OK, last week we talked about product pricing basics – especially as they relate to your brand image. Today, I’m gonna talk more about product pricing, specifically tying product pricing to your product category and also psychological pricing tactics.

Pricing based on product category

One of the biggest challenges related to pricing is accepting that consumers DON’T always buy the cheapest brand. We seem to think that price wars are the best way to gain customers and that’s often wrong. So, let’s take a look at how most customers look at pricing based on product category.

Products (both goods and services) are categorized as:

  • Convenience — including most grocery store items and other low-involvement products
  • Shopping — things you care more about, like clothing
  • Specialty — expensive, high-risk items such as cars and furniture
  • Unsought — things you’d rather not buy, such as funeral expenses

If you want to learn more about product categories, check out an earlier post or click here.

How do product categories impact pricing? I’m glad you asked.

Generally, prices are more important for convenience items because you buy them frequently and don’t care a lot about them. For instance, if you want meat for dinner, you might consider chicken because it’s less expensive. If Green Giant beans are on sale, you might buy them rather than Del Monte.

Online price comparison is really easy, so if you’re selling convenience items, you’ll likely feel a lot of pressure on your pricing — you’ll need to be at about the same price point as your competitors.

Shopping goods have a lot more flexibility in terms of pricing. If you really like the way a pair of Levi’s fit, you’re not likely to settle for a cheaper brand. More likely, you’ll wait for a sale or purchase fewer pairs of jeans, rather than settle for a brand you don’t like.

Online competition in the shopping goods category comes from off-price etailers offering name brand products at discounted prices.

Specialty goods – are often expensive, purchased infrequently, and consumers have a lot at stake when buying them. Hence, price becomes relatively unimportant. Instead, consumers likely set a range of prices they can afford. If your product fits within their range of prices, they’ll consider it. If not, you’re out. We call this the consideration set and consumers may use other criteria to determine whether a product fits in their consideration set. Basically, consumers compare products within the consideration set without consideration of whether the product is the cheapest in the set.

So, if you’re looking at cars, you may have a variety of models you’ll consider within the $10,000 – $12,000 range. You don’t necessarily buy the lowest priced model, but the one that fits your needs the best.

Unsought products include things like insurance, emergency products such as a replacement for a flat tire, coffins, and healthcare. Because these products are considered immediately necessary, consumers often discount the cost of them. This is especially true in the case of healthcare because someone else pays most of the bill. Don’t believe me? When was the last time you asked around to see which doctor performed an appendectomy cheapest?

Because there’s little price pressure on unsought products, especially emergency ones, the prices are way too high — hence why healthcare cost increases far exceed inflation.

Psychological pricing

Product pricing is a function of what category consumers put your product in, as we saw in the earlier section. But, within pricing, there’s also psychological forces at work and psychological pricing can really impact your sales.

Odd-even pricing

For some reason, pricing products at $16.99 works better than pricing at $17. That silly little penny makes a big difference.

Price bundling

Everyone likes a bargain. When you bundle stuff together and sell it at a lower price, consumers clamor for your product — even when they don’t need everything in the bundle. One of the best examples occurs when you buy your new mobile phone. You know — they offer an accessory bundle — a car charger, case, screen protector. Now, maybe you only need the case, but the bundle is only $10 more than the case alone, so you spring for the bundle. You’ve spend more to get stuff you may NEVER use — welcome to psychological pricing.

Artificial scarcity

Tell someone they can’t have it, and they want it even more. For instance, consider a sign in the grocery store offering 4 cans of green beans for $3, limit 4 cans per customer. Now, you might have gone in and only bought 1 can of green beans, but because they’re 4 for $3, you buy 4 (that’s another example of bundle pricing). But, because you’re limited to only 4 cans, you say, “Hey, I want MORE than 4 cans”, so you pick up even more cans of green beans. Maybe you even use family members as shills to buy more than 4 cans by having them each buy 4 cans.

By convincing you you can’t have more than 4 cans, the store created a huge appetite for owning as many cans of green beans as possible.