The Psychology of Price

A quick search on Google and you will find millions of entries on the topics of pricing psychology and pricing strategies. I have elected to recap strategies that, at the very least, most retailers should consider to determine price.

In a practice still prevalent today, the retail price of an item is often determined by a buyer or receiving person applying a formula to the landed cost of an item in order to determine what it should sell for. Should cost really be the determining factor in what a customer is willing to pay? Does it have anything at all to do with perceived value? Of course not, yet we see this all the time.
I have questioned retailers about this topic for years and always get the same responses. Most typical are, “double the cost and add $2 (supposedly to cover shipping),” or “multiply the cost by 2.2.”
One strategy that I have used with buyers at market was to determine the selling price prior to knowing the cost. To do this effectively, a retail buyer must answer the question, “What will our customers be willing to pay for the item?” Once the cost is revealed, a determination can easily be made if the item fits within the company’s markup strategy or does not.

Let’s discuss some additional strategies that you might consider as you determine price going forward.
• Remove the comma // Research has found that removing commas may make the price seem lower. For example, $1,499 vs $1499.
• Round price // Round prices are more fluently processed as opposed to non-rounded price points. Consumers can process a round price quickly. Non-round prices need more mental resources to process. Round prices are also more effective for emotional purchases, with this caveat: Try when possible to avoid price intervals like $100 or $500, as the assumption may be that they are artificially high and plucked out of thin air.
• Use of a premium price to set an expectation of excellence // The iPhone X selling for between $999-$1,149 is significantly higher than past models. Approaching or breaching the $1,000 threshold is noteworthy. Boosting prices into the four- digit realm crosses an important psychological barrier.
Here’s another example that you may remember. In 1994, after a 14-year hiatus from their 1980 well-publicized breakup, The Eagles released a new album and embarked on a world tour. What was unique was that they were the first rock and roll band to break the $100 ceiling for concert prices. Eagles manager Irving Azoff stated that this had nothing to do with supply and demand, but rather a statement of quality. Fans would once again get to see and hear a great American rock-and-roll band, not a washed up “oldies” show. This was a fascinating use of price as it set a belief of excellence in the mind of the consumer. I saw this show … and it delivered!
• Discount pricing // This is the high/low pricing strategy. Was $70, now $35. You save $35. It is important when using this strategy to frame the sale around the savings versus the amount being spent.
• Reduce the pain of paying // Uber revolutionized the taxi industry. With traditional taxi rides, you watch the meter increase with each minute stuck in traffic or each mile traveled. This evokes a painful sensation. With Uber, you know what the trip will cost before you start, and it’s billed right to your credit card. The perception of payment is also distorted by the use of gift cards and casino chips, two additional payment methods have that have created a separation between the customer’s money and the payment.
• Remove the $ // $$$ can remind some people of financial pain. Ever notice that some restaurants are now pricing menu items without the $?
The next time you are tempted to slap up the 25 percent off sign and call it good, remember that percentage off pricing is irritating to the customer. It is tremendously overused and less profitable to the retailer.

The psychology of pricing is a fascinating topic. I would encourage all retailers to experiment with a few of the points discussed in this article. You might discover a more profitable way of pricing your products

The Nine Secrets of Retail Success


Given the many bankruptcies and store closures the retail industry encountered during the past year, is it any wonder that retailers across the country are somewhat frazzled? In fact, by October 25 of last year, the US had already broken a retail milestone for number of store closures not seen since the 2008 financial meltdown. Nearly 7000 retail locations closed in 2017. This represents more than a 200% increase over the previous year.

As always, there are nearly as many different reasons for why as there were closures. Increasing internet shopping is only one of them, albeit a legitimate one. Financially troubled chains, inventory issues, changing consumer tastes, sameness of selection, weather, even politics, are among the many reasons contributing to the retail apocalypse.  One of the biggest factors however, is the fact that we are simply over-stored in this country.

The good news however, is the fact that retail is actually alive and well. The 2017 Holiday Season saw nearly a 5% increase in sales including both online and in-store. Retail jobs are not vanishing, in fact they are gaining and the future is bright. New stores are opening and existing stores are expanding. The tax reform bill signed in Dec. of 2017 will have a positive retail n retail.

Given that as a preamble, allow me to present, The Nine Secrets of Retail Success.

Secret #1. Simple is Best.

Retailers are finally learning that having more products won’t necessarily win over customers. We are already overwhelmed with too many choices. Who wants to dig through racks of sameness to find one great item? Not many. Remember the KISS method…Keep it Simple Stupid.

