Psychological pricing
Encyclopedia
Psychological pricing or price ending is a marketing
practice based on the theory that certain prices have a psychological impact. The retail
prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. The theory is this drives demand greater than would be expected if consumers were perfectly rational
. Psychological pricing is one cause of price points.
in 1969, prices often ended in 99. This is still seen today in gasoline (petrol) pricing ending in of the local currency's smallest denomination; for example in the US the price of a gallon of gasoline almost always ends in US$0.009 (e.g. US$3.289). Using 99 at the end of a price will always look more appealing - no matter who you are.
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).
The psychological pricing theory is based on one or more of the following hypotheses:
The theory of psychological pricing is controversial. Some studies show that buyers, even young children, have a very sophisticated understanding of true cost and relative value
and that, to the limits of the accuracy of the test, they behave rationally. Other researchers claim that this ignores the non-rational nature of the phenomenon and that acceptance of the theory requires belief in a subconscious level of thought processes, a belief that economic models tend to deny or ignore. Research using results from modern scanner data is mixed.
Now that many customers are used to odd pricing, some restaurants and high-end retailers such as Nordstrom
psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
used game theory
in 1997 to argue that rational consumers value their own time and effort at calculation. Such consumers process the price from left to right and tend to mentally replace the last two digits of the price with an estimate of the mean "cent component" of all goods in the marketplace. In a sufficiently large marketplace, this implies that any individual seller can charge the largest possible "cent component" (99¢) without significantly affecting the average of cent components and without changing customer behavior.
The euro introduction in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. A European wide study (el Sehity, Hoelzl and Kirchler, 2005) investigated consumer price digits before and after the euro introduction for price adjustments. The research showed a clear trend towards psychological pricing after the transition. Further, Benford's Law
as a benchmark for the investigation of price digits was successfully introduced into the context of pricing. The importance of this benchmark for detecting irregularities in prices was demonstrated and with it a clear trend towards psychological pricing after the nominal shock of the euro introduction.
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).
Research has also found psychological pricing relevant for the study of politics and public policy. For instance, a study of Danish municipal income taxes found evidence of "odd taxation" as tax rates with a nine-ending were found to be over-represented compared to other end-decimals.
pricing competition. Melville E. Stone
founded the Chicago Daily News
in 1875, intending to price it at one cent to compete with the nickel papers of the day. The story claims that pennies were not common currency at the time, and so Stone colluded with advertisers to set whole dollar prices a cent lower—thus guaranteeing that customers would receive ample pennies in change.
Others have suggested that fractional pricing was first adopted as a control on employee theft. For cash transactions with a round price, there is a chance that a dishonest cashier will pocket the bill rather than record the sale. For cash transactions with an odd price, the cashier must make change for the customer. This generally means opening the cash register
which creates a record of the sale in the register and reduces the risk of the cashier stealing from the store owner.
In the former Czechoslovakia
, people called this pricing "baťovská cena" ("Baťa's price"), referring to Tomáš Baťa, a Czech manufacturer of footwear. He began to widely use this practice in 1920.
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.
In its 2005 United Kingdom general election
manifesto, the Official Monster Raving Loony Party
proposed the introduction of a 99-pence coin to "save on change".
Wal-Mart
, a major retailer, makes use of .98 price endings as opposed to .99 endings.
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.
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
practice based on the theory that certain prices have a psychological impact. The retail
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. The theory is this drives demand greater than would be expected if consumers were perfectly rational
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
. Psychological pricing is one cause of price points.
