Your business’s pricing is imperative to the profitability and future of the business. For the most part, it’s a logical calculation; you’ll need to set the price higher than the total costs of the goods you produce, but if you set the price too high, you’ll scare customers away.

You can use your industry’s average profit margins as a starting point to calculate a price your customers will be willing to pay—but don’t forget, there’s also a subjective, psychological component to pricing. If you learn to exploit it, you can encourage more purchases and customer loyalty without having to push your prices too low.

The Psychology of Pricing

We like to think that people are rational actors, making logical, predictable choices in terms of value and cost. However, buyer decisions can typically be influenced by external factors, such as:

• Cognitive biases: The human mind is cursed with cognitive biases, which distort our perspectives and make us terrible at making purely logical choices.
• Comparative data: The more information a persona has to evaluate the fairness of a price, the more they’re going to use it. Competitor prices and historical data matter significantly here.
• Emotions and impulses: A change in mood, or the influence of time-based pressure can motivate a buying decision that might not otherwise unfold.

Tactics to Improve Price Perception

So which tactics can you use to improve customer price perceptions?

Avoid showing a firm price right away

Instead of showing your customers a firm price immediately, consider warming them up by showing them a range of prices. For example, JunkACar displays a range of prices it’s willing to offer for various models of car; this is partially due to the variances in value that cars can have, but it also gives customers a higher sense of value (since they’ll automatically look to the higher price).

Offer a discount

Stores like Sears, Kohl’s, and Macy’s are often seen advertising discounts on their products—yet there’s no “real” discount being offered. Instead, these stores tend to set an artificially high price, then slash it so the real price simply looks lower. You can use the same trick to make your “normal” price seem like a discounted one.

Present your discount wisely

While you’re offering a discount, make sure you use the numbers to your advantage. People tend to gravitate to higher-numbered discounts, even when the value is equal. For example, a $10 item with a 20 percent discount looks better than the same $10 item with a $2 discount—even though they both end up as $8. For products under $100, use a percentage. For those over $100, use whole numbers.

Throw in free bonuses

You can make the value of any item seem higher by throwing in a free bonus, even if it’s a discount on the customer’s next purchase. This also makes it harder to figure out the total objective value of the offer.

Compare yourself favorably to the competition

If you have competitors, list your products side-by-side. If your prices are objectively lower, highlight them. If your prices are higher, show off what makes your product better, such as additional features or higher-quality service and support.

Imply a sense of urgency

You can also imply a sense of urgency by making your price seem like a limited time offer. Amazon’s Gold Box is a perfect example of this, with discounts that only apply for a day or less. It motivates urgent action, which can make customers buy something they ordinarily would not.

Make the prices physically smaller

You can also make your prices seem lower simply by putting them in a smaller font. It seems strange, but people tend to respond more positively to physically smaller numbers—even if the price is higher.

Offer payments in installments

If you’re selling products worth thousands of dollars or more, you can make the price seem lower by offering installment packages. It’s much better to show a monthly price of $25 than a one-time price of $1,000.

Use decoy products and packages

Consider offering a higher-priced or less attractive product first, as a lead-in to get your customers to buy what you really want them to buy. For example, you could use a “standard” package that costs $100 a month as a way to make your $50-per-month package seem like a steal.

Explain the value in terms of numbers

Finally, consider explaining the value of your product in a way that justifies the price. For example, if you’re selling a $30 showerhead, you can claim that the head will save customers $40 in water every year due to its low-flow feature. This makes the logic much easier to follow.

With these tactics, you can make even your highest-priced products seem more reasonable to your customers. While you’ll still need to calculate fair prices in line with your competition, so they’re logically worth paying for, these strategies can put you over the top.