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:
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.