Customary Pricing: The Psychology of Familiar Price Points

Imagine walking into your local convenience store to grab a candy bar. Without even really thinking about it, you expect to pay about a dollar – maybe a little more or a little less, but definitely in that ballpark. You might not realize it, but you‘ve just experienced the power of customary pricing.

Customary pricing is everywhere in our daily lives, from the $0.99 can of Arizona iced tea to the $10 price point for a basic Netflix subscription. According to a study by pricing consultant Rafe Mohammed, nearly 80% of all consumer goods use some form of customary pricing.

For businesses and consumers alike, understanding how customary pricing works is essential. It impacts everything from your daily purchase decisions to a company‘s long-term profitability and market positioning. In this post, we‘ll take a deep dive into the world of customary pricing – what it is, how it works, and how businesses can use it strategically.

Defining Customary Pricing

At its core, customary pricing is a strategy where the price of a product or service is based on historical norms and consumer expectations rather than on factors like production cost, competitor pricing, or perceived value. Over time, customers come to expect to pay a certain price for the product, and deviating too far from that customary price can lead to lost sales or damaged brand perception.

Harvard Business School professor Gerald Smith provides a more technical definition in his book Pricing Strategy: "Customary pricing leverages behavioral economic principles of anchoring and reference dependence to set prices that align with ingrained customer beliefs about what is an appropriate amount to pay for a given product, regardless of its intrinsic value."

The concept of customary pricing has been around for centuries – there‘s evidence of standardized pricing for staples like bread and beer dating back to ancient Babylon. But the term itself emerged in the early 20th century as mass production and advertising gave rise to more consistent national pricing for consumer packaged goods.

One key characteristic of customary pricing is that it‘s "sticky" – once a customary price point is established, it becomes very difficult to change, even in the face of inflation or cost increases. Businesses often go to great lengths to maintain customary prices, whether that means reducing package sizes, cutting costs elsewhere, or simply accepting lower profit margins.

The Psychology Behind Customary Pricing

To understand why customary pricing is so powerful, we have to delve into the psychology of how consumers perceive and process prices. A few key concepts come into play:

• Price anchoring: This refers to the tendency for an initial price to serve as a reference point that influences perception of subsequent prices. If a customer is used to paying $1 for a candy bar, even a small price increase to $1.25 may seem excessive.

• Reference price effect: Customers don‘t evaluate prices in a vacuum – they compare them to reference prices, whether that‘s a previous price paid, prices of competing products, or prices of similar products in other categories. Customary pricing establishes a strong reference price in customers‘ minds.

• Perceived value: Ultimately, prices are a proxy for the perceived value a customer expects to get from a product. Customary pricing plays into this by creating a consistent value proposition over time. If you‘ve always been satisfied with your $1 candy bar, you‘ll keep buying at that price.

Interestingly, customary pricing can sometimes override other psychological factors like fairness or the magnitude of price changes. In a famous example, when Coca-Cola tried to raise the price of its vending machine sodas from $0.05 to $0.06 in the 1950s, sales plummeted – not because the one cent difference was too large, but because it violated the customary price.

Examples Across Industries

Customary pricing is most common for frequently purchased, relatively low-cost consumer goods – think that candy bar or soda in the checkout aisle. But examples can be found across a variety of industries:

• Groceries: Key value items (KVIs) like a gallon of milk or a loaf of bread tend to have very stable customary prices within a given market. Supermarkets often use these as loss leaders to drive store traffic.

• Entertainment: Movie theaters have long used customary pricing for concessions – in the US, a large popcorn and soda combo hovers around the $12 mark across most major chains. Similarly, DVD and Blu-ray prices tend to cluster at standard increments like $9.99, $14.99, and $19.99.

• Subscriptions: Monthly subscription prices for digital services like Netflix, Spotify, or Microsoft 365 have remained remarkably consistent over time. The customary price for an ad-supported streaming service is around $5-10/month, while ad-free tiers cluster around $15-20/month.

Not all products are well-suited for customary pricing, of course. It‘s less common for durables, specialty goods, B2B offerings, or anything where prices are individually negotiated. And even in industries where customary pricing is prevalent, there are usually premium offerings that intentionally break from the mold.

Setting Customary Prices

For businesses, identifying the right customary price point is both an art and a science. It requires a deep understanding of customer psychology, historical precedent, and competitive dynamics. Some key factors to consider:

• Cost structure: While customary prices aren‘t cost-based, there still needs to be enough margin to be profitable. According to the consulting firm Simon-Kucher & Partners, grocery stores typically aim for a 30-50% profit margin on customarily priced staples like milk or eggs.

