Pricing psychology for small businesses

Here's why this works. Most people have no idea what your thing should cost. Think of the last time you paid for a new roof, a logo or a bottle of olive oil. You looked around for clues that told you if the price was high or low. Your customers do the same, and you get to choose the clues.

None of this rescues a price that loses you money. Before you change anything, add up your materials, your time at a wage you'd accept and your share of rent and bills. That's your floor. Everything below sits on top of it.

Start with the row that fits you

Choose what goes first: the price or the product

The order changes the question in your customer's head.

"When the product came first, the decision question seemed to be one of 'Do I like it?' and when the price came first, the question seemed to be 'Is it worth it?'" Uma Karmarkar, neuroscientist and Harvard Business School professor at the time of the study

Karmarkar and her team scanned shoppers' brains while they shopped. Then they ran a second test on useful, boring things like batteries and flashlights, all at a discount. People were more likely to say they'd buy those when they saw the price first. For things people simply loved, the order hardly mattered.

They also found a catch. People who saw the price first said they'd pay a little less. Karmarkar warned that a tiny discount shown up front puts you at a disadvantage, because now people are checking whether it's worth it.

So use this rule:

• You have a real bargain on something useful? Lead with the price. "AA batteries, 24 for $9."
• You're not the cheapest, or the buyer needs convincing? Show what they get, then the price.

Here's how that sounds on a quote:

"Your whole house deep cleaned by Friday, including the oven and the inside of the windows. That's $280."

Compare that with "$280 for a deep clean." The second one asks them to judge the money before they can picture the clean house.

Give them something to compare

One price on its own gets compared with whatever is in the customer's head. That might be a cheaper rival or what their mother paid in 1994.

The first number someone sees becomes their yardstick. That's anchoring in pricing, and the easy way to use it is to show your biggest option first. Try three options:

• Full home plan: $480. Gutters, windows and a power wash.
• Gutters and windows: $290.
• Gutters only: $140.

Next to $480, the $290 feels sensible. On its own, it might have felt like a lot for a Tuesday.

Build the options so you'd happily sell any of them. You can also shape them so your favorite looks like the clear winner, which is the decoy effect at work. The weaker option still has to be a real thing you'd deliver.

A bundle does a similar job. Put a shampoo, a conditioner and a brush together at one price, and shoppers compare it with buying the three pieces apart.

Say the extra, not the total

When you want someone to pick the bigger option, tell them the gap. In a set of experiments by Thomas Allard, David Hardisty and Dale Griffin, people chose the pricier, better option more often when it said "for $20 more" than when it said "for $60 total". It still worked when the total was also on show.

Try this wording:

• "Add the second room for $60 more."
• "Make it the large for $12 more."
• "Include weekly check-ins for $40 more a month."

Pick the ending that fits what you sell

The 9 does something strange. In a test with a women's clothing catalog, a dress went from $34 to $39 and demand rose by a third. More people ordered it at the higher price. The 9 seems to tell people "this is a good price," and most of them can't check.

The same researchers ran three real-world tests, and the 9 lifted demand in all three. They found two things worth using:

• It worked better on new items than on items the store had sold before. People know less about a new item, so they seem to lean harder on the clue.
• It may work less well next to a "sale" sign. Pick one signal per price.

There's one more limit. The trick only works when the first digit changes. $2.99 feels cheaper than $3.00 because the 2 is doing the talking. $3.59 and $3.60 start with the same digit, so that penny is just a penny.

Round prices have their own job. Monica Wadhwa and Kuangjie Zhang found that round numbers make people go with their gut, and exact numbers make them stop and think. A purchase feels right when the price matches how the person is deciding. So:

Treat this table as your starting guess. Your own customers get the final vote.

Make the price easy to hear

Big prices are easier to take in small pieces. John Gourville called it the pennies-a-day idea. When you break a price into a small daily amount, people compare it with small daily spending. When you show one big total, they compare it with big, rare bills.

"$360 a year. That's about a dollar a day."

Keep the full total in the sentence. You want them to feel the small number, and you also want them to know what they're paying.

