Dropping your prices to get more customers may not lead to more profit. While this approach may have benefits in the short term, pricing psychology research reveals that lowering your prices too much can negatively impact your customer satisfaction scores and brand perception.  

Years ago, I had the chance to learn valuable lessons about pricing psychology from Brad Fallon, a lawyer-turned-entrepreneur with whom I interned as a college senior.

Brad and his wife co-founded MyWeddingFavors.com in 2004. Within two years, they had turned a $2,000 investment into $32 million.

Following this success, Brad launched StomperNet, an internet marketing company, which made $12 million in 12 hours, setting a record for the highest launch day sales for an information product up to that point in history.  

Brad's insights about pricing psychology were deep because, among other things, he sold digital products. Persuading people (especially in the early 2000s) to pay a high price tag for information products is hard because you're selling an intangible solution. 

Among the most valuable lessons I gleaned from him and others about pricing psychology is this: How consumers evaluate value, the worth of a product or service, is subjective and rarely rational. 

I'll give you an example. 

Mind over matter

In a 2008 study, participants were asked to rate wines at different price points while inside an MRI scanner, which allowed researchers to observe their brain activity. Ultimately, participants rated the wines with the heftier price tag as the best tasting.  

Researchers saw more activity in participants' orbitofrontal cortex, the brain region that processes pleasure, when people drank the pricer wines.

But here's the kicker: It was all the same wine. The only difference? The price tag. 

People believed the pricier wine tasted better and was of higher quality. As they say, perception is reality.

A pricey perspective

These insights relate to profit margins. You may have set your prices using competitive analysis or a cost-plus model. 

Competitive pricing means setting your rates based on your competitors' pricing, while cost-plus pricing involves adding a markup to your production costs to create a profit margin.

While these pricing strategies are useful, they have a drawback: They fail to consider your customers' perceptions of value and what they're willing to pay.  

In other words, these two pricing strategies overlook the most valuable person in a pricing conversation: your customer, the one who's paying you. 

Van Westendorp

Luckily, tools like the Van Westendorp Price Sensitivity Meter, developed by a Dutch economist in the 1970s, can be invaluable for analyzing what your customers would be willing to pay for your product or service.  

It can help you find the optimal price range by asking your target audience four simple questions in a survey:  

• At what price is this product or service too cheap?
• At what price is this product or service a good value or bargain?
• At what price is this product or service getting expensive but still worth considering?
• At what price is this product or service too expensive?

As you gain insight into what your customers are willing to pay for your goods and services--and why--you may discover something: Their beliefs about your solution's value and how much they're willing to pay for it may surprise you. 

It could be better or worse than you think. And it would be hard to uncover these insights with other pricing strategies. 

So use the Van Westendorp Price Sensitivity Meter to reduce the risk of underpricing or overpricing your products and services.  

Whether you're selling wine or wedding favors online, never underestimate the power perception and psychology play in shaping people's buying behavior. 

To overlook this would be a big price to pay.

Inc