The Art and Science of Pricing: A Guide to Mastering Behavioral Science Techniques in Ecommerce
Nadeem Manzoor, Director of Innovation & Analytics | June 07 2023
In the world of ecommerce, pricing can make or break a business. While it may be tempting to lower pricing to attract more customers, this approach is not always the most effective.
There are a multitude of factors that influence a customer’s decision to buy, and many of these factors are rooted in behavioral science. In particular, the “pain of payment” can be a major barrier for consumers, leading them to hesitate or abandon a purchase altogether.
But what if there were ways to reduce this psychological pain without necessarily lowering prices? Fortunately, there are ways to leverage behavioral science techniques to boost the appeal of your product and reduce price sensitivity. By understanding and applying these principles, you can optimize your pricing strategy and increase sales.
Let’s look at how to apply behavioral science to improve your ecommerce pricing strategy.
The Pain of Payment: Reducing Psychological Barriers
It can be an unpleasant experience to hand over hard-earned cash or enter your credit card details to make a purchase, especially when the price of the product is high or if there is hesitation about the value of the product.
Consumers work incredibly hard for their money, so, understandably, there can be psychological discomfort or negative emotions when parting with their money to make a purchase. This is known as the “pain of payment.”
The pain of payment can be a significant barrier to making a purchase, causing consumers to hesitate, abandon their shopping carts, or even decide not to buy at all.
While it might seem intuitive to slash prices to reduce the pain of payment, simply lowering prices may not always be the best decision:
- If your brand’s prices are already competitive, lowering them may not significantly increase sales or revenue.
- Lowering prices could hurt your brand’s perceived value and quality, leading to decreased sales.
- Consumers might view lowered prices as a sign of instability or desperation, leading to a lack of trust and a decrease in brand loyalty.
For these reasons, it’s important to focus on reducing the psychological pain of payment, rather than reducing the actual cost of the product.
The cashless effect and reducing the pain of payment
The Cashless Effect states that the more tangible payments are, the more psychologically painful it is for customers to spend. It’s why people on a budget find it easier to track their spending when they use cash instead of a credit card. The more painful it feels to pay, the less people will spend.
For example, researchers at MIT asked people to bid for a pair of tickets to the hottest tickets in town: seats for the sold-out final regular season game of the Boston Celtics. One group was told they’d pay with a credit card, and the other group was told they would pay with cash. The subjects in the credit card group bid up to 72% more for the tickets than those who were told they would be paying with cash. This phenomenon confirmed that there is real hurt when you see the cash leaving your wallet.
A number of big brands apply the cashless effect to their purchase experiences.
Starbucks made ordering and paying for coffee incredibly easy through their mobile app, removing the pain of payment when buying a coffee. The experience of scanning an app for a cup of coffee almost feels like getting something for nothing.
Disney World introduced its MagicBand, an “all-in-one device that effortlessly connects you to all your vacation choices.” When wearing the MagicBand, Disney guests can charge their rooms for almost any item or experience in the park.
Finally, Uber, which has transformed the travel industry, has eliminated the hassle of using cash to pay for a ride. Furthermore, the company has created seamless mobile-only experiences and has expanded its business model to other services such as food (UberEATS).
Ecommerce brands can take note from these big brands to improve the shopping experience and increase sales. Here are some strategies to reduce psychological barriers and motivate customers to complete a purchase.
Simplify the checkout process
Amazon is the clear example when it comes to eliminating friction and the pain of payment from the shopping experience. The conglomerate introduced ‘1-Click’ ordering to simplify the purchase process, allowing consumers to place an order automatically and completely skip the shopping basket. This technique reduces the likelihood of consumers having second thoughts about their purchase or abandoning their cart.
Introduce automatic renewals and subscription-based services
Another great way to reduce the pain of payment and increase customer loyalty is to introduce automatic renewals and subscription-based services. Several ecommerce brands have successfully introduced automatic renewals to their business model in order to reduce or eliminate friction in the payment process.
For example, Dollar Shave Club is a subscription-based service that delivers razors and other grooming products on a regular basis. The company’s automatic renewals ensure customers don’t have to worry about running out of products or manually renewing their subscription. Hello Fresh, a meal kit delivery service that provides customers with fresh ingredients and recipes to make home-cooked meals, uses automatic renewals to ensure customers receive their meal kits on a regular basis. These subscription services reduce the pain of payment to the point where consumers do not even need to think about making a purchase, creating a more seamless and convenient customer experience.
By introducing automatic renewals and subscription-based services, brands can streamline the checkout process and help customers avoid the pain of having to manually repurchase the product.
Offer multiple payment options
Offering multiple payment options is a powerful way to improve the customer experience as it helps consumers feel more control of their spending and reduce the perceived pain of payment. Prominently displaying payment options near a call-to-action or purchase button on an ecommerce site can make the checkout process more convenient and less stressful.