Then there's how you say it out loud. Say the price, then stop talking. "It's sixteen twenty-five." Don't add "but we can look at that," and don't explain your rent. Most quotes go through a negotiation before the customer ever sees them. It happens at 10pm, you play both sides, and somehow the customer still wins.

If you run a sit-down restaurant, there's an easy one. In a Cornell study, diners spent about 8% more when the menu had no dollar signs. Writing "twenty dollars" in words didn't help. This suits a menu in a room where everyone knows the currency. Leave the symbol on your website and your invoices, since people there need to know exactly what they're paying.

Show a discount the way that looks biggest

Here's a simple rule of thumb: show whichever number looks bigger.

• Under $100: use the percent. "25% off" a $40 sweater beats "$10 off."
• Over $100: use the dollars. "$50 off" a $200 chair beats "25% off."

The word "sale" is strong too. In tests with mail-order catalogs, putting it beside a price could raise demand by more than half. Save it for a few items at a time. A shop where everything is on sale all year has told people what its real prices are.

Before you discount, do this sum. Say a $100 item earns you $50. At 20% off, it earns you $30. You now have to sell five to make what three used to make. A discount has to pass that test.

Before you cut deeper, try a real deadline. People hate missing out more than they like gaining the same thing, which is the idea behind loss aversion marketing. "This price ends March 1" works, as long as it really ends March 1.

Three tricks that will cost you

A made-up "was" price. In Shopify, go to Products, pick a product, and find Compare at under Price. Shopify will tell you the number has to be higher than your price. The law asks for more. The FTC's guide on former prices says a "was" price must be one you really offered, openly, for a "reasonably substantial period of time". Other countries have their own rules, so check yours.

Fees that appear at the end. A low price with a surprise fee at checkout feels like a trick, and people often treat it like one. In the US, an FTC rule makes live-event ticket sellers, hotels and short-term rentals show the full price up front. Every other business can still get in trouble for misleading fees. Show the whole cost early.

A countdown that resets. Someone will refresh the page. The researchers behind the $39 dress warned that misused price signals, like "sale" signs, can break trust and lead to lawsuits. A fake timer asks for the same trouble. Use real deadlines and real stock counts.

How to raise your prices without a fight

People accept plenty of price rises. The ones they fight are the ones that feel unfair. Daniel Kahneman, Jack Knetsch and Richard Thaler surveyed people by phone about this. People accepted a business raising prices to protect its profits when they were under threat. They called it unfair when a business raised prices just because demand had gone up.

So tell people why, and give them notice:

"Our supply costs have gone up, so from March 1 a standard clean will be $140, up from $125. Anything you book before then stays at $125."

Try not to raise prices on the day everybody needs you. The hardware store that doubles its price for snow shovels during a blizzard will be remembered for it long after the snow has melted.

Test it with the customers you have

Big companies split their visitors into two groups and compare. You probably don't have enough visitors for that, so test more simply:

1. Change one thing for everyone.
2. Run it for your next 20 quotes or the next four weeks.
3. Count the money you made, along with the number of sales. A higher price with fewer sales can still be the better week.
4. If the gap is small, you can't really tell. Keep the price you'd rather be charging.

Then ask the people who said no. One question will do: "What made you hold off?" Offer a few answers they can tap or tick:

• It costs more than I expected.
• I'm not sure it's worth it for me.
• I'm still comparing.
• It's not the right time.

Those answers point to different fixes. "I'm not sure it's worth it" means your page or your pitch needs work, and cutting the price won't touch that.

A price is hardest to defend when nobody is there to explain it. On a website, that's true for every visitor. We built Possible for that gap, so keep in mind this is our own product. Possible is an AI built on real sales psychology. It asks each visitor the right question at the right moment, remembers the answers and guides them to a sale, sign-up or booking. It's free to start. If you sell online, here's more on our AI sales assistant for online stores.

Do this today

1. Work out your floor for your best seller.
2. Find your row in the first table and make that one change.
3. Rewrite one quote or product page so it shows what they get, then the price.
4. Add a second and third option next to your main offer.
5. Write down today's numbers, so you have something to compare with in four weeks.

Questions about pricing psychology