$21,400 is better than $20,000

Use moderate ($21,400) or highly ($21,468.45) precise pricing to boost your profitability. And try to justify the reasoning behind the price you set.

This research from 4 years ago is especially relevant for B2B sales, or B2C sales of expensive items and services that aren’t frequently bought. With some imagination and experimentation, it can even be applied more widely, once you understand the principles behind it.

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Use a moderate or highly precise price to increase your profitability

Impacted metrics: Customer spending | Conversion rate
Channels: Pricing | Sales team

Recommendation

Use a moderate ($981,200) or high ($981,218.37) precision price for your product or service - rather than a low precision, rounded price ($980,000).

Stick to a high precision price if you can credibly justify it (e.g. the house was appraised by an expert, the service requires 320 hours of X and 112 hours of Y). If not, moderate precision is your best bet.

Customers will be willing to pay more and negotiate less.

Effects

  • Previous research has repeatedly established that the more precise a price, the more a buyer is willing to pay. This research finds this is not always the case when it comes to expert buyers (e.g. an experienced purchasing manager).

  • For amateur buyers (e.g. a first-time home buyer), the effect appears to be linear and ‘infinite’. The more precise the price, the more they are willing to pay.

  • For expert buyers (e.g. a real estate agency buying a property), there is an inverted U effect. A moderate precision price is when they are willing to pay the most. If you use a high precision price with an expert buyer you lose credibility, and it has the same or less effect of a low precision price.

  • However, if you justify the reason behind a high precision price (e.g. the wall has a slight deformity, so an expert valued it accordingly), you can restore your credibility in the eyes of an expert buyer - and a high precision price has a similar effect to a moderate precision price.

(Results from some of the experiments - Click to zoom in)

Why it works

  • The first reason is that when we are anchored to a precise number like $32.50, we are more likely to think - and negotiate - in similar units. In this case, we will think of $2.50 as a unit, so we may try to negotiate to $27.50. On the other hand, if we are given $250 as an initial price, we will think of $50 as a unit, so we might try to negotiate to $200.

  • The second reason is that we assume that a precise price is calculated for a reason - there must have been an expert calculation behind it. It’s easy to think of someone coming up with a price of $100 without any basis (“that sounds good”). So when the price is precise, we expect the seller to be more competent and the price to be aligned with the value of what we’re buying.

  • We don’t know exactly why unjustified highly precise prices backfire with expert buyers. It might be because they believe they are being manipulated, or think we are making up a price without a basis.

Limitations

  • The effect may only work in a market where round numbers are prevalent. Once more precise numbers become prevalent, or in a market where this is the norm, the effect may not work anymore.

  • Most experiments were performed on 1-to-1 sales. We don’t know if the effect holds for mass products (e.g. groceries) and services. The psychological mechanisms should still hold, but there may be other factors that come into play.

Companies using this

  • The vast majority of sellers, even in B2B, still have a tendency to round up or down their prices.

  • Certain industries are an exception (e.g. trading), but this is mostly borne out of necessity than a conscious effort.

Steps to implement

  • If you sell B2B, use moderate or high precision pricing and always try to justify the reason behind your price. Build a story behind it.

  • If you sell B2C, try experimenting with gradually more precise pricing to see if it affects your customers’ willingness to pay.

Study type

Online and in-person market experiments, Germany

Source

Loschelder, D. D., Friese, M., Schaerer, M., & Galinsky, A. D. (October 2016). The too-much-precision effect: When and why precise anchors backfire with experts. Psychological science, 27(12), 1573-1587.

[Link to paper] [Article on INSEAD’s blog]

Affiliations

Leuphana University, Saarland University, INSEAD, and Columbia Business School

Remember: This research could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.


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