• Price band thresholds: Certain price points tend to be more psychologically appealing than others – e.g. $4.99 vs $5.00. Identifying these "price bands" can help pinpoint the optimal customary price.

• Competitive positioning: Customary prices can create opportunities to stand out from the competition. A store brand might set its customary price just below the market leader to convey value, while a premium brand might position itself at a slightly higher price point to signal quality.

• Channel dynamics: Customary prices may vary across channels – what customers expect to pay at a convenience store vs. a supermarket vs. online may be quite different. Brands need to manage their customary pricing architecture across channels.

Once a customary price point is set, the challenge becomes maintaining it over time. This may require evolving pack sizes, promotional strategies, or cost structures. For example, Hershey‘s has gradually shrunk its standard chocolate bar over the decades from 2 oz. to 1.55 oz., allowing it to keep the retail price at $1.

Strategic Implications

For companies, committing to a customary price has significant strategic implications. On one hand, it can be a powerful differentiator – the brand that offers a predictable, expected price customers can count on. Customary pricing is part of what‘s made budget retailers like Dollar Tree or Five Below so successful.

But it also brings challenges. Raising prices becomes extremely difficult – even a small hike can feel like a betrayal to customers. And as inflation drives up costs over time, profit margins can erode if productivity gains don‘t keep pace. Just look at Arizona Iced Tea, which has stubbornly kept its 23 oz. cans at $0.99 since the 1990s despite rising commodity costs.

Companies pursuing a customary pricing strategy need to have a long-term mindset and be willing to make upfront investments to maintain their price points. Coca-Cola, for instance, often gives its vending machine operators subsidies during inflationary periods to avoid having to hike prices.

There‘s also the risk that customary pricing can box a company into a specific market position. Brands that stake their identity on hitting a certain price point may struggle to introduce new premium offerings. Creativity in product development, packaging, and branding can help – think how Starbucks uses different sizes, formats, and limited-time offers to drive price realization beyond its base customary prices.

The Future of Customary Pricing

Will customary pricing endure in an era of e-commerce, price transparency, and ever-shorter product life cycles? The answer is likely yes – but with some important caveats.

Online, the proliferation of bots and price comparison tools makes it harder to maintain stable price points. And subscription-based business models may train customers to expect more fluid, personalized pricing. As McKinsey analyst Pallav Jain noted in a recent report: "In the future, we expect digital technologies and big data to enable more dynamic, real-time pricing even for customarily priced goods."

That said, the underlying psychology of customary pricing is unlikely to change. Customers will still gravitate toward familiar, trusted price points. And in an increasingly overwhelming sea of choice, the simplicity and certainty of customary pricing may become even more appealing.

Savvy companies will find ways to merge the benefits of customary pricing with the flexibility of newer pricing models. That could mean using dynamic pricing for initial purchase, but locking customers into a customary price for repeat purchases. Or using bundling and add-ons to create the perception of customary pricing while still optimizing for margin.

Putting Customary Pricing to Work

For companies considering a customary pricing strategy, the key is to approach it thoughtfully and holistically. Some best practices:

• Do your homework: Deeply research your category‘s pricing history, customer expectations, and competitive landscape to identify potential customary price points. Use techniques like price sensitivity measurement to test hypotheses.

• Commit for the long haul: Customary pricing isn‘t a short-term play. It requires aligning everything from cost structure to promotional strategy around maintaining price consistency over time. Make sure your organization is prepared for that commitment.

• Monitor and evolve: While the goal is price stability, you can‘t be completely rigid. Keep a close eye on profitability, customer feedback, and market trends. Be ready to adjust pack sizes or product mix if needed to maintain your customary value proposition.

• Compensate elsewhere: Accepting thinner margins on customarily priced items may require optimizing revenue elsewhere – whether through premium offerings, complementary services, or volume plays. Think through the role of customary pricing across your portfolio.

Ultimately, the power of customary pricing lies in its ability to create a strong, simple, enduring value proposition. In a world where prices are increasingly opaque and untethered, giving customers a price they can count on is a powerful differentiator. The key is wielding that power strategically – not just defaulting to it.

Whether you‘re a retailer, a consumer brand, or a B2B player, understanding the psychology and economics of customary pricing is essential. Because who couldn‘t use a little more certainty these days? Even if it‘s just knowing your favorite candy bar will still be a buck.