Use charm pricing to increase sales

The product prices you set in your online store are a crucial factor for the success of your business. In addition to their potential to generate conversions, they also influence the overall perception of the business among customers and, consequently, the future behavior.

Therefore, you should analyze which pricing strategy best fits the characteristics of your target audience. Remember that not only rational aspects play a role in the purchase decision. Emotions are just as important and can sway the decision in your favor. In this regard, charm pricing can be a valuable marketing tool for increasing your sales.

Pricing in e-commerce

You can apply different methods of pricing in your online store. The simplest method is to add the cost of production and distribution logistics and the profit margin. This is known as a cost-plus pricing strategy. The formula looks like this:

Sales price = X + Y + Z

Product Cost: X
Costs for warehousing, distribution and sales: Y
Profit margin: Z

It is intuitive but very rudimentary because it does not take into account other factors that influence price formation. These include, for example, competitor prices or market demand. While these should be considered in any form of retail, they are even more important in online stores. Finally, do not forget that consumers with Internet access can conduct extensive research, including price comparisons, without leaving home.

So, to set the prices, you need to consider the following points:

• Customer acquisition costs
• Customer retention costs
• Conversion rate
• Average sales value
• Customer Lifetime Value

Some retailers choose to keep the manufacturer’s suggested retail price. However, this approach makes it difficult to grow your business. The challenge is to find the “pain point” that the buyer is willing to accept.

Furthermore, product cost can be a subjective concept. Buyers are looking for added value and offers that satisfy their needs at the best price. For them, it is completely irrelevant how high the costs of the manufacturer or seller are. They are only willing to spend as much as the product is worth to them.

What is charm pricing?

The terms “charm pricing,” “psychological pricing” and “threshold pricing strategy” are often used interchangeably. In reality, the charm pricing strategy is a type of psychological pricing, as it appeals to the emotional impact of price on the purchase decision. It is an efficient method of pricing that has the potential to influence the buyer’s actions.

Charm pricing gives the impression of a slight discount on a product. Rather than selling a product at a rounded price, a few cents are deducted from the price to make it more attractive. Because of its outstanding persuasive success, this strategy is favored among retailers.

For example, a product for €10 will probably sell better if you offer it for €9.95 or even €9.99. This explains why there are hardly any rounded prices on products as well as services in many stores and businesses – both physical and online.

Of course, there are exceptions, which we will mention below.

The central idea, however, focuses on how the brain perceives these price differences. The mind does not bother to calculate the savings. A buyer simply processes that the price is lower.

It is interesting that this only works for odd numbers. The reasons behind this are not yet fully understood, but it was found that 5 and 9 are the most effective. A well-known MIT study from 1997 exhibited results that were later confirmed by other researchers. It noted that 60% of the price decimals end in 9 and another 30% end in 5, as in, for example, prices such as 2.99 or 2.95.

Why does charm pricing work?

As mentioned above, the effectiveness of a charm pricing strategy has a psychological background. To understand how this strategy works, it is important to look at the buying motives. What we, as consumers, perceive as an attractive price has less to do with numbers than with our emotions.

The magic number nine

The number 9 has great power in marketing. Its power is so great that Baylor University researchers conducted a study on its impact on pricing.

They used a model of consumer thinking styles that divided consumers into two groups:

• Analytical thinkers
• Holistic thinkers

Analytical thinkers focus their attention on individual aspects of the price. The perception of numbers is conditioned by the assimilation of single digits. In this sense, analytical thinkers are more likely to be influenced by prices ending in 9. The left digit acts as an anchor, which is associated with lower rounded costs.

In contrast, holistic thinkers process information in context. That is, when they read a price, they process it as a whole number, not digit by digit. This makes them less likely to submit to purchasing at reduced prices because they round up to the next whole number, which is usually higher. For instance, for them, a price of €99 is equivalent to €100.

Nevertheless, all consumers can be positively influenced by charm pricing tactics in certain situations. This is due to the limited cognitive resources of the brain. When we are overloaded with stimuli, thought processes are impaired. Even holistic thinkers react to the final 9 when they are under stress or time pressure.

This is interesting because it explains how a sense of urgency can drive sales, regardless of the type of thinker the customer is. Similarly, the presence of other distracting elements such as music or interactive apps can be a cognitive burden.

