The Price We Think We See: A Deeper Look into Price Perception & the Psychology behind it

One of the most underestimated forces in modern business is the psychology of money.

Every product has a number printed on it. That number is not the real price. There is an ephemeral real price of a product that exists in the mind of each customer that is framed, nudged, and manipulated. That price is constructed after the mind of the customer has been guided and altered. It is different for each customer and is rarely an accurate real price.

What I am describing is not a negative aspect of capitalism. It is an observation that has more to do with cognition. While supply, demand, or quality may influence purchasing decisions in India, the most influential factor is the psychology of money and price perception. When it comes to a price tag, the number matters less than the quality of the story that is constructed in the mind of the customer. That story can be altered with ease.

You are going to see a lot of rewriting of that story, and you are going to see that rewriting happen every single day.

The Left-Digit Arbitrage

If you walk into most stores in India, the big retail chains, or even the small neighborhood shop, you will notice a consistent pattern. Prices that end in nines. Most stores will have prices such as ₹99, ₹499, ₹999, or ₹4,999.

This is a trick you are all familiar with. It has become a common trick across most of India, and yet it continues to work.

The left-digit effect explains how people assign leftmost values to more than one digit. When people see the price of something that costs ₹999, they do not see it as one thousand minus one. They end up seeing it as nine-something. The price of goods that costs ₹1,000 and those that cost ₹999 occupy two different categories of price, even though it is only a one rupee difference. The one rupee makes a difference. It is the cheapest form of consumer psychology and the most lucrative.

Various studies and researches show that consumers are more likely to buy a particular item if it is priced at an integer that ends with the digit nine. That is not because they are foolish and they are not actually getting a better deal. It does not even mean that the item is more valuable. It is because the human brain is a pattern-matching machine, not a calculator. That is why seeing the price of something as ₹999 gives the consumer a sense of a better deal.

The answer to the question of why this works is simpler than the answer to the question of why we still appreciate the deal in the digit nine in the age of electronic payments and digital wallets. The answer to that is we do not purchase with our wallets. We purchase with our feelings. That is why we have a different feeling seeing the price as ₹999 than seeing the price as ₹1,000.

The Anchor and the Reference Point

How much is a reasonable price for a cup of coffee?

If we are in a small town in Kerala, a good answer would be ₹15. If we are in Starbucks in Mumbai, the cup of coffee would reasonably cost ₹350. This translates to ₹15 times twenty three yet the coffee is not 23 times better we just end up paying for the same thing maybe even slightly better but the price we pay for it is not at all worth the little difference that goes unnoticed by most people. Your brain processes price in comparative terms, not absolutes.

This is an example of anchoring, and it is the most significant influence in the world of pricing. You first encounter a price, it will serve as a reference point, and will color the rest of your perceptions of price as being expensive or cheap.

No one understands this as well as restaurants. People do not purchase a single item from a menu, so their goal in placing an extremely priced item at the top of the menu is to place a frame for the customers to assess the rest of the menu. And the rest of the menu in the customers' minds is relatively cheap. The burger in the example does not appear to be priced at ₹800. Rather it is seen as "much less than the pizza."

And this same psychology pricing is employed in real estate. E-commerce uses it as "was ₹5,000, now ₹2,999." The ₹5,000 was a fictitious price, but it helps make the ₹2,999 price an evident bargain.

There is also the reality that all this knowledge and understanding of psychology pricing will not provide you with protections. As the research confirms, even when people are conscious of the effects of anchoring, it affects their perceptions. The brain uses the number, whether you approve or not.

The Decoy and Choice Architecture

The decoy effect is perhaps the most beautiful example of a clever pricing strategy.

Once you learn of the decoy, it's impossible not to see it everywhere. Enjoy some popcorn at the movies? In many theaters, small popcorn is ₹200, and large popcorn is ₹400. Most moviegoers opt for the small popcorn because ₹400 for large popcorn is just too much. That's when the theater adds a new tier: medium popcorn for ₹350. Since the large popcorn is just ₹50 away from the new medium pricing, the large foil container of popcorn looks like a deal, so large is a buy. The medium is there for the sole purpose of making large look better. It's a decoy, and it's not meant to be purchased.

