Determining Your Own Price Breakpoints
Without going into the psychology behind it, here’s how to determine the price breakpoints in pricing your products or services. In general —
The greater the number of digits in the price (or fee), the higher the price seems to be. At first glance, this seems to be obvious. A price of $100 is higher than $99, so it should seem more expensive.
But the concept of breakpoints is that although there is the same arithmetic difference between $93 and $94 as there is between $99 and $100, people in general do not perceive much of a difference between $93 and $94 (that is, if they’ll pay $93 for something, they’ll also pay $94)… and yet they perceive a huge difference between $99 and $100.
Part of the reason is the increase in the number of digits. So there are automatically price breakpoints at $1, $10, $100, and so on.
(Along that same line, you can see that $10.00 seems more expensive than just $10, even though it's the same price.)
Another price breakpoint occurs at the number “2”. Like before, there is the same arithmetic difference between $193 and $194 as there is between $199 and $200, but people perceive a much greater jump in going from 199 to 200.
Another price breakpoint occurs at the number “0”. Subjectively, $499 is much less than $500, even though there’s just one dollar’s difference. A less significant breakpoint is at the number “5” — someone who will pay $49 for something (because it's "less than $50) might hesitate paying $51... even though it's just $2 more. (But if someone will pay $50 for something, they’ll probably pay $60 without serious objection.)
There have been all sorts of studies on price breakpoints, but these guides enable you to determine where the major price breakpoints frequently occur: $10, $20, $50, $100, $200, $500, $1000, $2000, $5000, $10000, $20000, and so on.
But there are other considerations. For example, it can make a difference whether you're writing your price or speaking your price. Studies have shown that written 1's and 7's are regarded as inexpensive numbers (because they're "skinny"), whereas 6's and 8's are seen as expensive. That is, it's often found that $16 is seen as more expensive than $17, even though it's not.
But that only applies to written prices. When you start describing prices verbally, then the number of syllables hints at the subconscious impact of the price. Although $9.99 is generally regarded as preferable to $10.00, when spoken "nine ninety-nine" can sound more expensive than a simple "ten bucks".
So, again, this is not an exact science nor is there a formula that applies in every situation. We're talking about people's perceptions, and perceptions can vary widely. But the lack of hard facts doesn't mean that price breakpoints are insignificant — you should still give them serious consideration.
If you start to study your own market, you’ll probably identify some major price breakpoints. The breakpoints you discover may not follow the guidelines I listed above, but if you research the discrepancies, you’ll probably uncover the reasons why they exist.
As an example of an apparent exception, I’ve been told by several speakers bureaus that they won’t consider booking speakers whose fees are less than $3,000.
Now $3,000 may not appear to be an obvious breakpoint, but remember that speakers bureaus typically take about one-third of your speaking fee as their commission. And one third of $3000 is… $1000, a significant price breakpoint.
One final note — be sure to price your product just under the price breakpoint to gain the psychological advantage of the breakpoint. For example, I was working with a speaker to develop the fee for a public seminar she was developing. She ran all the numbers (using the different methods you explored earlier), and determined that she needed to charge $210 per person for the seminar.
Unfortunately, this is just over the price breakpoint, not just under it. The result is that someone who was willing to pay $195 for the seminar might think twice about registering for $210… even though it was only $15 more. But someone who was willing to pay $210 would also probably pay $245 without objection.
So I recommended that she either lower her registration fee to $195 (to get it under the $200 breakpoint) even though she wouldn't make as much money, or raise it to $245 (to keep it under the $250 breakpoint). $210 may be the “correct” calculated price, but it’s psychologically unsound.
We're talking about psychology, so determining price breakpoints is not an exact science using absolute values. But it’s important to recognize that there are psychological “barriers” that people are reluctant to cross. Recognizing where these barriers exist will enable you to choose the “right” prices and fees — those that maximize your income.