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- PRICING PSYCHOLOGY: 7 PRINCIPLES ALL MARKETERS SHOULD KNOW
PRICING PSYCHOLOGY: 7 PRINCIPLES ALL MARKETERS SHOULD KNOW
Including lessons from Rory Sutherland, Dan Ariely, and more...
Niall Ratcliffe
November 24, 2024
In partnership with
Morning!
Snow covers the ground outside, it’s freezing inside, and I’m wrapped up in a full tracksuit. It’s safe to say I am definitely back in England.
A few weeks back my good friend Jack Frimston had infamous marketer Rory Sutherland on his podcast. Rory is a creative genius, but rather than just focusing on marketing tricks and tactics, he dives deep into human psychology.
He knows what makes people tick, what we’re naturally drawn to and most of all… what makes people buy, and a lot of that comes down to pricing.
So, I’ve spent the last few weeks diving into the psychology behind pricing—exploring the subtle yet powerful ways it can influence buying decisions.
Here are 7 psychological biases and pricing strategies every marketer can use to make people buy ↓
LISTEN TO THE AUDIO VERSION
BREAKING DOWN THE STRATEGY
In college, I got invited to Clearwater, Florida by a friend of mine. Clearwater is a hotspot particularly popular with the rich & wealthy in the Tampa Bay area.
It’s got pretty beaches.
Expensive restaurants.
And a bunch of bars.
As a college kid with about $73 to my name, I was quite excited about the trip. It was a location way out of my league, but I was a guest of quite a wealthy family, so it was going to be a great time.
That was until we went out for dinner on the first night.
I borrowed a polo shirt, threw on some jeans and headed out to a 5* restaurant for dinner. I was out of my depth and I could feel it, but that couldn’t have been more apparent when the waiter handed me the menu.
$60 pasta.
$90 steak.
$45 risotto.
The $72 in my bank account was not going to get far here.
But then I saw an option for a flatbread pizza - $28.
Anywhere else, I would have said that was way too expensive for a pizza, but here… it seemed like they were nearly giving it away.
It was a relief and I was more than happy to get it.
(For context, the pizza ended up being terrible.)
At the time, I was just happy to find a cheap dinner, but what actually happened there was a psychological pricing principle called “Anchoring” and it’s a tactic that Rolls Royce has used for decades to sell cars for £200,000+.
I thought I was ordering a cheap pizza, in reality, I ordered an expensive pizza that seemed cheap. The restaurant had hacked my psychology.
So what other pricing psychology tricks are there out there?
That’s what I asked myself over the last few weeks.
Here are the best 7 psychological pricing principles I found:
Principle 1: Price-Quality Heuristic (Rory Sutherland)
What’s the difference between a £10 bottle of wine and a £50 bottle?
The £50 one is better, right? Well… maybe not so. But that’s exactly what our brains think.
A 2008 study published in ‘The Journal of Marketing’ tested this exact scenario.
They gave a group of participants 2 glasses of the same wine. They told them one glass cost $45 and the other only $5.
Participants rated the same wine higher when told it cost $45 compared to when they believed it cost $5. Their brains weren’t lying either—an MRI scan revealed more activity in the pleasure centres when drinking the "expensive" wine.
Rory Sutherland calls this the Price-Quality Heuristic—the idea that we instinctively associate high prices with high quality, even if there’s no evidence to back it up.
Luxury brands like Rolex and Bentley thrive on this principle. Their prices don’t just reflect their products; they create the perception of prestige. As Sutherland often says, “Price isn’t just what you pay; it’s a signal of what you’re buying.”
Principle 2: Decoy Pricing (Dan Ariely)
I need to confess something here… I am a feen for a meal deal.
Sandwich: £3.50
Drink: £2.50
Snack: £1.75
Buy them all together in a meal deal → £3.60.
Every time I buy one I feel like I’ve just robbed the store. But this week I found out that this is just a psychological pricing principle called “Decoy Pricing”.
The idea is that if you present a customer with several bad options, they will happily opt for your “target” product - and be more satisfied with it.
Dan Ariely tested this concept in a famous experiment with ‘The Economist’:
Online subscription: $59.
Print subscription: $125.
Online + print subscription: $125.
Most people chose the combo deal, seeing it as a bargain. When Ariely removed the "print only" option, fewer people chose the combo. The decoy didn’t sell but acted as a psychological guidepost, making the combo feel irresistible.
Principle 3: Loss Aversion (Daniel Kahneman)
There’s a famous copywriting business I’ve followed for years called, “Ship 30 for 30” that helps people start a habit of writing online.
