On Psychological Price

Personal Picture // St Michel, March 2013

When minimalists discuss the price of things, it usually comes down to investing in quality pieces, calculating cost per use (or cost per wear in the case of clothing). Or it is about high street store and the real price of the cheap items we have at our disposal. Today, I'd like to discuss another side to price: how marketing sets a price point to objects, and why we should be aware of that as consumers.


When a company decides to put an object on shelf, they have to decide how much they want to sell it. First, there is the basic, logical calculation - how much does it cost to produce, and how much margin they need to get out of it to pay for the company's expenses, paychecks etc. I'm sure there are finance teams with excel sheets and "ROI calculations" right on top of it.

However, there is another, maybe less obvious aspect to deciding the final price of an object: the "psychological price" - in order words, how are consumers going to perceive your product, depending on how much it costs? Everyone knows the .99 trick. Make a 10€ object 9.99€ and suddenly it looks much cheaper. But there are many more aspects to psychological price.

Perceived Quality

If there is one thing the "cost per wear" formula proves, it is the fact that consumers assume a more expensive item will be of better quality. A friend of mine shared an actual experience that proves it, when he was working in a supermarket as a student. They'd received a batch of cheap, plastic watches to sell. They put it on shelf at 2€ to get rid of them, but they didn't sell very well.

A few weeks later, they put it back on shelf at 30€ (most probably, 29.99), and they sold in a few days. Why? Because 2€ is considered too cheap for an electronic item like a watch. It has to be a fake, cheap thing that will break in no time. They didn't trust the 2€ watch. But at 30€, suddenly it was a more acceptable price for a cheap looking watch. even though the manufacturing price was the same (probably less than 50 cents a watch...) The thing is, these watches probably were cheap crap that would break in no time, but raise the price and it suddenly seem psychologically acceptable.

Of course, using psychological price isn't only used to make a cheap item acceptable, it is also used by many brands to raise the perceived quality of their items. If a brand wants to position itself as a high quality or luxury brand, they will artificially raise prices, not only to raise their margins, but also to have an impact on the perceived image of their products.

Studies have been conducted (I couldn't find my class notes so I can't point to one in particular, sorry for the sloppy sources) that show how much people were willing to pay for 2 similar items. In that  case, it was cars. They put labels on the same car: Audi, BMW... and asked people how much they were ready to pay for the car. Systematically, they were willing to pay more for the brands perceived with higher value (Audi for example) than the ones perceived as cheaper (Fiat for example). Thing is, the car itself - design, fabrics, look - was exactly the same. This shows that the price we are considering acceptable for an object is highly biased by the image we have of the brand.


Why it is important to notice: This is a perfect reminder that price and quality are not necessarily correlated. Sure, a higher quality item will be more expensive, as it uses better fabric and sturdier fabrication methods, but more expensive items are not necessarily of better quality. Price isn't a reliable criteria of quality.

Raising Price and Breaking Point

When companies raise the price of an item, they also choose carefully of how much they will raise that price, how many consumers they may lose in the process. It's called "élasticité-prix" in French, I don't know the English term for that. Basically, you calculate the ideal percentage of price raise that will not put off too many consumers.

That's why many brands have been steadily raising their prices every year, but we didn't quite notice, as each raise was small and subtle enough to make it acceptable. I have the striking example of Comptoir des Cotonniers to share, as a long time consumer. I didn't keep track of every price raise, but I do remember my very first purchase. It was in 2004, and it was a cashmere and silk blend pearl grey knit. It was 100€, and it seemed a lot to me, as I had to babysit my neighbour's daughter for over a month to gather the funds.

Now take a look at this season's Comptoir knits. The cheapest ones are thick T-shirts, not proper knits. And their cashmere ones are priced 145€. A 50% increase in 10 years. If you raised your knit's price by 50% at once, everybody would notice and complain. But add 2€ here, 5€ there each season, and over the span of 10 years, it goes unnoticed.

Why it is important to notice: Small and steady price raises change your perception of an "acceptable" price. In Europe, we saw it first hand with the introduction of euros. Can you imagine that 20 years ago, a baguette of bread used to cost less than 3 francs in France, which was what, 40 cents? Now, it cost 1€. One. Euro. It doubled in 20 years, yet we now perceive 1€ to be an acceptable price for a baguette. For items of necessity like that, there isn't much to do about it, but when it comes to non-necessities, like candles, make-up, clothes, decoration items, the price range of offerings is wide enough for us to turn to really decent offers and avoid getting used to unacceptable prices.

What to do as a Consumer?

As everything, being aware fo the situation is the basis. Knowing about psychological prices is a good way to set your own "acceptable" price range for each item type, depending on your income, needs and values. To me, here are some of the key elements to be aware of:

• The real cost of goods: It is depressing when you know these things, as it means people are paying a high price for such low costs down the production line, but the "COG", cost of goods, is usually MUCH lower than you imagine, when mass produced items are concerned. When we create video game goodies at work, they cost maybe one tenth of how much it would be sold, transport included. Can you imagine how much it really costs Comptoir des Cotonniers to manufacture their 145€ Cashmere knits? If the consumers who bought the 30€ watch mentioned above knew the supermarket was already making a profit by selling it 2€, would they have bought it? Or would they, rightfully, have felt cheated?

• The real criteria for quality: Now that we are not in contact with the craftsmen anymore, it feels we consumers have very limited knowledge of how the items are made, we therefore have no idea how to assess the actual quality of what we are buying. Instead of relying on price or brand name to judge the quality of an item, we should rely on objective criteria like the fabric/material used, the design, the finish... I admit it probably necessitates some research at first, but isn't it worth it, to evaluate if the price really matches the quality of the item you are about to buy?

• The manufacturing behind the scenes: Psychological price is one of these "behind the scenes" elements we are unaware of. Take a leather bag for example - say it costs 200€. In order to assess if that price is acceptable, I guess you'd need to know more about how it was made. Not only the cost and quality mentioned above, but other details, such as how has it been manufactured? How was the raw material produced? Where? Was it chain-made by underpaid workers for a real cost of 20€ for the company, or was it hand-made by a local craftsman? Knowing as much as possible about the manufacturing process of an item is one of the best ways to figure out if the price is really justified or not.

Just like many more marketing techniques out there, the price point setting and manipulation mostly uses unconscious thinking processes. In other words, as consumers, we make these "psychological" judgements on price without even realizing it. However, I think this is an important factor to know about, especially for those of us who want to engage in more mindful consumption. What do you think? What criteria do you base your budgeting on?