The Profitable Price: How To Boost Sales With Pricing Psychology

My husband purchased a $600 pair of Oakley sunglasses last week. 🤯

When I asked him why he thought he needed a pair of glasses that cost more than our children's monthly education, he said it was because our insurance covered "most of it." 🫣

Hoping to encourage him to shop around a bit more next time, I followed up and asked him if he would ever buy from Warby Parker.

His response was: "Who's Warby Parker? Isn't that the $100 glasses company?"

I tell you this because it demonstrates two points:

1. My husband is the most consumery-consumer I have ever met.
2. Warby Parker has a crystal clear position in the market - one that even unaware consumers are apparently aware of.

But how they managed to secure this $100 position in a market dominated by highly competitive legacy brands is nothing short of amazing...

More Than Meets the Eye

According to Warby Parker's website, the brand had a humble beginning:

"Every idea starts with a problem. Ours was simple: Glasses are too expensive.

Our founders were students when one of them lost his glasses on a backpacking trip. The cost of replacing them was so high that he spent the first semester of grad school without them, squinting and complaining. (We don't recommend this.)

The others had similar experiences and were amazed at how hard it was to find a pair of great frames that didn't leave their wallets bare. Where were the options?"

Fast forward several years and the fellowship of friends had a plan to launch an eyewear brand dubbed "Warby Parker" that would provide the market with much-needed high quality and cost effective products.

The business model was simple: while other, more tenured brands were selling eyewear at an average price of $263 per pair, Warby Parker would swoop in and capture the majority of market by selling high quality eyeglasses at just $45.

It was a bold move that would disrupt the entire industry...all they needed was validation for their idea, and they were off to be multi-millionaires. 🎉

But their marketing professor, Jagmohan Raju quickly dismissed the idea of pricing their products at $45.

And his reasoning was 100% psychologically sound...

The Price Has to Be Right

If you want to choose profitable prices for your products that will satisfy customers, outmaneuver the competition, and boost sales, then you need to learn that pricing isn't about the numbers; it's about understanding the relationship between perception and value.

Great example: in the late 1990's, PG&E was prepping to launch their new Olay Total Effects product to the market. Olay began their product launch by testing three different price levels:

• A lower price of $12.99.
• A mid-tier price of $15.99.
• And a higher price of $18.99.

They wanted to find out which price would be more appealing to target customers, specifically when it came to boosting initial sales.

According to Psychology Today, "when Olay’s price was increased to $18.99, both groups, and particularly, the department store shoppers’ intentions to purchase shot up to levels higher than the $12.99 price."

Joe Listro, Olay’s R&D manager explained, "We found that at $18.99, we were starting to get consumers who would shop in both channels. At $18.99, it was a great value to a prestige shopper who was used to spending $30 or more [for a similar product]. But $15.99 was no-man’s-land—way too expensive for a mass shopper and really not credible enough for a prestige shopper.”

What Olay learned through their initial price testing is something we should all take to heart:

The psychology behind the price matters more than the numerical value.

Warby Parker's founders wanted to set their prices at $45 based on their own assumptions that price was a value driver. What they didn't realize was that customers were already coming to the table with three preconditioned "heuristics" (mental shortcuts) that would heavily influence their perception of the price:

1. First, customers were already "anchored" to other prices within the market: Professor Raju knew that consumers often use the first piece of information they receive as a reference point when making decisions (also known as the "Anchoring Heuristic".)
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   ➡️ Instead of setting prices to a lower anchor, Raju suggested the founders anchor to the much higher prices set by established brands and set their price at $95. Keeping their prices closer to a higher market value made their products seem valuable, yet affordable.
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2. Second, customers were evaluating prices based on quality perceptions: Raju also understood the common belief that price is often associated with quality (also known as the "Price-Quality Heuristic.")
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   ➡️ Lowering the price too much could signal inferior quality to potential customers and turn them off. By setting the price at a level that was significantly lower than competitors but still considerably higher than bargain prices, Raju helped the founders strike a balance that communicated both value and quality to consumers.
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3. Finally, customers were using previous reference points to make a quick decision: Finally, Raju advised the founders to consider the reference prices that consumers were already using to evaluate the fairness of a given price.
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   ➡️ By positioning Warby Parker's price point within the range of what consumers were accustomed to, Raju ensured that the price would seem reasonable and (most importantly), justifiable.
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   This would reduce friction and resistance to purchasing and increase the likelihood of adoption among the target market.

TLDR; Utilizing poor pricing psychology could potentially kill a brand straight out of the gate, but applying pricing psychology correctly has the potential to launch some brands into the stratosphere.

Wharton marketing professor Jagmohan Raju understood how to set a profitable price better than most, and it was one of the reasons why his advice made Warby Parker into an "overnight" success.

How to Set a Profitable Price for Your Brand

1. Find out what your customers truly value. Marketers often default to manipulating price as their first order of value, but customers aren't always looking for just cheap products.
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   To find out what your customers truly value, start a conversation. Ask them what triggered their need for your products, and what they didn't love about the options available. Get as much context to their journey as you can - the more information you have, the easier setting your "profitable price" will be.
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2. Spy on your competitors. Once you've got a good idea of your customer's journey, take a look at the market and figure out where your products stand in comparison to your competitors.
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   Are you on the lower end of the price spectrum? Near the top?
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   Take some time to identify gaps within your market and compare that to the needs of your customers so you can set a price that will balance both the needs of your business and the needs of the market.
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3. Test a psychological price before you commit. Understanding what your customers psychologically value will help you set a price that's both fair and profitable.
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   Once you've got both customer and competitor data to draw from, decide on three different price points to test within your market. Easiest way to do this is run an ad campaign strictly built to test prices - keep your creative linear so you can identify changes within customer sentiment. You'll learn a ton from this one.

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