It has been a while since I created a new category on the blog, and today I am doing that. The category is called “Internet Marketing”. The reason? I am planning to start writing a series on this topic, called “Internet Marketing 101”, where I’ll basically share the stuff I learned over the years buying/selling websites, launching products, promoting affiliate offers and what not.
Today I wanna talk about mental price barriers.
Human beings tend to have very clear patterns when analyzing things (not necessarily rational patterns), and the price of products and services is no exception.
The first pattern is that we tend to group prices according to the number of digits left of the dot. For instance, both $6.50 and $8.50 have 1 digit left of the dot, while $25.70 has two. As a result the first two prices would be considered similar and put in the same mental group, while the third would fall on a separate group.
This means that a potential customer would have a similar reaction whether your product costs $6.90 or $9.90. In other words, he would be equally willing to make the purchase in either case, which means that you should price your product at $9.90 if you want to maximize your profits over the long term.
Obviously you need to take this rule with a grain of salt. $19.50 and $90.50 have the same number of digits left of the dot, but consumers wouldn’t put those price tags in the same mental group. The problem here is that we have crossed different mental price barriers.
As far as Internet marketing is considered, the most common mental price barriers are:
- $10
- $20
- $50
- $100
If two price tags are below a certain barrier the consumer will probably have a similar reaction to both. For instance, $14.50 and $19.70 are both below the $20 barrier, so the prices would trigger a very similar on the mind of consumers. Same is true for $28.90 and $39.90, or for $79.90 and $97.70.
Let’s use some numbers to illustrate the points.
Suppose that you sell an ebook for $16.90, and your current conversion rate is 1.2% (that is, out of 100 visitors coming to your landing page, 1.2 will make a purchase). Now suppose that you have 10,000 monthly visitors coming to the page where you sell the ebook, so that translates into 120 purchases per month (10000*0.012) and $2028 in monthly profits.
As I mentioned before most people put $16.90 and $19.90 on the same mental group, so if we increased the price to $19.90 the conversion rate shouldn’t fall that much. Let’s assume it would fall to 1.1%.
Now every month we would have 110 purchases, as compared to 120 with the old price tag. However the price is higher, and so are the profits: 110*19.9 = $2189. As you can see by getting closer to the mental barrier we managed to maximize the profits, despite selling slightly fewer units.
The rule of thumb: price your products just below one of the common mental price barriers.
This principle is called price elasticity of demand in economics. If you want to read more on the topic check out the Wikipedia entry.
About Daniel
Daniel Scocco is a programmer and entrepreneur located in São Paulo, Brazil. His first company, Online Profits, builds and manages websites in different niches. His second company, Kubic, specializes in developing mobile apps for the iOS and Android platforms.
Okay, first let me just thank you for such a useful piece of information provided here. I have tried to do a lot of research on Internet marketing but I usually find some gibberish that I don’t understand. Your post on the other hand was a great help.
This is great for beginners who so far not jumped into the internet marketing. thanks for this awesome article
Nice Information Daniel. Am also going to launch a product like you.
This is good info, however this may depend from niche to niche. Although I think it can easily be applied to most of them really.
I think the barriers can even be applied to offline physical products.
that’s really weird how we think 9.99 and 10.00 are very different prices 🙂
Internet Marketing will be a good category. This category will always be an interesting topic to discuss. Thank you for sharing about this article in series. I want to learn further from an experienced blogger like you Daniel.
I’m in the wedding industry and I’m putting together an ebook to use as some link bait for brides as a how to “DIY WEDDING” I’m definitely going to use your article as a guide for setting price points and how I’m going to distribute it. Thanks for a well written piece.
I always thought that .99 was a little silly, but I did understand the idea behind it. This makes more sense. There is a larger mental barrier rather than a simple one. Thanks.
It’s not even only about it being a price barrier (which is totaly true in human psych) but we also tend to like for example 3,99 more then 3,90 so there’s profit to gain by the sellers.
Interesting points which I never never thought of. There is always an element of psychology involved in human mind.
Glad you came up with this post.
You spot it on. Mental price barriers will do the job perfectly when combined with effective promotion.
Thank you Daniel. I enjoyed your insight on this issue.
Daniel thanks for creating this new topic. I had heard about price elasticity before. I have always been interested in thought process between $9.95 over $9.99? Do more people purchase based on the .05 difference? If you charged lets say $19.90 or $19.95 for something, do you convert more customers than if you charged $19.99? I would be very interested in knowing if any of you have tested this theory and what the outcome was.
I find reluctance to purchase things on the web is slowly decreasing but overall barriers still exist. I’m a seasoned internet buyer, but my credit card was compromised yesterday and it does have me wondering if it’s worth it sometimes. This time the bank didn’t pick it up so it has me spooked.
Its exciting that Daniel Scocco and DBT team have decided to be writing a series on Internet Marketing. Sharing experiences is one way in which others can truly learn. With regards to this piece on Mental Price Barriers, I will say the analysis is clear and I will definitely price my online product below any of the mental price barriers.
Makes sense. When was the last time you saw an IM product (or anything in the store for that matter) priced at an even number? If the product is $19 the likelihood of the consumer buying is much higher than $20…even though the difference is only a buck!
May not seem like its that big of a deal, but when it comes down to selling 100 more units, we aren’t exactly talking chump change.
Nice post!!
We are psychological fools hence proved!!!!!
Jokes aside, but these price barrier concept is quite accurate and if we see anywhere in virtual or real world, big firms are exploiting this concept ever since. Great way to get more sales online without actually tricking the customer. 😀
Thanks for the share.
What a great post 🙂 I very much like the psycological aspects in your thoughts.
Interesting post, Daniel.
Price point is a very significant part of any online marketing and business strategy.
A great way to test pricing would also be to try $19,99 instead of $20,00. $19,99 looks a lot less but is only 1 cent lower and your conversion rate will most likely increase.
Great post Daniel. The psychological aspect of a human being while making a purchase is vastly utilized over the decades. As you said, $16.15 or $19.50 does not make much of the difference in a buyer’s mind but once you put it like $20.00, the consumer gives it a second thought. How stupid we human beings are !!
Another thing are the words like ‘discount, coupon’ and etc etc.. While you can sell your ebook for $59.99 or, for $79.99 with a discount of $ 50….. OMG!!! This means your ebook actually costs $129.99 ($79.99 + $50) but you are doling it out with a very discounted amount, only $79.99 for me only.. I am not sure why are you so benevolent with me…. I am the luckiest man on earth.. 😛
Hi Daniel,
Great piece with a tinge of buyer pschology element thrown into it. Hope to see more such coverage in the future.
Cheers!
Some interesting and valid points.. Although I do know them but never gave attention to this price tag thing. I will use 19.99.
Wow, some interesting ideas to think about, but I will need a bit more scientific prove and a way to determine what customers are prepared to pay.
Incredible advice here Daniel, the mental price barrier so incredibly true, if you price your product/service a few cents or dollars below the mental price barrier, your conversion rate will increase a LOT.
I might try this out soon,
Thanks
Great post, Daniel. Very interesting and something I never thought about before.
Every little bit counts.
This is really good information for bloggers that haven’t published their own products yet.
If you haven’t you need to publish your product ASAP.
My info product is priced at $37 I’m thinking of increasing it to the $47 range I think this post has helped me make that decision.