We’ve seen the benefits of this approach firsthand at Wellow, Function Growth's very own direct-to-consumer ecommerce brand. Every compression sock product page includes detailed information on the payment options we accept, clearly demonstrating we accept major credit cards such as AmEx, Discover, MasterCard, and Visa, as well as convenient payment options like PayPal. By clearly highlighting these options on every product page, we give our customers the power to choose the payment method that best fits their needs and preferences. Not only does this strategy reduce the pain of payment, but it also helps to build trust and loyalty with our customers.
Incorporate rewards or loyalty programs
Introducing elements of fun or reward can encourage consumers to make a purchase and increase customer loyalty. An element of gamification can reduce the pain of payment and make the customer experience more enjoyable.
For example, beauty retailer Sephora has introduced a gamified loyalty program called “Beauty Insider” to encourage customers to make repeat purchases and engage with the brand. Customers earn points for each purchase they make with the brand and can redeem those points for various rewards, like free samples or discounts. The extra incentive and rewards for purchase make the purchase experience more enjoyable and reduces the perceived pain of payment.
Loyalty programs can be a powerful tool for ecommerce brands, adding a sense of excitement and motivation for consumers.
Key takeaways for ecommerce brands to reduce the pain of payment:
- Simplify the checkout process
- Introduce automatic renewals and subscription-based services
- Offer multiple payment options
- Incorporate elements of fun or reward into the purchase process
Precision and Perception: The Power of Charm Pricing
Charm pricing is a proven and powerful strategy that can significantly impact a consumer’s purchasing behavior. It is based on the theory that consumers perceive prices that end in odd numbers to be more appealing or affordable than those that end in even numbers, often ending in “9.” By pricing an item at $9.99 instead of $10.00, businesses can take advantage of the “left-hand digit bias” that causes consumers to focus on the left digit of a price. This makes $9.99 seem significantly lower than $10.00, even though it is a one-cent difference.
Charm pricing is a tried-and-true strategy utilized by retailers for hundreds of years and remains effective today for several reasons:
- It considers that consumers are constantly bombarded with information and distractions. Charm pricing is effective because consumers read from left to right, with decreasing attention to each subsequent digit.
- It creates the impression that the product is a bargain or excellent value, making it more attractive to consumers. For this reason, luxury brands tend to avoid charm pricing, as they want to convey value and exclusivity to their customers.
- It can create the perception that the seller is being transparent and honest. Interestingly, consumers are less likely to trust round numbers as they tend to assume they are marked up more than precise numbers. This is known as the “power of precision,” and it can lead to increased sales and improved customer satisfaction.
Some of the most successful retailers and ecommerce brands use charm pricing effectively, including Amazon, Walmart, and Macy’s. If you browse these websites, you’ll notice that most of their products are priced just below a round number, such as $49.99 instead of $50.00 and $15.95 instead of $16.00. This is a subtle but effective way to make the product seem more affordable to consumers and can motivate them to make a purchase.
A/B Testing and Maximizing Your Website’s Potential
Your website is a giant laboratory, providing you with opportunities to test, learn, and maximize your website’s potential through A/B testing. The process goes beyond creative and design changes. By focusing on the underlying psychological principles that motivate consumers to make a purchase, you can identify small tweaks that yield big results.
For example, a University of Texas Study in 2019 found that just changing how you label your products that are out of stock can have a significant impact. He shows if you label a product as “out of stock,” you will get far more irritation than if it is labeled “sold out.” “Out of stock” implies a supply issue, while “sold out” implies an increase in consumer demand – so much so that the product flew off the shelves – which can increase urgency and perceived value.
A/B Testing can also help you identify the best pricing model for your brand. Pricing testing aims to uncover the ideal price point that maximizes revenue without turning away potential customers.
To test pricing strategies, you can create two versions of your product or service page, each with a different price point. Track the conversion rates of each version to determine which price point is more effective in generating revenue. You can apply this strategy to dynamic pricing, which involves adjusting prices in real-time based on factors such as demand, inventory levels, and competitor prices. Or you can test bundle pricing, where products or services are sold as a package deal at a discounted price.
A/B testing can be a powerful tool for ecommerce brands looking to implement the best pricing strategy to maximize their website’s potential and increase revenue.
Incorporating Behavioral Science into Ecommerce Pricing Strategies
Understanding consumer behavior and the psychology of pricing is crucial for ecommerce brands to stand out from the competition and maximize their website’s potential. By reducing the pain of payment, using charm payment, and testing and It’s important to remember that small changes can greatly impact consumer behavior. A/B testing is a powerful tool to help uncover changes and maximize the effectiveness of your website. By continuously testing and optimizing, ecommerce brands can create a better user experience and drive more sales.
Interested in learning how leveraging behavioral science can impact your bottom line? Get in touch with the experts at Function Growth. We’ve helped ecommerce brands unlock the power behind behavioral science to drive sustainable growth. Don’t let pricing mistakes break your business – contact us to leverage behavioral science to improve your pricing strategy today.