This document summarizes Ian Lunn's presentation on the psychology of pricing. Some key points include: - Pricing is important for determining sales volumes and profits, and creating opportunities for upselling and cross-selling. - Reference pricing and competitors' prices constrain what customers expect to pay. - Value-based pricing sets prices according to what customers perceive as valuable rather than objective costs. - Anchors, magic numbers, and deals influence customers' perceptions of value and willingness to purchase. - The presentation encourages using psychology to maximize revenue through effective pricing strategies.

1. Cambridge Product Management Network
The Psychology of Pricing
Ian Lunn
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2. Ian Lunn
 Over 20 years product management and
marketing experience in Telecoms, IT
and software
 Following Computing degree started life working in IT
consultancy – Logica and Hoskyns
 Senior marketing, product management and consultancy
roles at Cable & Wireless, Lucent, Vodafone and Orange
 Head of marketing in ‘dot-com’ company
 Wide experience across business and consumer markets in
both small companies and large multi-nationals
 Co-founded Product Focus 6 years ago
© Product Focus www.productfocus.com

3. Product Focus
 Europe’s leading product management training and
consultancy business with a focus on Telecoms, IT and
Software
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4. The importance of pricing
 It’s important beyond the obvious that it determines what
you get paid for your product or service
 It also
 Determines the volume of sales
 Is a tool to maximise profit
 Can create up-sell and cross-sell opportunities
 Creates a perception in the mind of your staff, potential
buyers and your competitors
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5. Mini-exercise
 Imagine you’ve just been made redundant and
you’ve decided to go into business with your
friend who’s in the same situation (and who
happens to be sitting next to you)
 You’ll be landscape gardeners
 What’s the name of your business and how
much will you charge for a day of your time?
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6. Reference prices
 Pricing a product launched into an existing category
(product area) is subject to ‘reference’ pricing limits
$50 $349
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7. Key constraints on pricing
Price
Cost
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8. Pricing strategies: value-based
 Maximises the revenue from differentiated products
 Price the product or product features relative to each
other based on the value the customer derives from their
use
 Requires an excellent understanding of the target
customer and what they value
“ There are two fools in any market, one that
does not charge enough and the other that
charges too much”
Russian proverb
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9. Influencing value-based price
Opportunity value
+ Cachet / desirability
Reduce ‘disliked’ activity
£1000 Perceived Value
Uncertainty
Switching costs
- Resistance to change
Objective Value e.g. Time saved x hourly cost
(10 hours at £100 = £1000)
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10. Example : energy saving light bulbs
Standard light bulb
Price to customer £0.60
Lifetime electricity cost £4.80
Lifetime cost £5.40
Energy saving light bulbs
Lasts 8 times longer uses 1/6 electricity
Value (£5.40 x 8) £43.20
Less cost of electricity (£4.80 x 8/6) £6.40
Lifetime cost - Objective value £36.80
Reference points + uncertainty + resistance to change
depress this resulting in a realistic market price £3 - £5
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11. Psychology of pricing
 If there are no easy reference points …
 Customers will look at proxies i.e. things that are similar
 They will look at other products in your range – if they are
judged to be reasonably priced or expensive then they will
assume it will be true for a new product
 They will subconsciously be influenced by anchor points
 So try and set an expectation with your customers about
why your product is worth X
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12. Magic numbers
Source : an extract from a Microsoft web page selling Windows 7 – April 2010
 $199.99 seems a lot less than $219.99 ($20 difference)
 $119.99 and $199.99 don’t seem that far apart ($80 difference).
 ‘Charmed’ prices end in 99, 98 or 95
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13. How to present an offer
 What do psychologists claim will be the most
successful promotions in these scenarios ?
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14. How to present offers
 Potential purchasers are twice as likely to defer a
decision to buy on which of these offers?
Mobile phone Mobile phone
Latest model, Latest model,
touch screen, touch screen,
music & video play, music & video play,
5mpx camera 5mpx camera
500 mins, 500 texts 500 mins, 500 texts
£50 + £25/month
£50 + £25/month
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15. Decoys to boost sales
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16. People love a bargain!
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17. Product Management Journal
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insights and explanations to over 2,000 product
managers across Europe
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