Let's be clear: mastering the psychology of pricing isn't about tricking customers—it's about understanding how people make decisions and structuring prices naturally and compellingly. From how numbers are displayed to how options are framed, the correct pricing strategies can make your offers more attractive without lowering profit margins.

Understanding the psychology behind pricing can help you position your products or services in a way that feels more appealing to customers, encourages purchases, and ultimately boosts revenue. Whether you're running an e-commerce store, offering consulting services, or selling SaaS subscriptions, small changes can make a big difference.

Here are some of the most effective pricing strategies rooted in consumer psychology:

1. The Power of the Number 9

Have you ever wondered why prices often end at .99?

This isn't just a marketing trend—it's a powerful psychological pricing tactic known as charm pricing. Consumers don't always process numbers logically; they rely on subconscious cues when purchasing. Research shows that prices ending in 9 can make a product feel significantly cheaper than it actually is, even if the difference is only a penny.

For example:

• £9.99 feels closer to £9 than £10, even though the difference is just one penny.
• £199 seems a much better deal than £200, even though it's only a tiny reduction.
• People perceive £4.99 as significantly cheaper than £5, even though the difference is minimal.

A well-known study by Thomas and Morwitz (2005) found that left-digit anchoring plays a key role in interpreting prices. When the leftmost digit of a price changes (e.g., from 3 to 2 when moving from £3.00 to £2.99), our brains register it as a more significant reduction than it actually is.

This effect is especially strong when consumers read prices quickly or compare multiple items at once.

Another interesting study by MIT and the University of Chicago tested the impact of charm pricing in a real-world scenario. They listed women's clothing items at three different price points: $34, $39 and $44.

Surprisingly, the $39 price outperformed both $34 and $44, even though $34 was the cheapest option. The presence of the 9-ending price made it seem like a better deal, even when a lower-priced alternative was available.

In 2012, the U.S. retailer J.C. Penney attempted to eliminate charm pricing in favour of rounded, "fair" prices (e.g., $40 instead of $39.99). Their reasoning? They believed customers would appreciate straightforward pricing. However, sales plummeted by 25%, as customers no longer perceived the prices as bargains. The company eventually reversed the decision and reinstated charm pricing.

2. The Decoy Effect: Steer Customers Towards a Higher Price 

Imagine you're offering two pricing plans:

• Basic: £25/month
• Premium: £50/month

With only these two choices, many customers will lean toward the cheaper Basic option, as it feels like the more economical decision.

However, by introducing a decoy option in between, you can subtly guide them toward the higher-priced plan:

• Basic: £25/month
• Standard: £45/month
• Premium: £50/month

Now, the Premium plan looks like a significantly better deal—for just £5 more, customers receive everything in the Standard plan plus additional benefits. The presence of the Standard plan acts as a decoy, making the Premium option appear like the most logical choice.

The Decoy Effect, also known as asymmetric dominance, is a cognitive bias where consumers are more likely to choose an option when a less attractive, similar option is introduced. In a well-known study by economist Dan Ariely, researchers tested pricing models for The Economist magazine:

• Online-only subscription: $59
• Print-only subscription: $125
• Print + Online subscription: $125

At first glance, the print-only option seems unnecessary, but its real purpose is to make the print + online option look like the best deal. When tested, most customers chose the print + online bundle, whereas, without the middle decoy, many opted for the cheaper online-only subscription.

Apple frequently uses the Decoy Effect when pricing its products. Consider a lineup like this:

• iPhone SE: £429
• iPhone 13: £749
• iPhone 13 Pro: £999
• iPhone 13 Pro Max: £1,099

Here, the iPhone 13 Pro serves as a decoy—it's priced close to the Pro Max, making the highest-tier model seem like a better deal. Seeing the price gap, many customers opt to upgrade to the most expensive model.

3. The Anchoring Effect: Setting a Higher Reference Point

When assessing value, people rely heavily on the first price they see—known as the anchor. This cognitive bias means that the initial number presented influences how we perceive subsequent prices, even if it has no direct connection to their actual worth.

For example, if you walk into a store and see a luxury handbag priced at £1,500, then come across another bag for £500, the second bag suddenly feels like a bargain. Without the initial reference price, £500 might have seemed expensive, but compared to £1,500, it feels reasonable.

Researchers at MIT conducted an experiment where participants were asked to write down the last two digits of their Social Security number before bidding on items in an auction. The items included wine, chocolate, and computer accessories.

• Those with higher Social Security digits (e.g., 80-99) placed significantly higher bids than those with lower numbers (e.g., 01-20).
• Even though the numbers were completely unrelated to the items, participants used them as reference points (anchors) when deciding their bids.

This experiment confirms that consumers' perception of price is influenced by the first number they see, even if it has no logical connection. When a high anchor price is set—whether through an original price before a discount, a high-priced premium option, or a reference product—customers adjust their willingness to pay accordingly.

4. Odd vs. Even Pricing: Which One Works Best?

How a price is structured—whether it ends in odd or even numbers—sends a subconscious message to customers about the product's value, quality, and positioning in the market.