Larry Schwartz maintains in his book “Paradox of Choice”, that given too many choices humans will simply not be able to choose. Many experiments have proven this to be true. One such study was conducted by Professor Sheena Lyengar from Columbia. In a California gourmet market, a booth was set up with samples of W&S jams. Every few hours the offering was switched from a selection of 24 jams to a group consisting of only 6. On overage, customers sampled two jams regardless of assortment size. 60% of the participants were drawn to the larger sampling while 40% stopped by the smaller one. What’s interesting is that 30% of those who were drawn to the smaller assortment bought while only 3% exposed to the larger assortment did.

Presence of choice might sound appealing as a theory, but in practicality more choice is oftentimes overwhelming and results in lower sales. The takeaway…More is not always better!

Keeping thing simple applies to your presentations, email blasts, social media posts, and especially your windows. You don’t need to put a sampling of everything you sell in the front window.


Secret #2. Expand Your Categories

Consider a display of items made in your community. The idea here is to keep a store’s brand somewhat regional. Once regional chain in the Midwest decided to try this concept with no set sales goals. They ended up doing millions in apparel, glassware, blankets, jewelry, handbags, belts, scarves, candles, and bath products. Not every item is right for every store. The point is that if you think outside of the box, products are available that have a local connection.


Secret #3. Build Customer Loyalty.

This is a hot topic in retail today and it starts by capturing customer information.  Case in point, nearly half of all households in the U.S. are Amazon Prime members. Since sales to Prime customers are nearly twice that of non-Prime shoppers, brick & mortar stores have become challenged to find ways to keep customers coming in.

Once such method offered by Restoration Hardware is the RH Grey Card.  For an annual fee of $100, customers get 25% off in every department, 10% additional savings on sale merchandise and design services, and early access to clearance events.

Loyalty programs, also know as frequent byer programs, have now become commonplace with most retailers.  To be effective, there must be perceived value. The key element in that the customer knows that by being part of the “program” that they are not getting the same offers everyone else does. One note of caution however, and that is to make certain that you understand what your loyalty program is costing you.


Secret #4 Provide Legendary Customer Service.

Shoppers are tired of being considered faceless numbers in a crowd. They are willing to pay for a better shopping experience. A recent study showed that over 2/3 of Americans spend 14% more with a company they believe delivers excellent service.

Saks Save Me service allows shoppers to call a dedicated number to resolve fashion emergencies and in some markets even sends a wardrobe van. Some preferred customers are offered rides home in a chauffeured BMW.

A colleague of mine who flies often for business, has been shuttled between connecting planes in a Porche simply because the airline values his business.

Guarantees and no-hassle return policies are an important part of customer service. You don’t have to look further than Zappos to see just how loyal customers can be if a brand convinces them they simply can’t go wrong thanks to their liberal return policy (Is Your Return Policy Hurting Your Business, SRT May/June 2016). Believe it or not, customers who return 50% of what they buy are also the most profitable. When I see a sign at the register that states NO Refunds or Exchanges. All Sales Final, I cringe. Stores with this approach will have a hard time surviving. Most often you find this with smaller retailers. One reason among several, why they remain small…small thinking perhaps?

Customer returns are a way of life.  Online returns account for 1/3 of purchases. 30-60-day return policies are now the norm. But why make it EASIER for customers to bring things back? A recent Journal of Retail study made an unlikely discovery. The study claims that the longer a store allows a customer to return something, the less likely they are to actually return it. Something far off becomes more abstract. Something closer becomes more concrete and thus changes your subsequent action. This is known as The Endowment Effect. The longer your own something, the more it begins to feel like it is really yours.


Secret #5 Empower your Sales Staff.

Studies have shown that even after researching on line, comparing prices and reading reviews, 40% of customers remain open to persuasion once they enter the store. A well-trained, empowered sales force determines your level of sales. Without them, your store cannot maximize its true upside potential.

Take the Apple Store which enjoys the highest sales per square foot in the history of the retail business. Employees are taught to solve customer problems, not sell good.  The logic behind The Container Store is that they would rather offer $40K to one super employee than pay $20K to two so-so employees. Last year, the average salary for this retailer was $44k. That’s salary, they don’t pay commission. They put every new associate through 187 hours of training. They are obsessed with teaching employees how to sell and amaze customers. For the Container Store at least, the secret to great retail is their ability to motivate their staff. It seems to be working for them as they rarely have sales or offer special deals.

Every year the Ritz Carlton empowers every employee from a maid up with up to $5K to comp guests. The only questions asked of the employee is what happened and make sure it doesn’t happen again.

