The Impact of Human Psychology on Product Pricing

Before we get into specific tips for product pricing, let’s get one important point out there right away: A successful pricing strategy is often based largely on human psychology, and human psychology can be really weird.

That’s why pricing can affect consumers in so many counterintuitive ways, like these:

  • A product priced high often generates a greater perceived value and therefore can attract more buyers
  • A product priced low can turn off customers, who will perceive it as less valuable
  • Simply having more than one pricing option, particularly when one seems very expensive, can drive customers to pay for the more affordably priced option
  • A sense of product scarcity—such as an ad claiming only a limited amount available at a given price—will compel more customers to buy

Notice that none of these examples above has anything to say about the product’s inherent value or importance to the potential buyer, or whether the price is actually what the customer was expecting to pay. It’s all psychology.

The Strange but Real Effect of “Greater Perceived Value” Pricing

Consider this sales story from the book Influence by psychologist Robert Cialdini, PhD.

To illustrate his thesis that we make many decisions for emotional reasons even when we think we’re using analytical reasoning, Dr. Cialdini tells the story of a jewelry store owner who was having trouble selling some turquoise jewelry she had recently put on display in her store.

The woman tried everything. She put the jewels at the front counter, placed them in a prominent display case, and guided customers to them every chance she got. Nothing worked. Finally, she was ready to give up. So she left a note for her store manager to “mark the prices x 1/2” on all of the turquoise inventory, which the manager misread as an instruction to double their prices. Interestingly, when the prices went up by 100%, they sold out almost immediately.

As Dr. Cialdini points out, a higher price truly can influence us psychologically into perceiving the product as more valuable.

Read the SaaS Pricing Book ➜

But What About the Power of Free?

At the other end of the spectrum, there’s the important point Chris Anderson makes in his book Free. As soon as your customer is confronted with having to pay any price for your product—even just a few pennies—a different type of psychology kicks in and can stop that buyer completely.

Should I really do this? Is this a stupid decision? Do I really need this right now? Those aren’t analytical questions your prospect is asking herself: they’re primal, fear-based questions. And she’s probably not even aware she’s asking them. All she knows is: something just popped up (a price) that could lead to a problem (me parting with my money). Let me stop before I do something I’ll regret.

This helps explain why, as research from the Baymard Institute has found, about 70% of online shopping carts are abandoned.

Or, as ProductPlan founder Jim Semick put it in a Product Stack webinar we co-hosted to discuss pricing subscription software, “Customers are irrational when it comes to pricing.”

3 Lessons About Product Pricing

So where does all this leave you and your product pricing strategies? The Product Stack webinar, The Art and Science of Subscription Pricing, has a lot of useful information on the topic from Jim as well as our friends at PivotalTracker and Jama Software. We recommend you give it a viewing.

But in this post, we’d like to call out a few important lessons ProductPlan’s own Jim Semick offered in the webinar.

Note: The webinar’s pricing discussion focused specifically on SaaS products, which all of the panelists’ companies offer. But many of these lessons can apply to other types of products.

1. Treat pricing as part of your product—and ideally a differentiator.

As Jim pointed out, with so much competition in just about every industry and product category, pricing can be a way a business can set its offering apart.

If you’re selling a product with many competitors, pricing yours differently could provide a competitive edge. For example, if your competitors employ usage-based pricing, you could try charging by monthly seat licenses. If your pricing model makes more sense to potential customers, it will be viewed as a unique value proposition.

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“If you’re selling a product with many competitors, pricing yours differently could provide a competitive edge.”

Another example: Maybe you can find a way to break a version of your product into multiple, smaller products that users can purchase separately and at their own pace.

The psychology involved: There are a couple of important psychological principles at work here. First, rather than forcing your prospective buyer to simply compare your product’s pricing alongside a series of competitors’ products with identical pricing models (a comparison you might win or lose), you’re giving them a sense of novelty—something we are psychologically drawn to. So you’re changing the contest from a question of which product is the cheapest to one about whether those other pricing models even make sense compared to yours.

