Raise Prices Without Raising Eyebrows - Prospect Theory

If you want to raise prices and cause the least amount of grief for customers, it helps to know a little bit about prospect theory. Prospect theory is a psychological theory that explains how people make decisions under uncertainty.

According to this theory, people tend to be more sensitive to losses than to gains, meaning that they feel the 'pain' of a loss more than they feel the 'joy' of a gain, so will often make decisions based on the potential for losses rather than the potential for gains.

When it comes to pricing decisions, like by how much to increase your prices and when, prospect theory shows us that we can minimize the pain customers feel by making one larger price increase instead of raising prices a little bit at a time.

So, in keeping with the idea that any one price increase should be a maximum of 8-10%, it's better to implement one price increase of 8%, rather than four 2% increases spread out over time.