Reward good behavior among employees and listen to them. Introduce a suggestion box and have regular store meetings.


Secret # 6 Visual Merchandising.

There is an old retail adage that describes the need for visual merchandising perfectly, “goods well displayed are half sold.” Think of the best ads you have seen on television or in store windows. The most effective ones are clean and simple and have a clear message.  You might think of Duluth Trading Company as an example of what I am talking about.

Be sure to pay attention to the first few feet when customers enter the store. This is referred to as the “decompression zone”. This is the space where customers get the “vibe” or feel of the stores. From this point, 90% of customers will turn right upon entry. Your best and newest items should be represented here.

When it comes to instore displays remember the eye moves up toward the rear of the store. Avoid at all costs large displays in the front of the store that visually block the customers view of the entire store. Vary the height of display tables. Most stores I visit have 4-way clothing displays, t-stands and waterfall displays that are set too high. Unless you run a big& tall operation be sensitive to the height of the average (woman) customer.

Reduce clutter at all costs. Nothing shuts down senses and promotes shopper anxiety faster that a messy, unorganized shopping experience. This also applies to display windows. Avoid the temptation of trying to say too much at one time. Less is more. You don’t have to show everything you sell in the front window.

Finally, don’t neglect the only public place where you can take off all of your clothes and try on someone else’s…the fitting rooms. Most have bad mirrors resembling something you might find at a circus, inadequate lighting and poor ventilation.


Secret #7 Manage your inventory.

Inventory is the very heart of the retail store. The best retailers know that in order to keep customers coming back in and buying, they most have a constant flow of new merchandise. No one comes in your store to see what came in LAST YEAR. They come in to see what’s new! I call this The Power of New!  If two turns annually are the goal in a given classification, then a six months supply on average is what you will need to achieve it. If you want to turn 3X you should have very little older than 4 months in stock, 4Xturn= 90 days and so on.

The methodology by which retailers control their buying and hence manage inventory is known as open-to-buy. This mathematical formula serves a multitude of essential services for the retail. It provides for sales and inventory target goals, it provides guidance for how much to buy, it establishes benchmarks for evaluating progress and it can be used at any level desired.

A good sales and inventory forecasting too is essential to maximize success in a retail operation. A failure to plan oftentimes leads to a plan to fail.


Secret #8. Control Your Markdowns.

Today’s retailers know that relying too heavily on deep discounts to move excess inventory not only hurts margins, but can actually train the customer to wait for the sale. Hence, the way we frame a sales or price our goods is very important. SAVE makes customers see how much they saved versus how much they spent. % off sales are way overdone, irritating to the customer and dangerous for the retailer.

First of all, you are asking the customer to do the math and most are math-challenged. Secondly it that customers over time develop an immunity to the %’s. It takes a higher and higher % to get them to move. 20% barely moves the needle in today’s world unless it is used on an item rarely discounted.

A $25 coupon has more motivation than a 25% off coupon even though it represents the exact same discount on say a $100 item. A recent online study tested the effectiveness of various email offers.  $50 off a purchase was chosen as a good incentive that would still maintain sufficient margin.  Using the same parameters, 15% off offer was selected as being of equivalent value. The $50 off coupon had a whopping 72% higher conversion rate and generated 170% more revenue.

While poor buying including selecting styles, incorrect sizes and price points, duplications, and buying minimum quantities that are too large to absorb can all be root causes for excessive markdowns the #1 cause is still OVERBUYING!

90% of profitable sales come from inventory that is less than ten weeks old. Knowing that, progressive retailers identify slow sellers in season and react accordingly. Understanding the markdown truths especially the fact that the cost you paid has absolutely nothing whatsoever to do with the amount of the markdown is key to controlling markdowns.

Secret #9. Don’t be Afraid to Say NO!

The people you hire in the early days of your retail career are not always the ones you might hire later. The right skill sets and attitude for the stage your company is currently in should be a determine factor. Sometimes that means saying NO to a would-be employee who fits all the other criteria.

If a certain line doesn’t move you or more importantly your customers, don’t waste their time or yours writing token orders just because someone showed you the line. That’s their job. It isn’t personal, it’s business. One of the main reasons that I encounter for retailers getting overstocked and overbought is that they buy from too many vendors.

Finally, you need people in your organization with the smarts and confidence to respectfully say NO to YOU! Surround yourself with people in your company and outside advisors who have the integrity to stand up for what they believe even if it differs from what you may think.


Adopting these 9 Secrets of Retail Success will help you stay focused and profitable this year and beyond.