Page 166 - DMGT550_RETAIL_MANAGEMENT

Unit 9: Merchandise Management

9.9.1 Is Psychological Pricing an Effective Strategy? Notes

Price has a psychological value. Buyers will buy a high priced product because they believe that
the high price is a good indicator of value. Their perception is not reality based, it is psychologically
based therefore buyer behavior is affected by more than the product and price tangibles.
Interestingly, as buyers do more investigation into the product’s attributes or the business
promotes the product’s characteristics more effectively, that product knowledge (‘familiarity
breeds contempt’) enables buyers to make a more rational, versus psychological, buying decision
and for buyers, price moves down the value scale.

One use of psychological pricing is in price-ending numbers. Buyers believe that prices ending
in uneven, rather than even numbers, (such as, $9.99, $199,999, etc.) are a better deal or a better
price than even numbers (e.g. $10 or $200,000). If the products to be priced are to be in a price
‘band’ (such as on-line auctions, or cars or other sales listings), if the listing price is in the odd
range, say $199,000, it will appear in a lower price band than the $200,000 listing and will be
viewed as better value. The challenge with this strategy is that products ending in an odd
number are also often perceived as being lower in value. Ensure that you chose the right price
and the right strategy for your specific product or service.

Another use of psychological pricing is reference price. Reference pricing is when buyers have
a psychological response to the price that mirrors the way they view a price’s relationship to a
specific product. A business could capitalize on reference pricing and position their product
amongst high value or luxury items to imply that its product belongs in the same category. Be
careful with that positioning strategy, it can backfire if buyers feel that your product doesn’t
really belong in that category.
For psychological pricing to be an effective price strategy, the product needs to have some
characteristics that would appeal to an ego-sensitive buyer. For example, luxury goods are
attractive to ego-sensitive buyers. Premium recreational goods, such as boats, are attractive to
ego-sensitive buyers. Your strategic planning model must ensure that the pricing strategy
selected for your product or service is a best-fit price.

9.10 Mark-Up and Mark-Down Pricing

After deciding the price of merchandise, the retailer’s next step is to consider whether there is
any need to change some price due to reasons, such as changing demand patterns, pilferage,
competition and seasonal shift during normal course of business. Price adjustments include
either markdown or additional markups.

Markdown

Mark-down is a most common technique to push retail sales that offers particular merchandise
at a price lesser than the merchandise marked price (normal price).
The reasons for markdown include:
1. Overstocking/overbuying
2. Season change

3. Clear-out shopworn/slow-moving merchandise
4. Clear-out old-fashioned/old-trend merchandise
5. Generate customer traffic

LOVELY PROFESSIONAL UNIVERSITY 161