Psychology of Pricing

  • Posted: April 19, 2013 
  • by Barbara   -  
  • Comments Off

Pricing  is a major  issue for retailers, effecting margins and profitability.  Retailers  want to  keep customers attracted to their store and compete in the  market place. Just recently  I came across an article by a dear colleague Cathy Wagner. Here is what she has to share about the psychology of pricing.

I agree with her 100% and could not  have said it better : so I didn’t and share what she wrote with you.

Many of my clients challenge me as well about this issue but once they try it and see that it works they are convinced and keep these tips at hand when pricing.

The Psychology of Pricing For More Profit

In my years as an independent specialty retailer I really got pricing down to a science. I didn’t know at the time that it actually IS a science. Behavioral economics and the study of psychology of retail shoppers is fascinating.
What a person will pay is all based on their perception of the value of the item. I learned in my store that adding a couple of dollars here and there didn’t change the customer’s perception of the value. An item that is $8 can be sold for $10. Now look at an item that is $11. It should just be $12. It just looks better, doesn’t it? And you would still buy it, right?

Adding that dollar or two has a HUGE impact on your profit.
It is imperative to strive for a minimum of a 55% initial markup (imu) for most stores. The easiest way to get that is to look at your inventory and see where you can use the pricing guidelines below. You will find it easier than you think. Many of my new clients fight me tooth and nail about this and then see how easy it is to mark up SOME items a little more. They become eager to do it as they see that impact is profound. For a store doing $500,000, increasing your imu from 50% to 55% can give you an additional $25,000.

The Psychology of Pricing For More Profit

In my years as an independent specialty retailer I really got pricing down to a science. I didn’t know at the time that it actually IS a science. Behavioral economics and the study of psychology of retail shoppers is fascinating. 
What a person will pay is all based on their perception of the value of the item. I learned in my store that adding a couple of dollars here and there didn’t change the customer’s perception of the value. An item that is $8 can be sold for $10. Now look at an item that is $11. It should just be $12. It just looks better, doesn’t it? And you would still buy it, right?

Adding that dollar or two has a HUGE impact on your profit.
It is imperative to strive for a minimum of a 55% initial markup (imu) for most stores. The easiest way to get that is to look at your inventory and see where you can use the pricing guidelines below. You will find it easier than you think. Many of my new clients fight me tooth and nail about this and then see how easy it is to mark up SOME items a little more. They become eager to do it as they see that impact is profound. For a store doing $500,000, increasing your imu from 50% to 55% can give you an additional $25,000.

ORIGINAL PRICE PROFIT PRICING NOTES
0 – $3.00 Use only the .50 or the .00 Don’t bother with the .25 or .75 – in most situations, it won’t make a difference.
$4.00 – $5.00 $5.00 A customer considers a $4 item to really be a $5 item anyway.
$6.00 – $8.00 $8.00 Use only when you have to – think hard and consider if the value of the item is really $10.
$9.00 – $10.00 $10.00 In their heads, a customer considers it a $10 item anyway.
$11.00 – $12.00 $12.00 An $11.00 looks like it should have been $10.
$13.00 – $15.00 $15.00 People like to think in 5’s. If it is $13 or $14, it might as well be $15.
$16.00 – $18.00 $18.00
$19.00 – $20.00 $20.00 As the prices get higher, I find that the extra dollar or two or three won’t stop a customer from buying it.
$21.00 – $22.00 $22.00 Keep the extra few dollars for yourself.
$23.00 – $25.00 $25.00 No discernible difference from the customers.
Above $25.00 Increase by $5 up to $100
Above $100 You can primarily increase by $25. Try it. Really look at an item. No one will buy an item at $140 that they wouldn’t buy at $150.

These are the only prices that you should use in your store.

Best;

Barbara


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