Odd Prices (e.g., £9.99, £19.95, £49.99)

Odd-numbered prices are commonly associated with discounts, deals, and affordability. They give the impression that the product is competitively priced and that the customer is getting a bargain. This is why supermarkets, fast fashion brands, and budget-friendly retailers frequently use charm pricing (e.g., £9.99 instead of £10).

Even Prices (e.g., £100, £250, £1,500)

Even-numbered prices, especially rounded ones, convey a sense of quality, exclusivity, and luxury. High-end brands avoid odd pricing because whole numbers feel intentional, premium, and well-crafted. A £1,000 designer handbag feels more luxurious than one priced at £999.99, even though the difference is negligible.

A study published in the Journal of Consumer Research found that odd prices trigger a perception of value, while even prices evoke trust, quality, and prestige. Consumers tend to associate rounded, whole numbers with high-end, handcrafted, or bespoke products, whereas odd-numbered prices suggest competitive pricing and affordability.

Apple prices its premium products with whole numbers to reinforce exclusivity:

•  iPhone 15 Pro Max: £1,199
• MacBook Pro: £2,499

Amazon, on the other hand, optimises for high conversions with odd-numbered pricing:

•  Fire Stick: £39.99
• Echo Dot: £49.99

5. The Power of FREE

The word FREE is one of the most powerful triggers in consumer psychology. People are wired to perceive free items as significantly more valuable than discounted ones, even if the actual financial benefit is the same. This is because zero cost removes any hesitation, making a purchase feel like a win-win situation. 

A famous study by behavioural economist Dan Ariely demonstrated this effect using chocolates. When participants were offered:

• A Lindt truffle for 15p or a Hershey's Kiss for 1p, most chose the truffle (higher quality).
• But when the prices were dropped by 1p—making Hershey's Kiss free—the majority suddenly chose the free option, even though the price difference remained the same.

This study highlights how the word FREE changes decision-making, even when the actual financial savings are minimal.

 Amazon mastered this tactic with its free shipping on orders over a certain amount and Amazon Prime offering "free" delivery. Customers often spend more just to qualify for free shipping, proving that people will buy extra items rather than pay for something they see as a "waste" (shipping costs).

6. Price Framing: Make Costs Feel Smaller

How you present a price can significantly impact how customers perceive its affordability. Even when the total cost remains the same, framing it in a smaller, more relatable way can make it feel much more reasonable. This technique is widely used in subscriptions, meal plans, and high-ticket purchases to increase conversions.

People naturally compare prices to everyday expenses rather than evaluating them purely as numbers. When a price is broken down into smaller, digestible amounts, it feels more affordable and justifiable, reducing purchase hesitation.

"£1.50 per day" sounds more affordable than "£45 per month"

• Many people won't think twice about spending £1.50 per day on coffee, but £45 per month feels like a more significant commitment.
• This strategy works particularly well for subscriptions and memberships (e.g., "Get unlimited access for just £0.99/day").

"Only 99p per serving" feels more reasonable than "£30 per meal plan"

• Instead of presenting the total price upfront, breaking it down into cost per use makes it feel like a small, justifiable expense.
• This is common in health and fitness plans (e.g., "Get fit for just £2 per workout" instead of "£60 per month").

 Many gyms advertise their pricing as:

• "Only £1.99 per day for unlimited access!" instead of "£60 per month"
• Customers perceive £1.99 per day as a minor expense but may hesitate at a £60 monthly charge, even though the cost is the same.

7. Tiered Pricing: Give Customers a Choice

Instead of offering just one price, businesses can increase conversions by structuring pricing tiers that cater to different budgets and needs. Tiered pricing not only removes the binary yes/no decision but also subtly guides customers toward the most profitable option. 

By providing multiple pricing options, businesses can appeal to different customer segments:

• Basic Plan: £15/month (For individuals or freelancers)
• Pro Plan: £45/month (For small teams or growing businesses)
• Enterprise Plan: £100/month (For larger businesses or premium users)

Most customers won't pick the cheapest option because they fear missing out on value, but they also won't always go for the most expensive. Instead, they are drawn to the middle-tier plan, which feels like the best balance of features and cost—a phenomenon known as the "compromise effect."

Studies have shown that when presented with three pricing options, consumers tend to gravitate toward the middle option—even if they hadn't planned to spend that much initially. This works because:

• The cheapest option feels too limited.
• The most expensive option feels excessive.
• The middle-tier option seems like the best value for money.

A classic example is Spotify's pricing structure, which includes:

• Spotify Free (Basic, ad-supported version)
• Spotify Premium (£9.99/month) (Most popular plan—removes ads and allows offline listening)
• Spotify Family (£16.99/month) (Higher-priced plan, but only useful for families)

Most customers choose Premium, as it offers significant value over the Free plan while not being as expensive as the Family plan.

Final Thoughts

Pricing is more than a numbers game—it's a psychological strategy. By making small tweaks, such as using charm pricing, anchoring, free offers, and tiered pricing, SME owners can increase sales without necessarily lowering prices.

The key is to test different strategies and measure their impact. What works best will depend on your product, audience, and industry—but one thing is certain: the way you present your prices matters just as much as the price itself.

Are your prices optimised to maximise sales and profitability? Small tweaks can make a big difference. Let Kaezn help you craft a pricing strategy that drives revenue and enhances customer perception.

Get in touch today to refine your pricing for success!