Price Psychology: A/B testing increases sales

The use of price psychology has always been a very effective strategy for retailers to increase sales. This is because it targets basic human emotions. However, to implement it successfully, it is important to use it intelligently. You should understand the buyer’s motivations and find the balance between profit and volume.

What is price psychology?

As the name suggests, price psychology is a pricing strategy based on the psychology of the buyer. It attempts to positively influence the purchase decision by evoking emotional reactions in the potential buyer. Several strategies fall under price psychology, but the most commonly used are:

Use of odd numbers

The effects of odd numbers on price perception are well documented. For example, a product that costs €4.99 tends to be more attractive than one that costs €5. Although the difference is slight, the buyer perceives €4.99 as the lower price.

Learn more about this in the article Use charm pricing to increase sales.

Product bundle

The price barrier can be eased by a bundled advertising strategy. Combining multiple items for a single price gives the impression that you are getting a discount, even if this value differs little from the sum of the individual product prices.

Prestige awards

This strategy is unlike most strategies of price psychology. The price of luxury goods is not determined by their production costs. Major, well-known brands have a symbolic value. Buyers pay high prices to share in the prestige of such in-demand brands.

Staggered prices

This strategy offers several similar items at tiered prices. When the price differences are small, the buyer often assumes that the middle price is the most appropriate. The less expensive product may be perceived as inferior, and the more expensive one may not justify the difference in value.

How common are shopping cart abandonments?

Fundamentally, a shopping cart abandonment is the failure to carry through on a purchase. Many potential buyers add items to the shopping cart but never take the final step to purchase. Rather, they simply leave the items in the cart. Often, shoppers are too uncertain to commit to a purchase, be it due to factors such as high shipping costs, complicated payment processes or simply a lack of incentives.

Shopping cart abandonment is a challenge for e-commerce. According to Statista, nearly 70% of shoppers abandoned their purchase before proceeding to checkout in 2020.

High abandonment rates are synonymous with lost sales opportunities. Therefore, it is important to create strong incentives to empower buyers in their choice. Price psychology plays a decisive role here.

Price psychology combats shopping cart abandonment

Shopping cart abandonment can be caused by several factors. It is important to determine the cause and make the necessary adjustments to reduce friction. Here’s how price psychology can help you address some of its most common causes:

Adjust product prices

The best known strategies in price psychology are the use of odd numbers, product bundles, prestige pricing and staggered pricing. Each of these strategies can help you avoid shopping cart abandonment:

• Use of odd numbers: If you still offer products at a round price, a switch to charm pricing can be very effective. Studies have shown, for example, that buyers are more likely to buy an item priced at €4.99 instead of €5.00.
• Product bundle: Anyone familiar with Amazon already knows this strategy. When a potential buyer looks at a particular product, a window with a bundle is often displayed on the same page. The bundle contains products associated in some way with the original item. Let’s say you are looking for a Polaroid camera. The bundle may include film and a bag for the camera. The advantage of the bundle is the small price discount. Again, this difference doesn’t have to be large to be effective.
• Prestige awards: With this strategy, companies rely on the prestige of their brand to give their customers the perception that their product is high quality. Apple, for example, uses this tactic. The perceived value of the products is significantly higher than the actual value of the manufacturing costs. The customer therefore pays for the brand name as well.
• Staggered prices: With this strategy, you can often find three similar products at different prices. A good example of this is the well-known coffee chain Starbucks. The chain usually offers its drinks in three sizes. For example, you can get a café latte for €3.99, €4.59 or €4.99. Because the price differences are not significant, the customer feels that they get the most for their money with the largest cup.

High shipping costs

According to a study by Statista, shipping costs are the main reason for shopping cart abandonment worldwide. The customer finds that the total cost of the product plus shipping costs exceeds his expectations. This price increase discourages potential buyers from continuing the purchase process.

Applying price psychology can help you redesign your cost structure. For example, if your profit margin allows, you could cover some of the shipping costs. Often, customers are willing to pay a higher price for an item if they receive free shipping in return.

Moreover, an unexpected price increase for shipping also deters the buyer. However, knowing the amount to be paid from the outset will make the customer more secure. With greater transparency on your side, you can thus avoid additional purchase abandonment.

Complicated payment procedure

A customer may respond positively to your price psychology strategy and add products to their cart. However, they may not complete the purchase if a lengthy or confusing payment process is required. Simplify the steps to complete the transaction and make sure the information is comprehensible and complete.

A bad payment experience can negate the positive effect of your price psychology strategy and drive the potential customer away.

