The Psychology of Pricing: Why Customers Judge Your Price Against a Reference

For the trader — the Lagos phone seller, the Nairobi cosmetics trader, the Accra building-materials dealer, the Johannesburg foodstuffs seller — the one who prices goods a dozen times a day, with money tied up in every carton on the shelf.

Your customer never judges a price alone

Here is the one thing worth knowing about how people buy.

A customer almost never asks, "Is ₦5,000 the right price?" She can’t. She has no perfect price in her head. What she really asks is, "Is ₦5,000 high or low compared to something else?" And that something else is whatever number she saw last, or the number sitting right next to yours.

This is the master pattern. A price feels high or low only against a reference — never on its own.¹ Researchers have shown this is so strong that even a random number, one with nothing to do with the product, will pull what people are willing to pay up or down.²

For you, that is good news. It means you are not helpless in front of the customer’s "that’s too much." You can set the reference she judges against. The rest of this brief is four honest ways traders do exactly that — while holding on to their margin.

(Margin is the money left after you pay for the goods and everything else — not the same as markup. Worth keeping that difference in mind; we come back to it at the end.)

First, who this brief is for: everyday goods

Before the four moves, one thing worth setting straight — who this advice actually fits.

Almost everything below is about everyday, commodity goods — the goods you move on volume, where the customer can line your item up against three other stalls and buy on price. For these goods, the price matters a great deal to whether she buys, and a lower price generally sells more. Economists call that being price-sensitive, or price-elastic. Most of what a market trader or small shopkeeper sells sits here: phones, cosmetics, building materials, foodstuffs. If that’s your shop, the four moves are for you.

For luxury or premium goods, the psychology can flip. When a customer can’t easily judge quality on her own, she often reads a higher price as a signal that the item is better.³ And for true status goods — the ones people buy partly to be seen owning — a higher price can make the item more wanted, not less, an effect economists call the Veblen effect.^4,5,6 On goods like these, a "bargain" signal can work against you: dropping the price, or a cheap-looking 9-ending, can quietly cheapen how the item is seen.

That flip is a whole subject of its own, and this brief will not try to teach it — the psychology of luxury and premium pricing is the subject of a separate article: The Psychology of Premium Pricing. For now, keep it as a boundary marker: the four moves below are built for the goods people compare on price. Where a move is only for those everyday goods, this brief says so.

Whatever you show first becomes the ruler

Whatever a customer sees first tends to become the ruler she measures everything else against.

Show her the ₦210,000 mid-range phone before the ₦150,000 one, and the ₦150,000 suddenly feels sensible. Lead with the ₦150,000 and it feels like the ceiling. Same phone at ₦150,000 either way — only the reference around it moved.

Sidebar: you may have observed that when a customer asks, savvy retailers start with their better, dearer item, then bring out the one they actually expect her to buy. They are not lying. Both are real goods at real prices. They are just choosing which one she sees first, and creating a price anchor.

The honest line: the anchor has to be a real item you would genuinely sell at that price. A made-up "was ₦250,000" that was never ₦250,000 is a fake reference — and that is deception, not psychology. More on that below.

Give three choices, and most people reach for the middle

Offer one price and you hand the customer a yes-or-no. Offer three — a basic, a middle, and a premium — and you turn it into a which one. When people see three, most avoid the cheapest and the dearest and settle on the middle.⁷ Add a clearly higher premium option and it quietly makes your middle option look like the smart, safe buy.⁸

In an Accra building-materials shop, that might be three real options — a budget 10-litre paint at GH₵ 200, a better-quality 10-litre at GH₵ 380, and a premium 20-litre at GH₵ 900. Most customers walk out with the GH₵ 380.

That is why the middle wins: the two ends give the customer a reference, and the middle looks like the reasonable compromise. So a third, dearer tier doesn’t just sit there — it pulls your average sale up.