Second, by dividing your product up into smaller and more affordable services, you are giving price-conscious customers a chance to buy into your offering without triggering the perception that because your product is more affordable than the others it has less value. That’s because your prospects can see that the full-featured version of your product is not priced unusually low.

So you can create a lower-priced entry point without sacrificing your product’s perceived value.

2. Find a way to tie your product’s price to your customer’s success.

Let’s say you’re selling a SaaS bookkeeping platform to mid-sized businesses. Most similar products will have pricing pages listing each of the options—may be a barebones freemium tool, an entry-level paid version, and a power-user or enterprise version.

That’s fine, but those prices don’t tell the would-be buyer anything about what the cost will mean in terms of their success.

So let’s say instead of listing your power-user version as $80 per month, your product pricing page plays up the fact that this cost represents “just %1 of what it would cost you to hire an accountant.”

This works for old-school products, too, not just SaaS software.

Marketing author Bob Bly often includes a prominent selling message for pages, which goes something like this: “The value you’ll get from the lessons in my book on marketing your service business will be worth at least 20 times the book’s cost, probably far more.”

If the reader gives this a moment’s thought, they realize it’s almost certainly true. If Bly’s book retails for $20, and they find even one good idea about marketing their services in the book, of course, that reader will enjoy a return on that knowledge that’s worth many times more to their business than $20.

The psychology involved: This strategy of connecting your price directly to how it will benefit your customer helps short-circuit that pang of fear most of us feel as soon as we’re confronted with having to open our wallets.

In fact, we’re countering emotions here not with analytical reasoning (which rarely works because emotions are more powerful) but with more emotions—in this case, desire. We’re telling our prospect, “Don’t worry about paying for this product; look at all the great benefits it’ll give you.”

3. Build in opportunities to sell your existing users more options and services.

Another point Jim made was that many businesses miss revenue opportunities because they view their flagship product as the one and only thing their company can charge for.

When these companies add new services or features to the product, for example, existing users (and new ones just signing on) get all of these new offerings as part of the product’s original pricing.

What these businesses are missing, though, is that these users have clearly already determined that the product they bought from you—before you added any additional functionality—was worth the price as the product stood at that time.

They also overlook another important fact: They have successfully built a product that meets real needs and solves real problems for their user persona. That means the company is in a strong position to know (or to learn, by talking to their users) what similar problems they might be able to solve. That could translate into not only additional products or separately priced add-ons but also professional services that complement their products.

In other words, your product pricing strategy should not be limited to figuring out the now-and-forever pricing of your company’s main product. It should also include finding ways to sell complementary products, product upgrades, and even relevant services to your market.

This strategy can also serve as a way to increase your overall revenue from your customer without raising your prices on your one primary product.

The psychology involved: As Jim pointed out when a customer buys your product for the first time, that price becomes their anchor—forever—for how they view your product’s cost. If you add significant value to your product over time, and you want to raise your prices, that could create serious friction with that customer—even if they know the product is giving them much more value than when they started using it.

So one benefit of creating and selling add-on components and products to your main offering is that it allows you to charge your customers for the increased value you’re building for them—without psychologically triggering their primal worry that the product they decided way-back-when was worth it… now might not be.

More Pricing Issues Discussed on the Webinar

  • If you’re building a startup, and you want to raise your product’s prices, should you grandfather in your early users at the old pricing? Why or why not?
  • Can lowering the price of your subscription-based service actually cause you to lose customers because the communication you send about the lower price will force some users to rethink the amount they’re paying in the first place?
  • How might your attempts to iterate your product pricing strategy along the way affect your relationships with investors? Are there good ways and bad ways to present this to your backers and stakeholders?
  • Product pricing is a complex and tricky topic—one of the most difficult aspects of product management to get right. If you’re completely stumped about where to start, check out the Product Stack webinar: The Art and Science of Subscription Pricing.