Let's be real: Developing a pricing strategy is a major pain in the you-know-what.
The truth is, pricing a product is not just a matter of finding a magic number; it is a matter of understanding your target customer, and why or how a certain strategy succeeds or fails over time. And while there are tons of tips and tricks out there for developing a pricing strategy, few resources provide examples specific to the food and beverage industry, and even fewer explain why those strategies work better than others.
So what is the key to a comprehensive, effective pricing strategy? What makes one strategy work for one product and not for another? The answer is: psychology.
In this article, we've broken down five case studies for you that examine different ways psychology comes into play when pricing food and beverage products. And because we're the best, we also made an easily digestible SlideShare offering different tactics and strategies that are particularly effective for the food and beverage industry. (You're welcome!)
Study #1: Adding Small Differences Can Increase Similarity and Choice
In several joint studies by the Yale School of Management and Singapore Management University, researchers found that implementing small differences in the prices of similar products actually increases the likelihood that a shopper will go through with a purchase.
The research revealed that “introducing small differences between objects increases perceived similarity,” as well as that “an increase in similarity decreases the difficulty of choice and the likelihood that a choice will be deferred.”
The researchers presented 78 university students with a choice: to purchase one of two similar types of gum, or to opt out of the purchase altogether and keep their money. One portion of the students were presented with two identically priced gum options, while the remaining had to decide between different priced options.
The result? 77% of students exposed to the different-priced condition decided to buy the gum, while only 46% followed through with the purchase when the prices were the same.
So, when prices differ even slightly, people pay less attention to the differences between the actual products. This makes their choice a lot less difficult, and a shopper that isn’t worried about buyer’s remorse is much more likely to make a purchase.
What Does This Mean?
Consider creating small contrasts in pricing between similar products in your own product line. This is not to say you should price every flavor of your sparkling water a cent higher or lower than the others, but introducing a 3% change in price between two or three of your products can almost double the incidence of purchase, according to the study.
Another way to take the results of this experiment into account is by pricing differently from a direct competitor -- something extremely helpful in the food and beverage category, where competition is everywhere, and differentiation is a must.
Study #2: Effects of $9 Price Endings on Retail Sales
Have you ever wondered why something is sold at $9.99 instead of $10? Well, it is a deliberate pricing strategy called “charm pricing.”
Prices ending with “9” communicate to the shopper not only that the price is low, but that it’s a bargain, according to a pilot study conducted by MIT and the University of Chicago. This works out in your favor, because an otherwise regularly priced item can be positioned to seem like a steal. Charm pricing also capitalizes on what is known as the “left digit effect" -- the fact that people put larger importance on the left-most number when analyzing price.
Almost every product on this page has a "9" ending price.
For this study, researchers worked with a national mail-order company that sells moderately priced women’s clothing. They selected four dresses to alter the prices of, adjusting them either $5 higher or lower than their normal “9” ending prices.
As expected, more dresses sold at the “9” ending price than at the price that was increased by $5. What surprised researchers was that the dresses sold with a “9” ending price also sold better than the dresses priced $5 less than that. See the results for yourself:
What Does This Mean?
Long story short, charm pricing basically tricks the shopper’s brain into believing a price with a “9” ending is a better deal than one that ends in a four or a six. And thanks to the left-digit effect, a product priced at $4.99 is initially interpreted as being a dollar cheaper than something priced at $5.29, when there is actually only a 30 cent difference.
To see this strategy in action, check out this video where KeVita's founder Bill Moses discusses how his decision to price his products at $2.99 helped him smoke the competition and gain traction in the functional beverage space:
(Pricing discussion starts at 3:30)
Study #3: Size Does Matter
Do things like size, font, and location matter when displaying a price? Two professors from the University of Connecticut and Clark University say “absolutely” -- and probably more than you think.
The professors conducted an experiment in which they displayed a regular price and a sale price on a product advertisement. They presented one group of participants with product ads that had font sizes congruent to the “size” of the price (as in the normal price displayed in a large font, and the sale price displayed smaller), and a second group with ones that were incongruent. If that sounds confusing, the graphic below should help:
The two groups were then asked to rate whether they would purchase the product from this retailer or search for a better price elsewhere. The results were as follows:
“As expected, the perceived benefits of searching for a lower sale price were less, the perceived price and value assessments were more favorable, and the purchase likelihood was greater when the numerical value and physical font size dimensions were congruent, than when they were incongruent.”
So basically, people were more likely to buy the product if the price and font size were congruent.
What Does This Mean?