A while back I listened to a podcast where the two cofounders explain how they have managed to make the program so oversubscribed for years now. Their answer: “It’s our loss aversion emails”.
1 week before the next cohort signs then send out an email that gives a certain % of people a £50 voucher, another group a £100 voucher and another a £250 voucher.
In the days after they send it, their sales skyrocket. All they are doing is giving people a discount, but by positioning it as a £50 voucher people go into “Loss Aversion’ mode.
Daniel Kahneman’s groundbreaking research on Loss Aversion found that losses hurt about twice as much as equivalent gains feel good. That’s why you’re more likely to subscribe if the message says, “You’ve won a £50 voucher” rather than “Save £50”.
It’s a simple psychological principle that completely changes how we frame things. Consider free trials for a music platform like Spotify, “Keep your playlists,” works better than “Continue listening with Premium.”
Why? It frames cancellation as a loss, not just an opt-out.
Principle 4: Perceived Value and Context (Rory Sutherland)
Go to McDonald’s and buy a £3.50 coffee and you’ll feel ripped off. Go to a cosy cafe in the Yorkshire Dales and pay £5 for a coffee- it’s a bargain.
This is one of my favourite lessons from Rory Sutherland about Pricing Context. Rory tells a great story about Eurostar’s expensive attempt to shave 10 minutes off travel time.
Their goal was to improve customer satisfaction. So they found what upsets customers most - trains being late - and decided to spend billions improving train times.
But Rory says the best thing they can do to improve satisfaction is to hire models to serve wine onboard. Why? Because people don’t care about speed as much as they care about experience.
A study in Psychological Science showed this perfectly with wine. Participants rated $4 wine higher when served in a luxurious setting compared to an ordinary room. The wine didn’t change, the context did.
The lesson here: pricing isn’t just about the product itself, it’s about the experience surrounding it.
Principle 5: Anchoring Effect (Daniel Kahneman)
Back to my expensive flatbread pizza that I thought was a bargain. This was all down to ‘The Anchoring Effect’. A cognitive bias that where we rely on the first piece of information we see to set our expectations when making decisions.
The first thing I saw was overpriced pasta and risotto. That was my anchor. The second I saw something significantly cheaper, it then seemed like a bargain.
Rolls-Royce has used this bias masterfully to sell some of the most expensive cars on the planet.
Rather than showcasing Rolls Royce’s as car shows - where they would seem terribly expensive. They instead, showcase their cars at private jet shows and yacht showings.
When you’ve been looking at £10,000,000 jets all day £200,000 doesn’t seem too bad for a car!
Principle 6: Time vs. Money Framing (Jennifer Aaker)
£25 for an Uber seems expensive. Yet if I told you the alternative was a 3-hour walk, the Uber would seem like a bargain - this is time vs money framing.
The concept is that consumers value experiences framed around saving time more than those framed around money. For example, saying “A weekend away for just £150” feels more appealing than “Save £50 on a trip to Gran Canaria.”
It’s about making customers feel like they’re not buying a product, but they’re buying back their time too.
Principle 7: Sunk Cost Pricing (Rory Sutherland)
On DOAC with Steven Bartlett, Rory Sutherland explained how Peleton have been dominating the industry by leaning into the Sunk Cost Fallacy - our tendency to stick with something we’ve invested in.
Their bikes cost £1,500 upfront, but they pair this with a £39/month subscription. Once you’ve spent the money on the bike, cancelling the subscription feels like wasting the initial investment. So the retention rate on that monthly subscription—even for customers who no longer use the bike—is incredibly high. Because cancelling your subscription doesn’t feel like saving money instead it feels like you lose the value of the bike itself.
As Rory says, “People don’t just buy products; they buy commitments.”
🌱 THE GREENHOUSE
Things I’ve saved this week that are worth seeing:
TL;DR
1/ Price-Quality Heuristic
2/ Decoy Pricing
3/ Loss Aversion
4/ Perceived Value & Context
5/ Anchoring Effect
6/ Time Vs Money Framing
7/ Sunk Cost Pricing
Well, if you didn’t know the psychological triggers that make people buy before, you definitely should now.
Rory and everyone I mentioned in this breakdown are incredible marketers who leverage psychology so much in their work - highly recommend you check all of them out.
For me, this breakdown was just a reminder to not get caught up in tricks and tactics, but instead, always run campaigns based on first principles - and that all starts with human psychology.
Learn something from this? Why not send this to a friend? I’d appreciate it :)
Until next Sunday.
— Niall
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