What do shoppers think—and how do they respond—when they see that $599 or $2,599 tag? Consider these influential marketing aspects and strategies for finding the right price points to increase traffic and profit
BY JULIE A. PALM
As much as we’d like consumers to buy a mattress based solely on how much they love the look, feel and life-enhancing technologies of the product, we know that something else matters as much—frequently even more—and that’s the price.
Price: A dollar sign and some numbers—$599, $1,599, $2,599.
If only it were that simple. As a retailer, you know that setting the perfect price for your products—the price at which you realize a strong profit and your customers feel they’ve gotten a good value for their money, maybe even a sweet deal—is an art.
We’re not here to tell you the ideal price for the Newest Fanciest Fabulous Mattress, but we do want to explore some of the latest and most interesting research into the psychology of pricing or, in other words, what consumers think—and how they respond—when they see that $599 or $2,599 tag so that you can become a pricing master.
Consider incorporating one of these strategies into your business model and see if it makes a difference to your bottom line. For instance, change the pricing structure of an underperforming mattress line for 30 days. If you have more than one store, try a new strategy at one location and compare results with the “control” stores. Track the effect on your overall sales and average ticket.
99 versus 00
Without setting foot in your store, we can reasonably guess that many of your price tags contain the numeral 9. In fact, we suspect you would have found it a little jarring if, in the example prices we used earlier, we had chosen $533, $1,567 or $2,512.
On an intuitive level, pricing an item at, say, $1.99 makes sense. A retailer wants to earn as much money as possible on a product, making $1.99 a better price—at least for the retailer—than $1.79. But consumers don’t want to feel like they’re paying too much. The “9” pricing theory says that although it’s only a penny difference, $1.99 feels considerably less than $2 because consumers focus on the 1, which, in this case, is half as much as the 2 that would appear at the start of the tag if the retailer increased the price by just one cent.
Vicki Morwitz, the Harvey Golub Professor of Business Leadership and a professor of marketing at the Stern School of Business at New York University, told CBS News’ Farnoosh Torabi this is due, in part, to something called the “left-digit effect,” which leads consumers to focus on the first numbers they encounter.
“We encode it in our minds before we read all the digits,” Morwitz said in the 2011 interview. This strategy has been deemed “charm pricing.”
William Poundstone, author of the book Priceless: The Myth of Fair Value (and How to Take Advantage of It) has estimated that using 9s (or other nonround numbers) can increase sales of products by nearly 25%.
But some newer research indicates that consumers may increasingly prefer paying prices in nice round numbers. Take for instance, the experience of video game creators who allowed players of “World of Goo” to set their own price for the game. More than 65,000 people bought “World of Goo,” paying anything from a penny to $150 through PayPal.
“Here’s the most striking statistic: 57% of consumers picked round, whole-dollar amounts ending in zero, and an additional 4% chose to pay round, half-dollar amounts. Those percentages are far too high to be random and, given the straightforward nature of the electronic payment, can’t be attributed to people’s dislike for handling small change or adding up different denominations of cash,” writes Matt Palmquist in a November 2013 blog for Strategy + Business. “The most plausible explanation is that people simply prefer round prices.”
Research conducted on restaurant tipping practices and at self-serve gas stations shows similar preferences for round numbers among consumers who have some control over the final amount of their overall bill.
“The implications for price setters and marketers are obvious: Ditch some of those $7.49 and $99.99 price tags in favor of rounded amounts that are easier for consumers to process,” Palmquist writes. “Some studies have shown that people appreciate the honesty of a flat amount and associate round prices with higher quality, which may encourage more favorable attitudes in consumers toward products that carry price tags ending in double zeroes.”
(Font) Size matters
When you put a mattress set on sale, how do you let your customers know? By breaking out the red signs and big, bold numerals to announce the new price? Morwitz points to research from Clark University and the University of Connecticut that shows you actually might be better off using smaller type to promote sales.
Put simply, consumers tend to associate “physical magnitude” with “numerical magnitude,” Morwitz says. Thus, even a lower price announced in huge numerals can defeat your sales message. Better to keep the type smaller and more sophisticated.
Dropping the dollar sign
When retailers see dollar signs, it usually means money coming in. When consumers see dollar signs, it usually means money going out—of their pockets. This helps explain why some businesses see average tickets rise when they eliminate the “$” from price tags.
“Over the past few years, pricing analysis specialists have determined that it’s far more effective to price goods without the iconic dollar symbol. It seems that when a currency sign appears with the price, we automatically connect it to our very own hip pockets or purses—and what is or isn’t inside there—leading us to believe the item in question is more expensive than it actually is,” says Martin Lindstrom, a branding consultant and author of Buyology: Truth and Lies About Why We Buy and Brandwashed: Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy.
In a 2012 piece for Fast Company, “The Psychology Behind the Sweet Spots of Pricing,” Lindstrom cites Cornell University research that tested three different menus at a New York restaurant: one listed food prices with dollar signs in front of the numerals, one printed numerals with no currency sign and one spelled out the word “dollar” after the numerals. Customers spent more when ordering from menus that contained only the numerals, not “$” or “dollars.”