Overview
According to a 1997 study published in the Marketing Bulletin, approximately 60% of prices in advertising material ended in the digit 9, 30% ended in the digit 5, 7% ended in the digit 0 and the remaining seven digits combined accounted for only slightly over 3% of prices evaluated. In the UK, before the withdrawal of the halfpenny coinBritish Halfpenny coin
The British halfpenny coin was worth 1/480th of a pound sterling. At first in its 700 year history it was made from silver but as the value of silver increased, the coin was made from base metals. It was finally abandoned in 1969 as part of the process of decimalising the British currency...
in 1969, prices often ended in 99. This is still seen today in gasoline (petrol) pricing ending in of the local currency's smallest denomination; for example in the US the price of a gallon of gasoline almost always ends in US$0.009 (e.g. US$3.289). Using 99 at the end of a price will always look more appealing - no matter who you are.
| Digit ending | Proportion in the 1997 Marketing Bulletin study |
|---|---|
| 0 | |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
| 9 |
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).
The psychological pricing theory is based on one or more of the following hypotheses:
- Consumers 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. Some suggest that this effect may be enhanced when the cents are printed smaller (for example, $1999).
- Fractional prices suggest to consumers that goods are marked at the lowest possible price.
- When items are listed in a way that is segregated into price bands (such as an online real estate search), price ending is used to keep an item in a lower band, to be seen by more potential purchasers.
- Judgments of numerical differences are anchored on left-most digits, a behavioral phenomenon referred to as the left-digit anchoring effect (see Thomas and Morwitz 2005). This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01 because their judgments are anchored on the left-most digit.
The theory of psychological pricing is controversial. Some studies show that buyers, even young children, have a very sophisticated understanding of true cost and relative value
Relative value
Relative value is the attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another...
and that, to the limits of the accuracy of the test, they behave rationally. Other researchers claim that this ignores the non-rational nature of the phenomenon and that acceptance of the theory requires belief in a subconscious level of thought processes, a belief that economic models tend to deny or ignore. Research using results from modern scanner data is mixed.
Now that many customers are used to odd pricing, some restaurants and high-end retailers such as Nordstrom
Nordstrom
Nordstrom, Inc. is an upscale department store chain in the United States, founded by John W. Nordstrom and Carl F. Wallin. Initially a shoe retailer, the company today also sells clothing, accessories, handbags, jewelry, cosmetics, fragrances, and in some locations, home furnishings...
psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Research
Kaushik BasuKaushik Basu
Kaushik Basu is an Indian economist who is currently the Chief Economic Adviser to the Government of India and is also the C...
used game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
in 1997 to argue that rational consumers value their own time and effort at calculation. Such consumers process the price from left to right and tend to mentally replace the last two digits of the price with an estimate of the mean "cent component" of all goods in the marketplace. In a sufficiently large marketplace, this implies that any individual seller can charge the largest possible "cent component" (99¢) without significantly affecting the average of cent components and without changing customer behavior.
The euro introduction in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. A European wide study (el Sehity, Hoelzl and Kirchler, 2005) investigated consumer price digits before and after the euro introduction for price adjustments. The research showed a clear trend towards psychological pricing after the transition. Further, Benford's Law
Benford's law
Benford's law, also called the first-digit law, states that in lists of numbers from many real-life sources of data, the leading digit is distributed in a specific, non-uniform way...
as a benchmark for the investigation of price digits was successfully introduced into the context of pricing. The importance of this benchmark for detecting irregularities in prices was demonstrated and with it a clear trend towards psychological pricing after the nominal shock of the euro introduction.
Another phenomenon noted by economists is that a price point
Price point
Price points are prices at which demand for a given product is supposed to stay relatively high.- Characteristics :Introductory microeconomics depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origin...
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).
Research has also found psychological pricing relevant for the study of politics and public policy. For instance, a study of Danish municipal income taxes found evidence of "odd taxation" as tax rates with a nine-ending were found to be over-represented compared to other end-decimals.