Inconvenient payment methods

Although distrust of electronic payments has decreased, it remains a major obstacle for many shoppers. Customers often have a preferred payment method that makes them feel more secure when making online payments. At checkout, many are inclined to abandon the purchase if their preferred option is not available. This is a 100% rational argument that cannot always be countered with a price psychology strategy. To overcome this obstacle, your payment method offering must be tailored to your target audience.

How to use A/B testing to reduce shopping cart abandonment

Once the cause of the problem has been identified, it is time to work on a solution. However, this is never easy as there often is more than one alternative. Trying different strategies can be risky and can waste significant time and money while possibly affecting your reputation.

Controlled experiments should be performed to obtain fast and accurate results. A/B testing with price psychology strategies is ideal for deciphering the most appropriate approach.

What is A/B testing?

A/B testing, or split testing, is a comparison method that allows you to measure your audience’s preferences. This involves testing two options by presenting them to different groups of buyers and comparing the results.

A/B testing is very popular in online retail because it provides real-time information and is easy to perform.

Since A/B testing focuses on a single variable, results are very accurate. Also, unlike surveys and other research techniques, they are based on actual facts rather than assumptions.

It is often used to evaluate design elements or functionality of websites, but this is not its only application. Used properly, it can be a significant resource for comparing pricing strategies and reducing shopping cart abandonment.

A/B testing and price psychology

A/B testing allows you to test pricing psychology strategies to determine which price best matches your customers’ expectations. Without it, you must rely on the behavior of your target audience and competitor data when making assumptions. Amazon, for example, changes its prices several times a day and tests for fluctuations in demand.

Pricing A/B tests also provide you with useful information about the elasticity of demand. A/B testing results exhibit how much buyers are willing to pay for your items. Mind that even a small deviation in price can lead to significant profit increases. If you manage to increase the average shopping cart value, you can compensate for the losses from shopping cart abandonment.

Also experiment with the placement of offers and the overall layout of the page. For example, you can highlight a bundle offer near the price to pay. This allows the customer to quickly see the savings earned in adding this item to their purchase.

Remember that A/B testing is an iterative method. Test your price psychology hypotheses and use the results to develop new pricing strategies. Focus on understanding your customers, improving the shopping experience and minimizing purchase abandonment.

Example of A/B testing for the creation of a price psychology strategy

Facts speak louder than words. So, an example is best used to explain how to perform an A/B test for a price psychology strategy.

Let’s say you have three models of travel irons in your online store. Note that we have limited the range to three products to reduce the anxiety of making a decision. Likewise, we prevent the buyer from getting into a bind because there are only two alternatives.

By placing the most expensive item in the first position, it acts as the anchor price. In comparison, the price of product B is perceived as significantly cheaper. The third iron acts as a decoy, another tactic in price psychology. Due to its features, it is unlikely to be considered, despite having the lowest price.

In practice, you have thus reduced the experiment to two products. The next step is to compare the conversion rates of the individual pages. Sales records show you what price customers are willing to pay for this type of item.

Another method of applying A/B testing to price psychology is to estimate demand sensitivity. To do this, select an item and assign it a slightly higher price than usual. For example, the price of iron B in a controlled group can be increased to €45.99.

Compare the extent to which demand has changed. If you see a drop in conversion rate, you have passed the break-even point. The same can be applied to test the maximum price of product A. Try lowering it to €55.99 and see if sales change. When determining the maximum and minimum profit margin, you should, of course, take into account the expected revenue.

Selling more does not always mean earning more. Perhaps a high price offsets a lower conversion rate. Experiment with price psychology strategies and conduct A/B testing.

Remember that you should only measure one variable in A/B testing. It is not advisable to change the prices of several A/B products at the same time. Determine the ideal price for each of these products in different test cycles.

If necessary, repeat the tests with new values. Feel free to test different price ranges. Perhaps €45.99 exceeds your customers’ price expectations. Then try €42.99. The advantage of A/B testing is that your results serve as input for further experimentation. It is very important to find the right price because this helps you determine the highest profit margin.

Finally, you can test a pricing psychology strategy. The above-mentioned staggered prices are particularly suitable here. This would be the case if you offer three very similarly priced products, for example, three irons priced at €27.95, €29.99 and €31.95, respectively.

Optimize your profitability with A/B testing for your price psychology strategies

In price psychology, A/B testing is a useful tool to optimize the profitability of your online store. It helps you avoid shopping cart abandonment by providing very accurate data. One must merely be very careful in making test hypotheses so that the results are useful. This means that they should effectively address the root cause preventing your customers from completing their purchases.