The price has psychological value. Buyers will buy a high-priced product because they believe the high price is a good indicator of value. Their perception is not based on reality, it is based on psychology, so buyer behavior is affected by more than just the tangible product and price.
Interestingly, as buyers research product attributes more or the business promotes product features more effectively, that product knowledge (“familiarity breeds contempt”) enables buyers to make a more rational purchase decision, rather than psychological, and for buyers, prices move. down the value scale.
One of the uses of psychological pricing is in final price numbers. Buyers believe that prices that end in odd numbers, rather than even numbers (like $9.99, $199,999, etc.) are a better deal or price than even numbers (like $10 or $200,000). If the products to be listed must be in a price ‘band’ (such as online auctions, cars, or other sales listings), if the listing price is in the odd range, say $199,000, it will appear in a lower range. Price range than the $200,000 listing and will be seen as a better value. The challenge with this strategy is that products that end in an odd number are often perceived to be of lower value as well. Make sure you choose the right price and the right strategy for your specific product or service.
Another use of the psychological price is the reference price. Reference price is when buyers have a psychological response to price that reflects how they view a price’s relationship to a specific product. A company could take advantage of reference prices and position its product among high-value or luxury items to imply that its product belongs to the same category. Be careful with that positioning strategy, it can backfire if buyers feel that your product doesn’t really belong in that category.
For psychological pricing to be an effective pricing strategy, the product must have some features that will appeal to an ego-sensitive buyer. For example, luxury items are attractive to ego-sensitive shoppers. Premium recreational goods, such as boats, are attractive to ego-sensitive buyers. Your strategic planning model should ensure that the pricing strategy selected for your product or service is the best price.
Make sure your pricing strategy fits your product and your market by testing the price before you go public with your entire target market. Also consider the impact that the other elements of the marketing mix have on your price: is the product the right one for a psychological pricing strategy? Is the promotional program in line with the pricing strategy? Is the location or channel of distribution balanced with price (ie, shipping the product should not cost more than the product itself)?