The information found in this study shows us that bigger isn’t always better, and displaying sale prices in a larger font to grab attention could actually have an adverse effect. Our brains like consistency, so displaying the original price large and the sale price small makes us think the difference between the two prices is larger than it actually is.
When designing a package, planning sales promotions, or otherwise designing something that will have your product’s price displayed, remember to keep things consistent. Congruent sizes to values (prices) will make customers see the sale as a steal, and will help mitigate any desire to search elsewhere for a better price, directing customers away from your competition.
Study #4: Neural Predictors of Purchases
You’ve probably come across the idea of reducing pain points in the buying process for consumers. Behavioral economic theories suggest that when people are considering a purchase, their brains are engaged in an active competition between the instant pleasure of acquisition and the instant pain of spending their money. Neuroimagery takes this a step further, and shows that the parts of our brains associated with pleasure and pain are extremely active during and predictive of the purchasing decisions we make.
A research team from Carnegie Mellon, MIT, and Stanford wanted to better understand what happens in the brain when we consider a purchase. They hooked participants up to brain imaging software, and then presented them with four screens such as the ones below with varying products and prices to watch their brain activity:
(Source: NeuroImage, Vol. 18 Iss. 2, 2003)
The study found that when people were presented with a product they associated with pleasure on the first screen, neurotransmitters for dopamine and serotonin (AKA happy hormones) were activated. When they were presented with the second screen and a price for that product that they didn’t agree with, it activated the insular cortex -- the part of the brain associated with loss prediction. Whether or not the insular cortex lit up almost always predicted their purchasing decision accurately.
What Does This Mean?
This study shows us that addressing pain points in the sales process should be a major priority when developing a pricing strategy. Nobody wants to lose money, but that is essentially what we do each and every time we pay for something. So how do you make your product valuable enough that the pleasure of having it is greater than the pain of buying it?
A great way of doing this (especially in food and beverage) is to create bundles. If you sell a beverage with a bunch of different flavors, consider putting them into a “variety pack." Or, say you sell frozen sweet potato fries -- including single-serve dipping sauces in the package would put you way ahead of your competition!
Another way of doing this could be by enlarging your product by a just noticeable difference that won’t hurt your profit margins. Slapping a “now 10% bigger!” label on your bags of roasted chickpeas will establish your product as a better bang for one’s buck. Or perhaps, create a product package that can be reused by the shopper in the future. Finding creative ways to enhance or emphasize the value of your product will help shoppers see the purchase as less pain, more pleasure.
A bunch of the cereals in this photo are "family size."
Study #5: Altering Price Perception
When it comes to pricing, context matters. You might not pay $16 for a cocktail at a dive bar, but would happily hand it over at an upscale lounge. And while selling in the food and beverage space is different from selling in the service industry, the same psychological rules apply.
This quote from an article published by the Harvard Business School sums it up pretty well:
“Research into human judgment has found that how we perceive a particular offer's value is highly influenced by any relevant number that enters the negotiation environment.”
Below is a video that goes into one method of altering price perception: price anchoring. While the video discusses how this method worked for a magazine subscription, we'll talk after about how price anchoring is also a viable strategy in the food and beverage industry.
What Does This Mean?
Now, we are obviously selling something completely different from a magazine subscription, so let’s see how this could work for food and beverage. Adding a “decoy” or “anchor” priced item to your product line can help direct sales of the products you really want to be selling. Let’s look at the following example.
Say you’re in the hot sauce business. You are about to introduce three products to the market -- a green hot sauce, a red hot sauce, and a “special recipe” hot sauce.
You want people to purchase the special recipe sauce over the other two, as the special recipe will be priced slightly higher and would make you more money. So how should you price the other products to influence shoppers toward purchasing the more expensive option?
Check out the graphic below:
As you can see, we priced the red hot sauce (which we assume will be more popular than the green) the same as the special recipe sauce. When customers come across your products, they will see the red sauce is priced the same as the special sauce, and more than likely, they will purchase the special recipe over the other two. If the red hot sauce you were going to buy anyway is the same price as the special recipe sauce, why not just get the special recipe?
Pulling It All Together
It is important to keep in mind that the studies and strategies we’ve discussed here are not meant to be implemented on their own. Coming up with a pricing strategy is an ongoing process, and some strategies may use any combination of the methods we’ve suggested here to optimize pricing.
Figuring out what will work best for your business can be tough, but understanding the science behind the strategy makes it a lot easier to predict how your customers will react to certain prices.
For more inspiration, don't forget to check out the SlideShare up top, in which we discuss different pricing strategies that are most effective in the food and beverage space!