ASSIGNMENT OF

INDUSTRIAL PSYCHOLOGY

(Effect of price on psychology of consumer)

SUBMITTED TO: SUBMITTED BY:

Dr.Navjot Kaur Gagandeep Kaur

Sec-C (5894)

Alka bharti

Sec-A (5812)
The term consumer psychology refers to the study of how people relate to the goods and
services they use in their daily lives. Consumer psychology provides opportunities to
examine issues such as what factors are most important when people decide to purchase a
particular item, how customers determine the value of a service, and whether or not television
and magazine advertisements can convince a reluctant consumer to try a new product for the
first time.

The consumer psychology is affected by many factors but the most effective one is the price
of the product. A customer must determine that the price is right before they are willing to
buy. However, pricing is one part math and nine parts psychology. That is why so many
prices set at $9.99, $99.99 or 1,999.99. This is a psychological move to keep the customer
from moving to the next price threshold. The product may be just a penny under the $100
mark, but to customer, there is a major chasm between $99 and $100.

Pricing is more than just about numbers; it is a play on perception. In many cases, the
psychology of pricing is more important than the actual price itself. It cannot be guess that
what is in consumer’s minds when they consider prices and how this affects their behaviour.
Consumers behave differently, so perception plays a large role in customers’ acceptance.
The cost of a product or service is relative to what the buyer thinks that cost should be. Based
on his or her previous experiences, the customer will judge whether prices are too high, too
low, or on target.

Through personal experiences, advertising, and a base knowledge of standard pricing,

customers will have a good idea of where prices should fall in relation to the market and
competitors.

By using psychology, one can present a perception of value or discount that will help them to
sell their products. For example, the common use of $9.99 over $10.00 has long been a matter
of pricing psychology that says: Although there is only a 1 cent difference, something in the
$9 range is a greater bargain than something in the $10 range. In fact, studies show that odd
numbers are more commonly associated with lower prices than even numbers.

Giving an item free with purchase is primarily a perception of savings. While a buy-one-get-
one-free offer represents a small savings to the customer, it draws more business because of
the idea of getting something for free. Using that philosophy, one can ask the consumer to
buy two and get a third for free and thereby double your initial sale. They get something for
free, and one sells two instead of one.

As long as one has a firm grasp on their costs and know that they will not lose money, they
can present products and services in a manner that indicates to the customer that they are
“walking out with a savings.” In many cases, it’s primarily a matter of presentation.

Other factors that play into the perception of pricing include availability. If, for example, you
indicate a one-day sale, the idea that availability is limited will encourage the customer to act
quickly rather than mull over the purchase. Likewise, if you know that supply and demand
are in your favor, you can stand by a higher price and let it be known that only a few items
remain available. Limited items always appear as more valuable.

Of course, you need to remain honest in pricing, marketing, and advertising. However, as
long as you are neither price gouging nor making fraudulent claims, you can use the power of
perception — or the psychology of pricing — to your advantage

Pricing is the process of determining what a company will receive in

exchange for its products. Pricing factors are manufacturing cost, market place, competition,
market condition, and quality of product. Pricing is also a key variable in microeconomic
price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of
the four Ps of the marketing mix. The other three aspects are product, promotion, and place.
Price is the only revenue generating element amongst the four Ps, the rest being cost centers.

Pricing is the manual or automatic process of applying prices to purchase

and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales
campaign, specific vendor quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others. Automated systems require more
setup and maintenance but may prevent pricing errors. The needs of the consumer can be
converted into demand only if the consumer has the willingness and capacity to buy the
product. Thus pricing is very important in marketing.
Price/quality relationship

The price/quality relationship refers to the perception by most consumers that a relatively
high price is a sign of good quality. The belief in this relationship is most important with
complex products that are hard to test, and experiential products that cannot be tested until
used (such as most services). The greater the uncertainty surrounding a product, the more
consumers depend on the price/quality hypothesis and the greater premium they are prepared
to pay. The classic example is the pricing of Twinkies, a snack cake which was viewed as
low quality after the price was lowered. Excessive reliance on the price/quantity relationship
by consumers may lead to an increase in prices on all products and services, even those of
low quality, which causes the price/quality relationship to no longer apply.

Premium pricing

Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or
near, the high end of the possible price range to help attract status-conscious consumers. The
high pricing of premium product is used to enhance and reinforce a product's luxury image.
Examples of companies which partake in premium pricing in the marketplace include Rolex
and Bentley. People will buy a premium priced product because:

1. They believe the high price is an indication of good quality;

2. They believe it to be a sign of self worth - "They are worth it;" it authenticates the
buyer's success and status; it is a signal to others that the owner is a member of an
exclusive group;
3. They require flawless performance in this application - The cost of product
malfunction is too high to buy anything but the best - example: heart pacemaker.

Demand-based pricing

Demand-based pricing is any pricing method that uses consumer demand - based on
perceived value - as the central element. These include: price skimming, price discrimination
and yield management, price points, psychological pricing, bundle pricing, penetration
pricing, price lining, value-based pricing, geo and premium pricing. Pricing factors are
manufacturing cost, market place, competition, market condition, quality of product.
Multidimensional pricing

Multidimensional pricing is the pricing of a product or service using multiple numbers. In

this practice, price no longer consists of a single monetary amount (e.g., sticker price of a
car), but rather consists of various dimensions (e.g., monthly payments, number of payments,
and a down payment). Research has shown that this practice can significantly influence
consumers' ability to understand and process price information

"Consumer behaviour" refers to the interaction between price changes

and consumer demand. We know that a reduction in the price of X will result in an overall
rise in the quantity demanded of good X. However, this rise in the quantity demanded is due
to the total price effect, which can be into two separate parts, the substitution effect and the
income effect.

The substitution effect refers to the extra purchase of good X now

that it is, after the price fall, relatively cheaper than other substitutes in consumption. The
income effect refers to the rise in real income (purchasing power) now that the price of one
commodity is lower within the bundle of commodities purchased by the consumer. This extra
real income can potentially be used to buy more of all commodities, including X.

Total price effect = substitution effect + income effect

In terms of rules associated with the law of demand, the substitution effect will
always be negative. The income effect can be positive, zero or negative.

Example of positive substitution effect would be like two very popular brands
addidas and Reebok if the price of addidas will be more consumers will go to Reebok
showroom and likewise.

Positive income effect means increase in income will increase the purchasing
power of consumer.

Negative income effect means increase in income will not affect purchasing power
positively. It is applicable in giffen goods. Example of giffen goods is like we have two
commodities wheat and bajra and the consumer who was consuming bajra after increase in
income will not increase their consumption in bajra instead consumer will move to wheat
with additional income
Zero income effect means there will be no change in purchasing power

How price affects consumer psychology it all depends upon the need of the consumer. For e.g
a drug addict person always want drugs, alcohol and etc and he will be ready to pay more
than price just because of addiction but at the same time price of these drugs does not matter
to other person. So consumer always pays according to his need.