You already know how to build three tiers — different pack sizes, a bundle, a plain-versus-premium version — so there’s no need to repeat the how-to here. The good-better-best section of the Complete Guide to Pricing for Small Businesses covers that. This brief just explains why it works, so you can set the tiers on purpose.

The honest line: the tiers have to be genuinely different — real differences in size, quality, or what’s included. A "premium" tier that is the same goods with a bigger price sticker is a trick, not a tier.

The last digit sends a quiet message

The last digit of your price sends a quiet message — and this is the one move where the commodity-versus-premium split shows itself directly.

On everyday goods, a price ending in 9 — KSh 1,999 instead of KSh 2,000 on a jar of body cream — whispers "good deal." In field experiments, a 9-ending lifted demand.⁹ But two honest catches come with it:

• It mostly works when the first digit drops. KSh 2,000 → KSh 1,999 works because the customer’s eye reads "1,000-something," not "2,000-something".¹⁰ KSh 1,950 → KSh 1,949 barely moves anything — the first digit didn’t change.
• A 9-ending signals "cheap." That same study found the boost was weaker once a "Sale" sign was already up.⁹ That is the commodity-versus-premium line poking through: a bargain signal helps a good you sell on price, but on a good you sell on quality it can undercut the very image you want. This fits how premium buyers read price — a higher, cleaner number as a sign of quality.³ It’s why premium goods often do better on a clean, round number.

What seems to be going on: for everyday, price-sensitive goods that move on volume, a 9-ending that drops the first digit can help. For goods sold on quality, a round number carries the message better. The traders who do this well match the digit to the message, rather than adding a 9 to everything — and, again, the deeper "how to price a premium good" question is answered in The Psychology of Premium Pricing, not this one.

A real saving lands harder than a plain discount

The words around a price change how it lands. People feel a saving or a loss more sharply than they feel a plain gain.¹¹

So on a Johannesburg foodstuffs stall, "buy the full carton and save R 120" lands harder than "the carton is a bit cheaper." "Lock this price before it goes up next month" lands harder than "this is the price." Same money — stronger words.

When there is a real saving, the traders who sell it well name it — in naira, cedis, shillings, or rand — as money kept in her pocket.

The honest line: the saving has to be true. Framing a real R 120 saving well is smart selling. Inventing the R 120 is a lie.

The bright line — where selling ends and deception begins

Every tactic here uses real prices and real choices, presented well. That is honest selling, and it is allowed.

The moment the reference itself is fabricated, it crosses into deception — and, in many places, into breaking consumer-protection law:

• a fake "was R 900, now R 500" when it was never R 900;
• invented "original" prices or permanent "sales";
• false scarcity — "last one!" when there is a full carton in the back;
• a decoy option built to mislead rather than to genuinely offer choice;
• and — on the premium side — pinning a high price on a good to imply a quality it does not actually have. Using the price signal to fake quality is deception too.

The test is simple: could you explain what you did to the customer’s face and still keep her trust? If yes, use it. If no, leave it. Trust is the one thing a trader can’t restock.

Don’t forget the margin

A clever price still has to pay you. It is easy to anchor, tier, and frame your way to plenty of sales but little left over — a busy shop that still doesn’t pay, turnover that isn’t profit.

Before setting any of these prices, it’s worth checking that the number still clears a real margin — the money left after the goods and every cost, not just the markup added on top. Markup and margin are not the same number, and traders lose real money confusing them. It helps to run the price through Monyvo’s free Markup & Margin Calculator first, then add the psychology on top.

One honest note on the evidence: these patterns come from strong studies of how people everywhere make decisions. Rigorous research on exactly how they behave in African informal markets — where haggling is normal and the sticker price is just a starting point — is still thin.^12,13 Treat the psychology as reliable human behaviour, and your own read of your customers as the final word.

