to understand the effects of double or triple discounting. She understood that the price and the knowledge level about the product impacted the perception of savings. For some items, users didn’t think they were saving through double discounting even though they were.

Truth is, retailers often expect consumers to do maths. Not every consumer wants to do that. Double or triple discounting confuses them.

There’s unfortunately a way to take advantage of this confusion. The stores shown above were doing the right thing — they were giving the consumers what they were outlining.

However, in recent years, many retailers and online sellers have taken double discounting to another level.

• Complex math with big numbers: Instead of saying 30% off, they can say 20% off. And then add 10% extra discount on discounted price. By adding on discounted price, retailer offers less than the consumer thinks

Math time!

1. 30% discount on a $100 item means the final price is $70

2. 20% discount on a $100 item equals $80. 10% on discounted price would be $8. So final price will be $72. The consumer will get 28% discount even though he might think he’s getting 30%

Final Thoughts on Psychological Pricing

Seth Godin said in his 2005 book “All Marketers are Liars” that

“Perhaps the reason price is all your customers care about is because you haven’t given them anything else to care about.”

If consumers truly value your product, they will be willing to shell out big bucks without any psychological pricing. But if you have me-too products, then playing with the pricing is very useful.

Sometimes psychological pricing can be useful in making the consumers understand the true value — as IKEA did. But it’s good to not be in a position to take advantage of users.

Read more on pricing strategy.