Joshua D'Costa
Growth & Marketing
Jan 20, 2025
|
7
min
Have you ever done online shopping, only to realize you spent more than planned? Chances are, you were influenced by psychological pricing strategies. The techniques that retail industries use can also be very effective when applied to pricing in other SaaS industries or B2B industries.
Undercharging will cripple your business with uncompensated development and delivery costs while overcharging will hinder growth and drive away thousands of potential customers. Implementing psychological pricing tactics for SaaS founders can lead to maximized conversions.
Let us explore psychological pricing, benefits for SaaS founders, pitfalls to avoid, and ways to implement pricing strategies into your business.
What is Pricing Psychology?
Pricing Psychology is a marketing strategy that plays on the psychology of consumers by altering prices and product packaging. It involves techniques like “buy two get one free” or pricing an item for $4.99 rather than $5. The main goal of psychological pricing is to influence consumers buying habits to maximise conversion and sale volume.
For SaaS Businesses understanding of psychological pricing is crucial as subscription-based models require ongoing customer commitment.
Why should SaaS Founders care about Pricing Psychology?
A Study from Harvard Business School shows that a 1% improvement in pricing can lead to an 11% increase in operating profit. So it becomes important for SaaS Founders to optimize their pricing strategies even after settling for a Pricing model.
There are Four types of Psychological Pricing strategies which are intended to encourage customers to buy more products or pay higher prices.
Four Pricing Strategies That Drive Conversions
Charm Pricing
Charm pricing is a simple tactic where prices end with “.99” or “.97” to make products appear cheaper than they actually are. For example, $9.99 is perceived as significantly less expensive than $10.This psychological trend comes from the fact that we read from left to right. When consumers see $9.99 they often focus on the number “9” instead of rounding up to $10. This subtle Psychological nudge tricks the brain into associating the price with a lower category.
Artificial Time Constraints
“Valid only for next 24 hours!’”, “Limited offer only!”, “75% off” These are some common artificial time constraint methods created to push customers to make quicker decisions.This psychological pricing strategy creates a sense of urgency which results in FOMO (Fear Of Missing Out) when customers feel they might lose a good deal, they are more likely to buy it immediately rather than postpone.
For SaaS founders, offering discounts for annual subscriptions “valid only for the next 48 hours” or any Time constraints can drive quicker sign-ups.
Anchoring Effect
The Anchoring effect works by presenting a higher price first to make other options look more affordable by comparison.
Let's say you are browsing SaaS pricing where the product plan is listed at $199/month, but the starter plan costs only $49/month. The higher-priced plan sets an “anchor”, making the lower-priced option feel like a great deal in comparison.
Bundling and Perceived Value
Bundling is about combining complementary services into a single package at a slightly discounted rate to increase perceived value.
For example, If a SaaS company offers a pairing of a Subscription management tool ($49) with an analytics tool ($29) at $60. This can attract customers seeking all-in-one solutions.
A well-thought bundle simplifies decision-making for the buyer, particularly in SaaS, where the abundance of options can be overwhelming.
By offering the convenience of a bundle, SaaS founders can attract customers who want comprehensive solutions without the hassle of piecing together multiple tools.
Why Psychological Pricing Works for SaaS
Decision Simplification
Pricing psychology reduces decision fatigue by making choices appear simpler. Instead of overwhelming users with complex tiers, clear pricing nudges them toward the desired option.
Enhancing Perceived Value
Psychological pricing amplifies the perceived value of your offering without altering the actual cost. For instance, presenting features as “valued at $500 but yours for just $199” builds a sense of getting a deal.
Steps to Implement Pricing Psychology
A/B Testing
Experiment with different price points, visual layouts, and messaging to determine what resonates most with your target audience. For Example, if you are offering a productivity tool test pricing options like $9/month vs. $10/month for a starter plan and track which brings more conversions.
Behavioral Data
Behavioral analytics tools provide insights into customer purchasing habits to identify customer purchase patterns for better pricing strategy. Dodo Payments offers real-time data on users to interact with pricing tiers, allowing SaaS founders to access insights on pricing trends and user behavior.
Localize Pricing
Adapting prices based on geography ensures affordability and relevance for different markets. For example, video editing software charges $10/month globally. However, for India, it introduces a localized pricing tier of ₹599/month to make the product more accessible.
Pitfalls to Avoid
Overuse of Discounts and Scarcity
Constantly offering discounts can devalue your product. Over time customers may realise that discounts are a recurring feature and stop subscribing at a full price. Use discounts strategically, like during product launches, first-time sign-ups, etc.
Neglecting Customer Value Perception
If your pricing strategy undermines the perceived value of your product, it may lead to higher churn rates. For instance, offering heavy discounts might make customers question the product’s quality. So focus on highlighting product benefits like- ease of use, and time-saving to justify the price.
Confusing Pricing Tiers
Research shows that people are more likely to make a choice when presented with clear options, too many pricing options can overwhelm users. Focus on clearly outlining each tier to simplify decision-making and guide users toward their ideal plan.
The Role of Psychological Pricing in Automatic Billing Models
Retention Boost
Psychological pricing like churn pricing can ensure customers see ongoing value in your subscriptions, reducing the likelihood of cancellations. Such methods make customers feel that they are getting a deal, reducing the likelihood of cancellation.
Upselling Opportunities
Use an anchoring pricing strategy to encourage customers to upgrade tiers. For example, a well-placed high-pricing tier can make mid-tier subscriptions appear more appealing and affordable.
Conclusion
Proper implementation of these psychological pricing tactics for SaaS founders can lead to maximized conversions. Start by analyzing your current pricing strategy and leverage strategies like charm pricing, bundling, and anchoring, you can align your pricing model with consumer behavior for optimal results.
Dodo Payments offers advanced tools to help you implement effective pricing models, automate billing, and analyze customer behavior to transform your pricing strategy and scale your SaaS business effortlessly.