Historical comments
Exactly how psychological pricing came into common use is not clear, though it is known the practice arose during the late 19th century. One source speculates it originated in a newspaperNewspaper
A newspaper is a scheduled publication containing news of current events, informative articles, diverse features and advertising. It usually is printed on relatively inexpensive, low-grade paper such as newsprint. By 2007, there were 6580 daily newspapers in the world selling 395 million copies a...
pricing competition. Melville E. Stone
Melville E. Stone
Melville Elijah Stone was a newspaper publisher, the founder of the Chicago Daily News, and was the general manager of the reorganized Associated Press.-Biography:...
founded the Chicago Daily News
Chicago Daily News
The Chicago Daily News was an afternoon daily newspaper published between 1876 and 1978 in Chicago, Illinois.-History:The Daily News was founded by Melville E. Stone, Percy Meggy, and William Dougherty in 1875 and began publishing early the next year...
in 1875, intending to price it at one cent to compete with the nickel papers of the day. The story claims that pennies were not common currency at the time, and so Stone colluded with advertisers to set whole dollar prices a cent lower—thus guaranteeing that customers would receive ample pennies in change.
Others have suggested that fractional pricing was first adopted as a control on employee theft. For cash transactions with a round price, there is a chance that a dishonest cashier will pocket the bill rather than record the sale. For cash transactions with an odd price, the cashier must make change for the customer. This generally means opening the cash register
Cash register
A cash register or till is a mechanical or electronic device for calculating and recording sales transactions, and an attached cash drawer for storing cash...
which creates a record of the sale in the register and reduces the risk of the cashier stealing from the store owner.
In the former Czechoslovakia
Czechoslovakia
Czechoslovakia or Czecho-Slovakia was a sovereign state in Central Europe which existed from October 1918, when it declared its independence from the Austro-Hungarian Empire, until 1992...
, people called this pricing "baťovská cena" ("Baťa's price"), referring to Tomáš Baťa, a Czech manufacturer of footwear. He began to widely use this practice in 1920.
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.
In its 2005 United Kingdom general election
United Kingdom general election, 2005
The United Kingdom general election of 2005 was held on Thursday, 5 May 2005 to elect 646 members to the British House of Commons. The Labour Party under Tony Blair won its third consecutive victory, but with a majority of 66, reduced from 160....
manifesto, the Official Monster Raving Loony Party
Official Monster Raving Loony Party
The Official Monster Raving Loony Party is a registered political party established in the United Kingdom in 1983 by musician and politician David Sutch , better known as Screaming Lord Sutch.-History:...
proposed the introduction of a 99-pence coin to "save on change".
Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
, a major retailer, makes use of .98 price endings as opposed to .99 endings.
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
Swedish rounding
Swedish rounding is rounding the basic cost of a purchase which is to be paid for in cash to the nearest multiple of the smallest denomination of currency...
. 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
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
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.
See also
- PricingPricingPricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...
- Price pointPrice pointPrice points are prices at which demand for a given product is supposed to stay relatively high.- Characteristics :Introductory microeconomics depicts a demand curve as downward-sloping to the right and either linear or gently convex to the origin...
- Marketing mixMarketing mixThe term "marketing mix" was coined in 1953 by Neil Borden in his American Marketing Association presidential address. However, this was actually a reformulation of an earlier idea by his associate, James Culliton, who in 1948 described the role of the marketing manager as a "mixer of ingredients",...
- Mental accountingMental accountingA concept first named by Richard Thaler , mental accounting attempts to describe the process whereby people code, categorize and evaluate economic outcomes....
- MicroeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
- Take a penny, leave a pennyTake a penny, leave a pennyTake a penny, leave a penny refers to a type of tray, dish or cup often found in gas stations, convenience stores, and other small stores in North America, meant for convenience in cash transactions...
- Numerical cognitionNumerical cognitionNumerical cognition is a subdiscipline of cognitive science that studies the cognitive, developmental and neural bases of numbers and mathematics. As with many cognitive science endeavors, this is a highly interdisciplinary topic, and includes researchers in cognitive psychology, developmental...
External links
- The Left-Digit Effect in Price Cognition
- Heuristics in Numerical Cognition
- 99-cent pricing hooks shoppers
- Nine-ending Price and Consumer Behavior: An Evaluation in a New Context (PDF)
- Image communicated by the use of 99 endings in advertised prices
- The Effect of $9 Price Endings (PDF)
- Get smart for just $9.99