Psychological pricing refers to the practice of using prices to elicit emotional reactions from customers. One example is maintaining an artificially high price point on a luxury item to give the impression of high-end quality. Conversely, sale prices can be offered on commodity products to attract bargain buyers.
Marketers use psychological pricing to increase sales as well as establish a product's brand. It is the reason most items are priced at slightly less than a round number, such as $9.99 instead of $10.00, as people perceive the odd numbers as much lower than they are. It is also a primary cause of price points, a strategy in which companies seek to maximize market share by offering products at various price levels.
Identifying the target market is critical to developing a psychological pricing strategy. The demographics of the market influence the emotional responses to various pricing points. For example, wealthier consumers presented with two similar products may find themselves subconsciously more attracted to the higher-priced item, while less affluent customers may find themselves drawn to the lower-priced item.