“Even when the word ‘dollar’ was spelled out, it triggered the ‘pain-of-paying’ response,” Lindstrom says.
Poundstone cites the same Cornell research in his book Priceless, arguing that a simple “30,” rather than “$29.99” or even “$30,” allows consumers to focus more on what they are buying and less on how much it costs. When it comes to pricing, one lesson may be: Simplify, simplify, simplify.
Do away with price tags
If you really want to concentrate your customers’ attention on the features and benefits of your store’s products rather than their cost, you can try the rather bold move of eliminating price tags entirely.
Some mattress retailers, including BedCrafters by Michelle and McRoskey Mattress Co., believe that price tags on the sales floor encourage customers to fixate on price rather than quality, comfort and support so they don’t put them on their beds. Instead, retail sales associates discuss price when customers ask, usually late in the sales process when shoppers are trying to decide between mattress models.
Mark Ellwood, a contributing editor at Conde Nast Traveler and author of Bargain Fever: How to Shop in a Discounted World, posits that such retailers may, in fact, be at the forefront of a movement away from price tags.
The shift, according to Ellwood, is the result of two converging trends: Internet-driven pricing transparency and retail overcapacity (too many retailers selling stuff to too few consumers) that has retailers offering unprecedented numbers of loyalty programs, sales and deals. Together, these changes are giving consumers enormous power and creating a landscape in which individuals frequently pay wildly different prices for the same item.
“Remember, until the 1840s, there was no price tag. The price tag was invented in the 1840s. And I think we really are in the final days of the price tag. In 50 years, a price tag will be a retail (eyesore). It will operate in very different ways. Everything will be fluid,” Ellwood said in a conversation with Knowledge@Wharton, the online business analysis journal of the Wharton School at the University of Pennsylvania, in late 2013.
Ellwood offers an example of such fluidity: “I was just filming a segment for ABC with Juju Chang, and she walked into Banana Republic and bought a beautiful sweater and a lovely blazer—the perfect gift for her husband. Then I walked in 10 minutes later and, with the same sales assistant, I paid 25% less simply because I signed up for a newsletter from Banana Republic online and then spent a 25% voucher for online shopping. I pulled them out and I said, ‘Hey, I would love to spend this voucher with you if you let me use it now.’ ”
Consumers increasingly expect discounts—and rewards for loyalty.
However, Ellwood says, “You can’t constantly discount because it is a race to the (bottom). In a price war, there are casualties. But I think it is about rewarding loyal customers. In Bargain Fever, I talk about (luxury shoe brand) Roger Vivier for example. Roger Vivier has a very clever sale where it puts red and yellow dots on the bottom of the shoes and then it sends engraved invitations to regulars saying, ‘Hey, come shop—30% off or 40% off, according to the dot.’ There is a little sign in the window that says sale for legal reasons, but it is tiny.” The sale is intended for its most loyal customers, not off-the-street shoppers.
Admittedly, furniture and department stores may find it easier to launch frequent-buyer loyalty programs than stores that sell only mattresses. This is yet another reason sleep shops should expand beyond beds to offer pillows, linens, candles and other items that consumers buy more regularly.
Here are a few ideas for rewarding loyal or well-qualified customers: Six months after their mattress purchase, reach out to customers with a special promotion for new warm-weather or cool-weather linens or on the anniversary of their purchase, offer a discount on new pillows or a guest-bed upgrade. You also can use your customers to recommend others: Give a free eye mask or aromatherapy candle to anyone who recommends a friend (who then buys a qualifying mattress). Of course, for such programs to work, you need to have an excellent customer relationship management system in place. If you don’t, make installing one a resolution for 2015.
What matters more than money
Intrigued by the successful “It’s Miller Time” slogan from the bargain beer brand, researchers have studied the effects of selling time over money and found it can be a winning strategy among today’s time-pressed consumers.
To test the thesis, Jennifer Aaker, the General Atlantic Professor of Marketing at Stanford Graduate School of Business, and co-author Cassie Mogilner, a professor of marketing at the Wharton School, conducted a series of experiments, including one involving a lemonade stand.
In that experiment, they enlisted the help of a couple of kids to sell glasses of lemonade priced from $1 to $3. Over the course of the study, they used three different promotional signs:
O “Spend a little time and enjoy C&D’s lemonade”
O “Spend a little money and enjoy C&D’s lemonade”
O “Enjoy C&D’s lemonade”
The first sign, which emphasized spending time, drew in twice as many customers as the other two and those customers were willing to pay twice as much for the lemonade. The team’s other experiments—involving iPod loyalty and waiting lines for a concert—showed a similar consumer preference.
“Marketers need to start being aware of the meaning that their products bring to the lives of their customers before they start focusing their marketing efforts,” says Gregory Ciotti when analyzing the results in a June 2012 blog post. Ciotti, founder of the Sparring Mind blog, writes frequently on topics of marketing and psychology and is author of the ebook, Conversion Psychology.
That’s certainly relatable advice for mattress retailers, who can easily point to an array of benefits of their primary product besides its price—starting with less time tossing and turning and more time getting a good night’s sleep. O
Julie A. Palm is a writer and editor based in Winston-Salem, North Carolina. She can be reached at email@example.com.