Psychological pricing is a pricing and marketing strategy that utilizes the power of psychology or the subconscious to influence customers to spend more. It is based on the theory that certain prices have a psychological impact, and in this pricing method, retail prices are often expressed as just-below numbers: numbers that are just a little less than a whole number. The idea behind reducing the left-most digit is that customers will read the slightly lowered price and treat it as much lower. For example, an item priced at $3.99 is conveyed by the consumer as 3 dollars and not 4 dollars, treating $3.99 as a much lower price than $4.00.

Psychological pricing is one cause of price points. The psychological pricing theory is based on one or more of the following hypotheses:

• The left-digit effect: This bias is caused by the use of an anchoring heuristic in multi-digit comparisons.
• The power of odd numbers: Odd numbers are perceived as more trustworthy and less likely to be rounded up than even numbers.
• The power of charm pricing: This is when businesses knock a rounded dollar figure down by one cent. The brain reads $12.99 as $12, not $13.

Psychological pricing tactics come in many forms, and here are four examples of psychological pricing with advantages and disadvantages:

1. Artificial time constraints
2. Discounting
3. Innumeracy
4. Tiered pricing

Psychological pricing is effective because it plays on the fact that consumers rarely know what something should cost. Most often, the way we determine if something is a good deal is by getting it for a lower price than normally listed or by comparing it to similar products in the same category. Psychological pricing also relies on simple changes that trick the brain, and one of the most well-known strategies is called charm pricing, where businesses knock a rounded dollar figure down by one cent.

The advantages of using the psychological pricing method include:

• Price bands
• Increased sales
• Simplified decision-making process
• Increased returns on one-time sales
• Creating a sense of urgency for the purchase

The disadvantages of using the psychological pricing method include:

• Potential loss of trust
• Potential loss of revenue
• Potential loss of customers
• Potential legal issues

In conclusion, psychological pricing is a pricing and marketing strategy that utilizes the power of psychology or the subconscious to influence customers to spend more. It is based on the theory that certain prices have a psychological impact, and in this pricing method, retail prices are often expressed as just-below numbers. Psychological pricing tactics come in many forms, and they are most effective when used at the appropriate time and place. While psychological pricing can work tremendously well in many situations, it can also do more harm than good in some cases.