Stop Playing Games With My Money!

D. Rhodes, CPA, Writer and Editor

Did the title get you here? Yeah – it was a good one and it's one of the strategies we're going to discuss below. Today we're going to briefly dive into "The Mind Games of Money" and decode the psychology of pricing.

We're constantly asked questions about pricing – which is why we talk about it every 6-8 weeks. This time we're going to dive deeper into one of our unconventional approaches on pricing, because beneath the surface of numbers and decimal points lies a fascinating world of psychology that can make or break a sale. Today, we're discussing some proven psychological practices that influence purchasing decisions and exploring how you can learn from "Big Business" and leverage these insights to boost your bottom line.

The Decoy Effect: How Comparison Shapes Choice

Ever wonder why companies often offer three pricing tiers? It's not just to cater to different budgets—it's to guide your choice.

The Economist magazine once offered three subscription options:

• Web-only subscription for $59

• Print-only subscription for $127

• Web and print subscription for $127

At first glance, option 2 seems pointless. Who would choose print-only when they could get web and print for the same price? But here's the kicker: the presence of option 2 made option 3 seem like a bargain, significantly boosting its sales.

This principle, known as the "decoy effect," is used widely. Netflix, for instance, uses a three-tier pricing strategy that makes its standard plan seem like the best value, nudging customers away from the basic plan.

Anchoring and Framing: The Power of Context

The way a price is presented can be just as important as the price itself. This is where anchoring comes into play.

In a study published in the Journal of Marketing Research, researchers found that exposing consumers to a high anchor price for a product increased their willingness to pay by up to 50%. This explains why luxury brands often display their most expensive items prominently—they're not necessarily expecting to sell many, but they make their other "merely expensive" items seem reasonable by comparison.

Apple masterfully employs this technique. When they launch a new iPhone, they often introduce the premium model first, anchoring a high price in consumers' minds. This makes the standard model seem like a bargain in comparison, even though it's still a premium-priced product.

Charm Pricing: More Than Just Numbers

A study published in Quantitative Marketing and Economics found that using a $9 or $7 ending increased demand by more than 24% compared to a nearby price point. This phenomenon, known as "charm pricing," is so powerful that it even works when the 9 or 7-ending price is higher than a nearby round number.

Take the case of well-known clothing retailer Nordstrom. In a controlled experiment, they priced a dress at $34, $39, and $44. Surprisingly, the dress priced at $39 outsold both the cheaper $34 option and the more expensive $44 one. This real-world example demonstrates the potent psychological pull of the number 9.

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While these psychological pricing techniques can be powerful tools, it's crucial to use them ethically. Manipulative pricing practices can damage trust and harm long-term customer relationships.

Dan Ariely, professor of psychology and behavioral economics at Duke University, warns: "Once you start thinking about the way people really think, then you can create much better pricing—and much better business models."

The key is to use these insights to better communicate your value, not to deceive or manipulate customers.

Understanding these psychological principles gives you a powerful toolset and an advantage in your industry. Brainstorm on which of the strategies we discussed best fits your current business model.

1. Create smart comparison sets: When offering multiple options, design them to highlight the value of your preferred option.

2. Use anchoring judiciously: Consider introducing a premium option to make your standard offerings seem more attractive.

3. Test charm prices: If you're currently using round numbers, try experimenting with prices ending in 9 or 7.

Remember: Our ultimate goal is to help you save time and money, while building wealth and legacy.

The choice is yours, but the clock is ticking. Reach out today so we can help get you from where you're at, to where you want to be. Your move boss.

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*This article provides general information, not individual tax advice. Tax situations vary; consult with a qualified tax professional, like myself, for advice specific to your circumstances.