Eight pricing strategies that drain your wallet

THERE are many different pricing strategies that all attempt to do the same thing: to make you voluntarily spend as much money as possible.

Below are eight pricing strategies that are used against your wallet. 

1. The number “9”is a very powerful psychological number: many would perceive something which costs RM199 as much cheaper than something which costs RM 200, while the difference is only a single Ringgit. This explains why so many prices end with a 9. In fact, when two promotions of the same product (originally priced at RM60) were tested, the one that was discounted to RM49 did better than the one discounted to RM 45, despite the latter being discounted to even less!

2. Freemium pricing is used in many apps, notably Angry Birds, Farmville and the ever-popular Pokémon app. Although the games are free to download, once you are addicted you will have to spend real money to buy a virtual currency to continue to play, to upgrade or to buy tools.

3. Anchor or decoy pricing is used to manipulate your reference set. By offering one extremely expensive product (typically called the diamond, VIP, premium package), all the other packages seem reasonably priced in comparison. How do hotels sell a RM10,000 VIP suite? By putting it next to a RM60,000 presidential suite. The presidential suite is not even meant to be sold (although it would be nice if it was occasionally rented by a rock star or celebrity)!

4. The aversion to extremes that many people have is used by fast food chains around the world, who offer “small”, “medium” and “large” sized meals, making it easy for people to choose the middle size. The extremes of “small” and “large” seem less appealing and require more justification than the middle of the road.

5. Premium pricing is used by monopolist and companies that want to project a perception of high quality, by asking a high price, hoping consumers will think price and quality are correlated. Nowadays it is almost synonymous with Apple, which by itself takes more than 90% of the total profits that are made in the smartphone industry. But it is also used by all luxury fashion brands: watches, bags, clothing and fragrances. You don’t actually think it costs Starbucks more than 2 or 3 Ringgit to make your favourite iced Frappuccino?

6. Tiered pricing is used to get you to buy more in exchange for a discount. You will see this often in B2B environments: the more you buy of an item, the more the unit price will drop.

7. Bundle pricing is used by companies who want to sell you something you don’t really want by combining it with a product you do want and offering a package price that seems reasonable. You will see the “set lunch”, inviting you to shell out a few more Ringgit than the price of the main course in order to also get a soup or an iced lemon tea.

8. Dynamic pricing is the most sophisticated pricing mechanism and is used mostly online. Airlines and retailers have so much data at their disposal they are able to change the price of millions of products instantly, based on the time, inventory, competitor prices, day, location, device and hundreds of other variables. For example, iPhone users will be given higher prices and served different ads because companies know iPhone users, in general, have a higher income than Android users.

So is there a silver lining? Yes, luckily there is. There are also some pricing strategies that benefit consumers, at least in the short term. 

Penetration pricing is used by new market entrants to quickly steal market share from its competitors by pricing their products or services with virtually no profit margin. 

Predatory pricing is used by monopolists to either deter new entrants from entering the market or to drive competitors out of the market, by offering low prices at which its (potential) competitors cannot be profitable.

Mark Reijman is co-founder and managing director of https://www.comparehero.my/, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.