Pricing is one of the biggest stress points for small business owners. Whether I’m working with equine photographers in Cowgirls with Cameras or entrepreneurs in my broader business community, pricing always rises to the top of the question list.

In this episode, I break down three powerful pricing psychology principles that influence how your customers perceive value: the anchoring effect, charm pricing versus round number pricing, and the decoy effect. I share where these ideas come from, why they still matter today, and how you can apply them intentionally in your own business.

Pricing isn’t just math. It’s positioning, perception, and psychology. And when you understand how the brain interprets numbers, you can set your prices with far more clarity and confidence.

00:00 Introduction: Why Pricing Psychology Matters

03:30 The Research Behind Pricing Psychology

06:00 The Anchoring Effect Explained

11:30 When Anchoring Backfires

16:30 Charm Pricing vs Round Pricing

21:30 When Round Pricing Signals Authority

26:00 The Decoy Effect & Three-Tier Pricing

31:00 When Decoy Pricing Becomes Unethical

33:00 Pricing With Intention

EP 26 Pricing Psychology

Now, a lot of the things that I'm gonna talk about today are based on research that has basically been influencing how entrepreneurs and businesses price their products and services since the seventies and eighties. Now the research goes back a lot [00:01:00] further. These things have been in effect way before these gentlemen started studying them,

and at the same time, I understand that modern pricing may have shifted a little bit, and I'm gonna try to point to that when I can. I do wanna give a nod to two researchers on whose research I am going to draw for a lot of this information, as well as interjecting my own entrepreneurial experience, having tried

all three of these pricing paradigms that I'm gonna talk about today, but those researchers are Daniel Kahneman and Amos Tversky, and their research is published broad and wide. You can find it online and you can interact with it. You can buy books on Amazon, et cetera, et cetera. If you wanna dive into this subject a little deeper. There's another person, Richard Thaler, who has done a lot of research around this area as well.

I do wanna say this. I think most of us as entrepreneurs want to believe that if we price our products and services logically, that it will make sense to the consumer. I do wanna caveat this by saying that this research, along with a lot of other research, definitely shows that purchasing decisions are made emotionally.

The anchoring effect is the concept that the first number a person sees in association with whatever it is that they're interested in purchasing, is the number that they anchor in on, and then they base the value judgments on the numbers that they interact with after that, based on that first number.

So that first number is an anchor to how they are gonna perceive the pricing after that. So let's say that you sell a consulting package and when the person comes to your website and they look at the consulting package, they see a price tag of $5,000, and then when they talk to you in a sales conversation, you price the package to them at

makeup, was associated with their last purchase of something similar, something that they'd heard somebody else paid for this particular type of product or service, or they'll even anchor it into a random number that they pull out of the air or what they think that something like this should cost. So if we don't set that anchor many times

So when a potential customer encounters your pricing, inside their head, they're not going, is this objectively worth it? They're looking for a comparison to start judging that by, to understand is it worth it in comparison to what they already understand.

And the second dealership we go to has a similar car that is $65,000. We're gonna perceive that $65,000 car as being worth 75,000 because that's the one that we saw originally. So now we're like, oh yeah, this is a good deal. That's $10,000 less than the car I just looked at. So now anchor pricing has made an effect

in how we perceive the value of what we're buying. Anchor pricing can backfire, and here's some ways that it does backfire.

And so the value is shifty and trust really fades in that equation. If you are going to use anchor pricing, you need to be careful in how you structure that first price tag in comparison with what you are offering on the backside of it. Another place that anchor pricing really backfires is when we discount constantly.

So I think about Hobby Lobby when I think about this because Hobby Lobby continually runs frame sales. And as a photographer and an artist, I buy a lot of frames. I will wait for their frame sale. Now on one hand. I will stock up during their sale. So I probably spend more, but I also now only value those frames at the sale price.

Black Friday is another example of this. People who wait for those Black Friday deals because a business consistently offers the same Black Friday deal. As a business owner, we need to understand that when we do that, we are influencing the consumer public to purchase at a certain time. Now, I am certain Hobby Lobby has a method to their madness.

Another place that this might fail just like setting a too realistic high anchor, it can also fail if we set a low anchor in the beginning. So this happens, especially with new businesses where they say, okay, well eventually I'd like to charge $500 for this, and I'm gonna offer it to start off with, because I'm a new business, I'm gonna sell it for 300, and eventually I'll raise the price to 500.

It's not a good thing to do. It's okay to sell what you're doing at the $300 price tag, but what we wanna do is we want to set the value, that anchor number at the 500 so that when you raise your price back up to 500 people are not like, oh yeah, that's not worth it because the value is at 300 and now I'm paying

anchoring is often smaller or it is negligible in effect. So do keep those things in mind when you're considering how to set or utilize anchor pricing if you wanna use it. The next pricing psychology paradigm I wanna talk about is charm pricing versus round pricing. So charm pricing is where we offer a number that is not a round number, so like $997, and I'm gonna use that example a lot

That ends in not a zero, like nine 50 is considered round pricing. 997 is considered charm pricing. And a thousand is considered round pricing. So those are three numbers that are fairly close together to give you an idea of what's the difference between charm pricing and round pricing. So charm pricing has become very, very popular, especially in certain industries.

Educational things like online courses, consulting, coaching packages, that kind of stuff. Anything that's kind of packaged up together tends to get a little bit of charm Pricing and things that are sold completely online have really been affected by charm pricing.

And people will see the [00:13:00] 997 as more of a discounted price, whereas the a thousand dollars covers authority and professionalism. So when you're looking at those two numbers, understand that little measly $3 plays a lot of psychology into how your buyer is perceiving what they are buying. So when we're thinking about whether we wanna use charm pricing or round number pricing, we really wanna dive into what do we want

When you're looking at this as a business owner, we really want to look at how do we want to set up that perception in our consumer public. This is another way to utilize a marketing concept to bring the right people to our door if we wanna bring people who appreciate optimization, charm pricing is the way to go.

really look at our businesses and how our pricing

really attracts them, or repels them from our. The third thing I wanna talk about is the decoy effect. So this is another pricing paradigm that businesses use, and you will see this often show up in three tiered pricing. So the decoy effect is to set a price that influences the architecture of the other prices in your business.

It is akin to anchor pricing, but it has a little bit different perception to it. So let's say you're a coach and you offer three different packages, and you offer a basic package, a pro package and elite package.

One thing is good, three things is good. Three things offers a choice. One thing offers a solid option, right? That's your only option, and it's an easy decision to make. Three gives you choice. Two tends to create paralysis, which is why we see three tiered pricing. So back to what I was talking about with those three tiers, what you do when you do three tiered pricing is you're offering both the top and the bottom as a decoy, because honestly, you want

When in reality it should be one in the middle because the one in the middle is generally the one that we mostly pick. Oddly enough, most humans wanna pick that mid option. They don't wanna be basic, they don't feel like they need to be elite.

In that case, you're basically creating three different products with a single choice, and they're competing against each other for the consumer's attention. That does not work at all, and that's another thing I do see coaches and consultants do. The packages will be radically different.

Those are three different products. If they also aren't comparable or if that comparison is misleading, this will also backfire. If you're manipulating things rather than clarifying things. So if it's really obvious to the consumer public that that elite tier or that that basic tier is really worthless or way inflated, they're gonna be suspicious of the middle tier.

the intention behind your business and your pricing, and ask if those two things are aligning. Is the pricing reflecting your brand? Is it reflecting you? Is it reflecting the quality or level of your service? Or is there something in those numbers that the consumer public is responding to and you are not bringing in the right people into your business because your pricing feels off to them.

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