The Psychology of Pricing For More Profit

In my years as an independent specialty retailer, I really got pricing down to a science. I didn’t know at the time that it actually IS a science. But since then I’ve learned so much about behavioral economics and the study of psychology of retail shoppers – and it is fascinating!

What a person will pay is all based on their perception of the value of the item. I learned in my store that adding a couple of dollars here and there didn’t change the customer’s perception of the value.

An item that is $8 can be sold for $10. Now look at an item that is $11 –  It should just be $12. It just looks better, doesn’t it? And you would still buy it, right?

Adding that dollar or two has a HUGE impact on your profit.It is imperative to strive for a minimum of a 55% initial markup (IMU) for most stores. The easiest way to get that is to look at your inventory and see where you can use the pricing guidelines below.

You will find it easier than you think. Many of my new clients fight me tooth and nail about this and then see how easy it is to mark up SOME items a little more. They become eager to do it as they see that impact is profound.

For a store doing $500,000, increasing your IMU from 50% to 55% can give you an additional $25,000 in possible cash flow!

Profit Pricing Chart

0 – $3.00Use only the .50 or the .00Don’t bother with the .25 or .75 – in most situations, it won’t make a difference.
$4.00 – $5.00$5.00A customer considers a $4 item to really be a $5 item anyway.
$6.00 – $8.00$8.00Use only when you have to – think hard and consider if the value of the item is really $10.
$9.00 – $10.00$10.00In their heads, a customer considers it a $10 item anyway.
$11.00 – $12.00$12.00An $11.00 looks like it should have been $10.
$13.00 – $15.00$15.00People like to think in 5’s. If it is $13 or $14, it might as well be $15.
$18.00 – $20.00$20.00As the prices get higher, I find that the extra dollar or two or three won’t stop a customer from buying it.
$21.00 – $22.00$22.00Keep the extra few dollars for yourself.
$23.00 – $25.00$25.00No discernible difference from the customers.
Above $25.00Increase by $5 up to $100
Above $100You can primarily increase by $25.00Try it. Really look at an item. No one will buy an item at $115 that they wouldn’t buy at $125.

These are the only prices that you should use in your store.

Download a printable chart here

The value of ‘free’

There is a groundbreaking book called Predictably Irrational by Dan Ariely. He devotes a whole chapter to how consumers are “predictably irrational” when it comes to prices and how they overvalue ‘free’.

At clearance sale time, I always liked to have some things in a basket marked ‘free’. They would be items that had already been marked down to the lowest price and I would mark them out of stock to just give away.

It was so fun to see the reactions of customers. More than once, they would try to give me money! Most of all it was just fun to bless some kids with a treat!

Now go and price your merchandise for more profit!

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