This type of pricing structure is very common and is the business model of most companies with three pricing tiers. Take a look at your Swiggy One membership, your Amazon Prime subscriptions, or even your mobile data plans. There usually exists a tier that is very low and cheap. There's also a tier that is very high and expensive. Between the low tier and the high tier, there exists a pricing tier that is meant to be a purchase. It contains the offer that the company wants to sell.

This effect has been successfully used in many Indian companies because the Indian market is very competitive and price sensitive. It's also very common for Indian consumers to feel clever for finding a good deal. The decoy effect shows that consumers are not being tricked to spend money on something they don't actually want. Rather, they are being manipulated to feel clever for getting a great deal on a purchase the company wants to sell.

When High Price Becomes the Product

It's a perplexing reality of the psychology of spending that sometimes consumers perceive a product as being more desirable simply because it is more expensive.

This is known as the price-quality heuristic. For products and services that are difficult to evaluate the quality of (e.g. wine, medicine, consultancy, education), people often use the price as a proxy for quality. We believe that if something is expensive, it's good. If something is cheap, it's probably bad. In many cases, we are actually right. Something that is expensive is likely good.

One classic study demonstrates this. Participants tasted the same wine with one being labelled the "expensive" wine and the other the "cheap" wine. The "expensive" wine was rated to have a better taste. This was not an instance of participants pretending to rate the wine better. The participants' brains actually registered more pleasure. The price of the wine changed the sensory experience.

This phenomenon can be observed all over India. A ₹30,000 saree purchased from a boutique in Banaras is essentially fabric. A ₹5 lakh private school in India is essentially just a school. A ₹2,000 fine-dining biryani is just an experience that validates its cost. The price is part of the experience.

This is part of the reason why luxury brands in India will never offer sales. The price conveys the experience, and the experience is for people who have the money to spend.

Market Behavior & Algorithms

Traditionally, products and their prices were tangible since they existed in physical spaces. With the advancement of technology and algorithms, prices are now tailor-made, intangible, and dynamic.

If you were to open the Zomato application at different times to view the price of the same dish, you would find different prices for the same dish. This is because the algorithms differentiate the pricing based on the urgency of the consumer. Surge pricing, dynamic pricing, and personalized offers are all forms of psychological pricing, and the advancements in technology have made them even more effective.

There is an increasing number of applications that provide retail services (such as Blinkit and Zepto) at a premium price for the sake of convenience. Blinkit claims that the price of biscuits at the time is the price of convenience of not having to leave your house, the algorithms are designed to know that you will not do a price comparison by going to the store, and that the effort is more expensive than the markup, so you will pay the price.

The design of a the subscription model is such that consumers feel that the choice was made for them at a rational price. There are three tier systems for subscriptions. The most expensive subscription is fully devoid of advertisement and the features are superfluous. The most popular plan is the middle plan that is cheap and contains the superfluous features. It is clear that the middle plan is the most chosen, and it is designed as such.

The Information Asymmetry

The easy answer to all of this is that businesses are manipulative and consumers are foolish. But that is not quite right.

The more accurate answer is that there is an information gap between the people setting prices and the people paying them. The person pricing the product has spent years studying how you think. You have spent approximately zero seconds studying how they price. That asymmetry is the real product being sold.

When Big Bazaar prices something at ₹999, they know exactly what is happening in your brain. When you see ₹999, you think you are making a simple decision about whether to buy. You are not. You are participating in a psychological experiment that has been running since the first shopkeeper held up three items and asked which one you wanted.

The question is not whether you can outsmart every pricing trick. You cannot. The question is whether you can recognise the moment when a feeling is being sold to you disguised as a number.

The Real Price

There is no such thing as the "real" price of anything. There is only the price that makes you feel like buying, and the price that makes you feel like stopping. Every business in the world is trying to move you from the second feeling to the first, and they are using the most sophisticated understanding of human psychology ever assembled to do it.

So the next time you see ₹999, or a "was ₹5,000" crossed out in red, or a middle tier with a "most popular" badge, ask yourself: what am I actually paying for? Am I paying for the product, or am I paying for the feeling that I got a good deal?

Sometimes the answer is both. Sometimes the answer is neither. But the question is always worth asking. Because the price on the tag is never the real price. The real price is the one you agreed to in your head before you ever reached for your wallet.