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Pricing psychology: how to set prices that drive sales

People’s overall impression of your brand is shaped by many factors. Direct and indirect interactions with your products or services are important, but referrals from friends and family, social media, customer reviews, product quality, shopping experience, and customer support can all have a role to play in how consumers view your business.

While you can take actions to improve this perception, it’s important to acknowledge that customers’ experiences and opinions will vary and can change over time. But there’s one factor that will always affect customer perception of your brand: price.

Pricing and customer perception

Pricing is a critical factor for consumers when they consider buying a product. People naturally want to ensure they get the most value for their money. However, from a business perspective, it’s important to recognise that having the lowest price or the product with the highest perceived value doesn’t automatically guarantee success in the market.

Take designer handbags, for instance. They often come with a much higher price tag than products of similar quality from less well-known brands. Yet, many customers are willing to pay a premium to buy designer goods. While luxury handbags serve the same practical purpose as other bags, attributes like exclusivity, brand reputation, and status differentiate high-end brands and give them a competitive edge in their target market.

Does this mean setting high prices for your products will make you a profitable luxury brand? Absolutely not. Achieving business success involves considering a multitude of strategic factors. It’s crucial to delve deeper into how consumers perceive your brands and products and how this perception influences their purchasing decisions. It’s important to base your pricing strategy on how it will affect consumer behaviour and help achieve your broader business goals.

Pricing strategies


There are several pricing strategies you can employ to run a profitable business. Here are some of the popular ones listed below:

Competitive pricing

This is a pricing strategy where a company determines prices for its products or services based on the rates set by its direct competitors. This approach can be especially effective when the company prices its offerings slightly lower than its competitors. However, even if the prices are not necessarily lower, setting prices in line with competitors can still help companies remain competitive if the product offers additional features or benefits. This approach is commonly employed in highly competitive markets.

Value-based pricing

Companies that use value-based pricing set the price of a product or service based on the value perceived by the customer rather than the actual costs. This approach requires companies to research and analyse customer data to understand the product’s worth in the eyes of consumers and how much they are willing to pay for the brand. For example, consulting firms, luxury brands and streaming services often use value-based pricing based on varying levels of convenience, service quality, and features.

Penetration pricing

Penetration pricing is a strategic approach in which a business launches a product or service at an initially low price to capture customers’ interest. By offering attractive initial prices, the brand aims to rapidly gain market share and divert customers away from competitors. Although this initial phase may yield lower profit margins, the strategy relies on generating substantial sales volumes to offset these narrower margins. After building a large customer base, companies typically raise prices to increase profits.

Dynamic pricing 

Dynamic pricing, sometimes referred to as surge pricing or time-based costing, is a pricing strategy employed by businesses to adjust prices to maximise revenue flexibly. Companies leverage this strategy to continuously evaluate prevailing market conditions and make real-time price adjustments based on demand and supply. Dynamic pricing is often used in ecommerce, hospitality, and the travel industry.

Premium pricing

Businesses can use a premium pricing strategy by charging higher prices than their direct competitors for their products. The idea behind this approach is that when products are priced relatively higher, people may perceive them as having superior value or quality compared to competitors. Take Dyson hair dryers for example. Though Dyson is known for their innovative technology and superior performance, they are often priced significantly higher than many hair dryers on the market.

Psychological pricing

Psychological pricing is a strategy that involves setting prices slightly below a whole number to create the perception of a lower cost. For instance, pricing an item at $99 instead of $100 gives the impression of greater affordability. While the one-dollar difference doesn’t save much money for the buyer, displaying a two-digit price instead of a three-digit can greatly influence a customer’s decision-making process.

Cost-plus pricing

Cost-plus pricing, also known as mark-up pricing, is a popular pricing strategy where a fixed mark-up percentage is added to the cost of the product to determine the selling price. For example, let’s say you run an online business that sells dog treats. Making each pack costs you $40, including materials, labour, and overhead. If you find that a 60% profit margin on each pack sold will keep your business running successfully, your selling price can be calculated as:

Selling price = cost + desired profit margin

$64 = $40 + $24 (60% of $40)

Australian legal requirements for price transparency

In Australia, pricing transparency isn’t just good practice; it’s a legal mandate for businesses. Companies must provide precise pricing information for their products and services, ensuring that all taxes, duties, and additional charges are clearly and accurately disclosed. Here are some important legal considerations about pricing you must know.

1. When promoting and displaying your prices, you must display the total cost of the product or service, including all taxes, duties, levies, or booking fees. Optional fees, such as delivery charges, do not need to be included in the total price.

2. If your business applies surcharges during weekends or peak seasons, you must communicate which surcharges are in effect and when. For example, if you run a car rental service, your rental agreement should prominently state the weekend and public holiday surcharge.

3. If your business charges a payment surcharge, you must have the evidence to validate the underlying cost structure for the surcharge. If customers are not given an alternative payment option without incurring a surcharge, the surcharge must be incorporated into the displayed price.

4. Be extra cautious when comparing prices with previous costs. If the product was not sold at the higher “original” price for a reasonable period before your sale, it could be considered deceptive.

5. Offering products as “free” with certain conditions attached can be a form of misleading price claim, as it can trick customers into paying more than they originally intended.

There are more things you need to know about pricing requirements in Australia. For more information, we recommend you continue your research on the Australian Competition and Consumer Commission (ACCC) website.


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