Quick answers

Does this advice work for everything I sell?+

It’s built for everyday goods people compare on price — phones, cosmetics, foodstuffs, building materials — where a lower price generally sells more. For luxury or status goods the psychology can flip: a higher price can itself signal quality.³, and for status goods a higher price can even make the item more wanted, an effect economists call the Veblen effect.^4,5 That’s its own subject, covered in The Psychology of Premium Pricing.

Should I put a 9 on the end of every price?+

Not really. A 9-ending signals "cheap" and helps mostly when it drops the first digit (KSh 2,000 → KSh 1,999). For goods sold on quality, a clean round number tends to work better.^9,10

Is this just tricking customers?+

Only if you fake it. Arranging and describing real prices and real choices is honest. Inventing a "was" price, a fake shortage, a false saving, or a premium price meant to imply quality the good doesn’t have — that’s deception, and that’s the line worth not crossing.

Where do I start tomorrow?+

A good place to start: pick one fast-moving product, set a real three-tier choice, lead with the dearer option, and name any real saving in the currency you trade in. Checking the margin on each tier first with the Markup & Margin Calculator keeps the clever price from quietly costing you.

---

Try these free Monyvo tools

• Markup & Margin Calculator — work out your true cost and the margin you keep.
• The Psychology of Premium Pricing — for makers and service owners: why a higher price can make quality work look better.
• The Complete Guide to Pricing for Small Businesses — how to price with confidence and raise prices without losing customers.
• Monyvo Business Library — short companion reads on profit, cash and running a small business.

Sources

1. 1. Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 185(4157), 1124–1131. Anchoring-and-adjustment mechanism.
2. 2. Ariely, D., Loewenstein, G., & Prelec, D. (2003). Coherent Arbitrariness. Quarterly Journal of Economics, 118(1), 73–105. Arbitrary anchors shift willingness-to-pay.
3. 3. Rao, A. R., & Monroe, K. B. (1989). The Effect of Price, Brand Name, and Store Name on Buyers’ Perceptions of Product Quality: An Integrative Review. Journal of Marketing Research, 26(3), 351–357. Price–perceived-quality relationship; direction only, effect size varies by design.
4. 4. Bagwell, L. S., & Bernheim, B. D. (1996). Veblen Effects in a Theory of Conspicuous Consumption. American Economic Review, 86(3), 349–373. Formal model of the Veblen effect; direction only, no demand magnitude.
5. 5. Veblen, T. (1899). The Theory of the Leisure Class. Macmillan. Origin of "conspicuous consumption" underpinning the Veblen effect; conceptual attribution only.
6. 6. Veblen-good definition (Corporate Finance Institute; corroborating Wikipedia entry). Plain-language definition of a Veblen good; definitional/illustrative only.
7. 7. Simonson, I. (1989). Choice Based on Reasons: The Case of Attraction and Compromise Effects. Journal of Consumer Research, 16(2), 158–174. Compromise effect.
8. 8. Huber, J., Payne, J. W., & Puto, C. (1982). Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis. Journal of Consumer Research, 9(1), 90–98. Attraction/decoy effect.
9. 9. Anderson, E. T., & Simester, D. I. (2003). Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments. Quantitative Marketing and Economics, 1(1), 93–110. Charm pricing lifts demand, conditionally; weaker with a "Sale" cue.
10. 10. Thomas, M., & Morwitz, V. (2005). Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition. Journal of Consumer Research, 32(1), 54–64. Left-digit mechanism.
11. 11. Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–292. Framing, reference points, loss aversion.
12. 12. Haggling and dynamic pricing in African and traditional markets. Elgar Encyclopedia of Retailing, bargaining chapter. Illustrative context only.
13. 13. Regional psychological-pricing studies (Lusaka, Zambia grocery retail; Ugandan behavioural economics). Regional relevance; full text unverified, no figure carried.

Editorial note (integrity): rigorous research on how these pricing-psychology patterns play out specifically in African informal and haggling-based markets is still thin. The patterns above are drawn from well-established studies of general human decision-making; treat them as reliable behavioural evidence, not as measured facts about any particular African market.