When you think about retail pricing, flashy sales and discounts may come to your mind. However, the strategies used to influence our spendings go far deeper than “50% off” signs. In fact, retail pricing strategies are a masterclass in behavioral economics, leveraging psychological nudges to maximize sales and keep consumers coming back for more.
According to a 2023 report from McKinsey & Company, the global retail market is expected to grow to $32 trillion by 2027, with pricing strategies playing an important role in driving this growth. But what makes a consumer choose one item over another? Why are we more likely to buy something priced at $19.99 than $20.00? By exploring principles like charm pricing, decoy effects, and scarcity cues, this article uncovers how retailers subtly influence our decision-making and encourage us to spend more.
Charm Pricing: The Allure of $9.99
One of the most well-known pricing strategies in retail is charm pricing- ending prices with a “9.” While this may seem trivial, research shows that consumers are far more likely to perceive $9.99 as significantly cheaper than $10.00, despite the difference being just one cent. This is due to our tendency to read numbers from left to right, a phenomenon known as the “left-digit effect.”
In a 2015 study by Anderson and Simester published in Marketing Science, researchers found that products priced at $49.99 significantly outsold those priced at $50.00, even when the difference was negligible. Retailers capitalize on this cognitive bias to make prices feel more appealing and create a perception of value.
Additionally, charm pricing triggers an emotional response: it suggests a bargain. For budget-conscious consumers, this slight reduction can act as a powerful nudge, reinforcing the idea that they’re making a smart financial decision.
The Decoy Effect: Steering Consumer Choices
Imagine you’re deciding between two coffee sizes: a small for $3.50 and a large for $5.50. Suddenly, a medium appears on the menu, priced at $5.00. Though you originally intended to pick the small, the medium now seems like a better deal, and the large feels like an even greater value. This is the decoy effect in action.
As demonstrated by Huber, Payne and Puto in a 1982 study in Journal of Consumer Research, the decoy effect manipulates consumer preferences by introducing a third, strategically priced option that makes one of the original choices more attractive. Retailers often use this tactic to drive sales of higher-priced items by positioning them as the “best value.”
In practice, you’ll find the decoy effect at play in everything from subscription plans to fast food menus, where the “medium” size is rarely purchased but significantly boosts sales of the large.
Scarcity Cues: “Only 2 Left in Stock!”
Another common tactic in retail is leveraging scarcity to create urgency. Online retailers like Amazon prominently display messages such as “Only 2 left in stock” or “Limited time offer” to nudge consumers toward immediate action.
Scarcity appeals to our fear of missing out (FOMO), a psychological principle rooted in loss aversion. Behavioral economics tells us that people are more motivated to avoid losses than to achieve equivalent gains, as shown by Kahneman and Tversky (1979). When we believe a product may soon be unavailable, we are far more likely to make a purchase, even if it wasn’t part of our original plan.
In a 2020, a study published in Psychological Science, researchers found that scarcity messages increased purchase likelihood by 34%, demonstrating the effectiveness of this strategy in influencing consumer behavior.
Anchoring and Perceived Value
How do retailers make a $200 pair of shoes seem like a steal? By displaying them next to a $400 pair. This tactic, known as anchoring, sets a reference point for consumers, making the lower-priced item appear more reasonable by comparison.
Anchoring takes advantage of our tendency to rely heavily on the first piece of information we encounter when making decisions. A 2006 study by Ariely, Loewenstein and Prelec in The Quarterly Journal of Economics showed that consumers’ willingness to pay for a product could be manipulated simply by exposing them to an arbitrary anchor, such as the product’s original price.
This is why retailers frequently use “was/now” pricing, showing the original price alongside the discounted one. The anchor (the original price) makes the discounted price seem like an incredible deal, even if it isn’t significantly lower.
Conclusion
Retail pricing is a nuanced art rooted in behavioral science. From charm pricing to scarcity cues, the strategies retailers use are designed to tap into our cognitive biases, guiding our choices and maximizing their revenue.
However, while these tactics are effective, they also raise ethical concerns about transparency and consumer autonomy. As consumers, understanding the psychology behind pricing can empower us to make more informed decisions and avoid falling for these manipulative tactics.
By staying mindful of these pricing strategies, we can make more thoughtful choices and take control of our spending habits.
Written by Sara Lacerda
References:
Anderson, E., & Simester, D. (2015). "Price endings, left-digit effects, and consumer behavior." Marketing Science.
Huber, J., Payne, J. W., & Puto, C. (1982). "Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis." Journal of Consumer Research.
Kahneman, D., & Tversky, A. (1979). "Prospect theory: An analysis of decision under risk." Econometrica.
Ariely, D., Loewenstein, G., & Prelec, D. (2006). "Coherent arbitrariness: Stable demand curves without stable preferences." The Quarterly Journal of Economics.
Snir, A., Levy, D., & Chen, H. A. (2017). End of 9-endings, price recall, and price perceptions. Economics Letters, 155, 157–163.
Anderson, E. T., & Simester, D. I. (2003). Effects of $9 price endings on retail sales: Evidence from field experiments. Quantitative Marketing and Economics 1, 93–110.
Shlain, A. S. (2018). More than a penny's worth: Left-digit bias and firm pricing. University of California, Berkeley.
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