Finally, the study also sheds light on cultural differences to consider if your target audience is international. For example, U.S. consumers were found to be predominantly analytical, while Asian shoppers tended to be more holistic.

Perceived loss

Perceived loss also plays a major role in consumer buying behavior. As Western cultures generally read from left to right, the left digit has a greater resonance. For this reason, a price of €24.99 is perceived as close to €24, although the difference between the price and €25 is smaller. The number on the left affects the perception of the total price.

Expected price

We all like to feel like we’re making smart buying decisions, and charm pricing gives the customer the sense that they have saved money with their purchase. This is especially true when the expected price comes into play.

Customers generally have price expectations. Before making a purchase, they estimate the appropriate value. This is the “pain” they are willing to tolerate. If prospective customers expect to spend around €100 on a pair of shoes and they get them for €99, they will feel they have saved something.

This is also referred to as perceived gain. The estimated or expected price serves as the anchor price.

Think about the prices of the food you buy in the supermarket. When writing your shopping list, you can calculate a budget. You probably use rounded numbers for this. However, even if these products are just a few cents cheaper than expected, you will feel like you have saved, so it then seems permissible to succumb to the temptation to add more products to your shopping cart.

Accurate pricing

At first glance, it may sound contradictory, but decimals add a certain precision to pricing. Charm pricing can be attractive because it is offering prices that are a perfect fit. The buyer has the impression that efforts have been made to determine the lowest possible value.

Therefore, it appears to be a good deal, so they are willing to pay that price. This does not only apply to the retail sector. This strategy is also effective for larger transactions, such as the purchase of real estate. In fact, it is rare to find houses with a rounded price. Real estate agents utilize charm pricing with their numbers that run into the hundreds or thousands. It is not uncommon for the asking price of a property to be €199,900 rather than €200,000.

How do you set prices with charm pricing?

Perhaps you are now convinced that you should deduct a cent or five cents from every item in your store. This, however, is not how the strategy works. In certain situations, the price can be the extra push the customer needs to make the purchase. However, this is not a universal rule.

Purchasing decisions do not follow a single guideline. They depend on the circumstances of the buyer and the nature of the goods.

The charm pricing strategy is ideal for low-priced products. A one cent discount has an emotional impact on the consumer. If the barrier to entry is low, the savings are usually not analyzed rationally.

In other words: When the price is low, the mind doesn’t waste time calculating. It simply follows the dynamics.

In contrast, there are situations where price is not the dominant variable. Luxury goods, for example, usually do not use charm pricing. Consumers choose this type of purchase for the perception of prestige or quality. Therefore, it is common that such products have a rounded price.

In addition, when using a charm pricing strategy, do not limit yourself to the rule of the number 9. It is important that you analyze market prices accordingly, otherwise you may suffer disadvantages. If your competitors offer the product for €19.95 and you set a price of €19.99, yours will be perceived as more expensive.

How a pricing strategy affects your sales

Lower prices for your products will likely encourage more customers to make a purchase. The online retailer Gumroad conducted a study based on this that examined how many people purchase products with so-called whole prices compared to prices set by a charm pricing strategy. The following table shows the price in the left column and the corresponding conversion rate in the right column. Here we can clearly see that charm pricing is much more effective.

However, one needs to be careful. Ultimately, competing with prices is dangerous because it is easy to get caught in a discount spiral. Nevertheless, the true value of charm pricing lies in its effect on consumer loyalty. This is the result of a study by the International Council of Shopping Centres (ICSC). For example, 92% of respondents say that loyalty to a store or brand is determined by price and value.

By offering competitive prices to your buyers, you will not only make a one-time profit but also build a business relationship.

Charm pricing strategy: a compelling tool in e-commerce

E-commerce is highly competitive. It is not geographically limited, and customer acquisition can be a lengthy and costly process. Therefore, it is important to retain customers and aim for a good conversion rate. In this regard, a charm pricing strategy may be the most appropriate and effective pricing strategy. It provides the extra incentive that can turn a visit to your website into a sale.

In any case, the use of charm pricing is not an exclusive tactic. It can be perfectly complemented by other measures that also help to persuade the consumer. You should still always pay attention to the behavior of your target group and adapt your offer to the dynamics of the market.