Psychological Pricing

99 cents

thaler

Psychological pricing (also known as ‘price ending’ and ‘charm pricing’) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. Consumers tend to perceive ‘odd prices’ as being significantly lower than they actually are, mentally rounding to the next lowest monetary unit. Thus, prices such as $1.99 are associated with spending $1 rather than $2. Now that many customers are used to odd pricing, some restaurants and high-end retailers psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.

In a traditional cash transaction, fractional pricing imposes tangible costs on the vendor (printing fractional prices), the cashier (producing awkward change) and the customer (stowing the change). These factors have become less relevant with the increased use of checks, credit and debit cards and other forms of currency-free exchange; also, the addition of sales tax makes the pre-tax price less relevant to the amount of change (although in Europe the sales tax is generally included in the shelf price).

Psychological pricing can be explained by prospect theory, a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that consumers typically feel more pain from losses than pleasure from financial gains. Psychological pricing also takes advantage of the ‘anchoring effect’: the left-most character in a word or number is given inordinate attention. Consumers often ignore the least significant digits rather than do the proper rounding. Even though the cents are seen and not totally ignored, they may subconsciously be partially ignored. Keith Coulter, Associate Professor of Marketing at the Graduate School of Management, Clark University suggests that this effect may be enhanced when the cents are printed smaller.

Several studies have also shown that when prices are presented to a prospect in descending order (versus ascending order) positive effects result, mainly a willingness to pay a higher price, higher perceptions of value, and higher probability of purchase. The reason for this is that when presented in the former, the higher price serves as a reference point, and the lower prices are perceived higher as a result. Another phenomenon noted by economists is that a price point for a product (such as $4.99) remains stable for a long period of time, with companies slowly reducing the quantity of product in the package until consumers begin to notice. At this time the price will increase marginally (to $5.05) and then within an exceptionally short time will increase to the next price point ($5.99, for example). Price ending has also been used by retailers to highlight sale or clearance items for administrative purposes. A retailer might end all regular prices in 95 and all sale price in 50. This makes it easy for a buyer to identify which items are discounted when looking at a report.

A recent trend in some monetary systems is to eliminate the smallest denomination coin (typically 0.01 of the local currency). The total cost of purchased items is then rounded up/down to, for example, the nearest 0.05. This may have an effect on future ‘odd-number’ pricing to maximize the rounding advantage for vendors by favoring 98 and 99 endings (rounded up) over 96 and 97 ending (rounded down) especially at small retail outlets where single item purchases are more common. Australia is a good example of this practice where 5 cents has been the smallest denomination coin since 1992, but pricing at .98/.99 on items under several hundred dollars is still almost universally applied (e.g.: $1.99 – $299.99) while goods on sale often price at .94 and its variations. It is also the case in Finland and The Netherlands, the only countries using the euro currency which do not use the 1 and 2 cent coins.

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