Retailers have long relied on discounts to drive sales by slashing prices, increasing volume, and hoping the margin loss is offset. However, there’s a smarter alternative that doesn’t erode brand value or profitability. It’s called behavioral pricing, and it works by aligning prices with the way people actually make decisions.
At the most recent Dynamic Pricing Community event, I explored how behavioral pricing leverages psychology to guide customer choices. In particular, I looked at three key of price anchoring, decoy pricing, and loss aversion, and how these can be used to influence customer choice. When used correctly, they not only boost profits but also deepen customer engagement.
If you’re interested in this topic and would like to dive deeper into pricing strategy, I recommend reading my two latest publications: The 10 Rules of Highly Effective Pricing, and The Pricing Model Revolution that can be found e.g. on Amazon.
The concept of psychological pricing
Behavioral pricing is a pricing strategy that takes into account how consumers perceive, react to, and emotionally respond to prices, rather than relying solely on cost or market-based approaches.
It focuses on understanding and influencing customer behavior to increase perceived value, willingness to pay, and ultimately, sales.
Key elements of behavioral pricing
Price anchoring: Introducing a higher-priced item first to make subsequent prices seem more reasonable or affordable
Decoy pricing: Offering a third, less attractive option to make the target option appear more valuable
Loss aversion: Emphasizing what the consumer might lose by not purchasing e.g. limited time offer
Price Anchoring shifts perception of value
Anchoring works by placing a higher-priced item near your intended target product to make it feel like a better deal. This has been proven in practice.
A fashion retailer I spoke with introduced a €120 pair of board shorts into their lineup. It wasn’t meant to be a bestseller. Instead, its role was to make their €70 shorts feel more reasonably priced. The result? A 10% increase in average order value for that product category.
We see the same effect in wine shops, tech stores, and even restaurant menus. People don’t evaluate prices in isolation; they instead compare, and the context you give them shapes their perception of value.
Decoy Pricing guides customers to better decisions
Have you ever noticed how adding a third, less appealing option can steer someone toward the choice you want them to make? That’s decoy pricing.
A well-known example is from The Economist, which once offered:
- Online-only for $59
- Print-only for $125
- Print + online for $125
Almost nobody chose the print-only version, but its presence made the combo offer seem like a great deal. Remove it, and more people opted for the cheaper online-only version.
Retailers can replicate this effect. For example, if you’re selling a 2-pack and a 3-pack of socks, pricing the 2-pack slightly too high makes the 3-pack look like a much smarter purchase. This method gives customers a greater feeling of confidence in their decision.
Loss Aversion creates a sense of urgency
People hate losing more than they enjoy gaining. This simple truth can transform how you frame your offers.
Instead of “Save €10,” try “Don’t miss out on €10 in savings, offer ends tonight.” That subtle shift turns a passive offer into an urgent one. Customers respond to the fear of loss more than the promise of gain.
Retailers are already using this in countdown timers, low-stock alerts, and one-time offers, but many aren’t optimizing it. Loss aversion becomes especially powerful when combined with a product trial or exclusive access; once customers feel ownership, the idea of giving it up becomes harder.
Key takeaways from the Dynamic Pricing Community
During our session, we heard from retailers using behavioral pricing in creative ways. A few points really stood out:
- Premium products elevate the entire category: Even if a high-priced item rarely sells, it raises the perceived value of mid-range options.
- Customers don’t always go for the lowest price: In categories like gifting or fashion, shoppers often choose based on emotion or brand image, not just cost.
- Too many pricing options can backfire: It’s tempting to offer a range, but overchoice can overwhelm. Three well-structured choices often outperform a menu of six.
- Different categories need different strategies: What works for cosmetics might confuse electronics shoppers. Testing is essential.
Why behavioral pricing is better than discounting
Traditional discounting trains customers to expect deals. Over time, it weakens brand equity and compresses margins. Behavioral pricing, on the other hand:
- Improves perceived value
- Preserves or increases margin
- Strengthens brand differentiation
- Builds emotional connection with customers
It’s not a replacement for all price adjustments, but it’s a more sustainable tool for guiding decisions and creating impact without compromising your bottom line.
How to put behavioral pricing into practice
If you’re new to this approach, start with these steps:
- Review your product lineup
Look for where you can add higher-priced options to serve as anchors. You’re not trying to sell them in volume, you’re using them to reframe everything else. - Design your pricing tiers deliberately
Offer three choices: a basic, a premium, and a “middle” decoy version that nudges customers toward the one you want them to pick. - Use scarcity and urgency with care
Avoid gimmicks, but don’t shy away from highlighting real-time stock levels, time-sensitive offers, or exclusive access. - Track the right metrics
Behavioral pricing is about shifting decisions, not just lowering prices. Track average order value, choice distribution, and conversion rates to see what’s working. - A/B test presentation, not just price
Sometimes, changing the layout or phrasing of your offer yields bigger results than a price cut.
Behavioral pricing influences consumer choices and retail profitability
Behavioral pricing is not about tricking customers. It’s about understanding them. By aligning your pricing strategy with the way people think and choose, you can create better customer experiences while improving your financial outcomes.
The best part about behavioral pricing: you don’t have to sacrifice your brand, or your margins, to do it.
About the author
Dr. Danilo Zatta is a globally recognized expert in pricing, revenue growth, and business strategy. With decades of experience advising both global corporations and mid-sized firms, he has led hundreds of projects in pricing excellence, strategic growth, and business model innovation across Europe and beyond.
Danilo is the author of over 20 books and numerous articles on pricing and corporate strategy. His bestselling book, The Pricing Model Revolution (Wiley), has been translated into over ten languages and was hailed by marketing legend Philip Kotler as “the best book on pricing.”
Named by the Financial Times as one of the world’s leading pricing minds and recognized as a Top 5 Global Pricing Thought Leader on LinkedIn, Danilo frequently speaks at international business forums and top universities. He holds an MBA from INSEAD and a Ph.D. in revenue management and pricing from the Technical University of Munich.
