Psychological pricing

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Retail prices are often expressed as odd prices: a little less than a round number, e.g. $19.99 or £6.95. Psychological pricing is a theory in marketing that these prices have a psychological impact that drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.

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: $1999.
  • Fractional prices suggest to consumers that goods are marked at the lowest possible price.
  • Now that consumers are used to psychological prices, other prices look odd.

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.

Contents

Research supporting odd pricing theory

Kenneth Wisniewski and Robert Blattberg at the University of Chicago's Center for Research in Marketing showed that when the price of margerine was lowered from 89 cents to 71 cents, sales volume increased a mere 65%, but when it was lowered from 89 to 69 cents, sales volume increased by 222%.

In another study, the perceived value of all the numbers between 1 and 100 were studied, and 77 was shown to have the lowest perceived value relative to its actual value.

Schindler & Kibarian (1996) tested odd pricing using three versions of a direct mail catalog for women's clothing. The catalogs were identical except for the prices, which ended with 00, 99, or 88. The version with prices ending in 99 generated 8% more sales volume and had more purchasers than the 00-ending version. The 88-ending catalog produced a similar sales volume and number of purchasers to the 00-ending version.

Historical origins

Exactly how psychological pricing came into common use is not clear. One source[1] (http://www.straightdope.com/classics/a3_166.html) speculates that it originated in a newspaper 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.

It seems unlikely, however, that this is the full story, if it is indeed at all relevant or accurate. The practice is likely to have arisen in the late 19th century as an attempt by merchants to appear to be significantly underselling the competition while in fact lowering prices by only a small margin. It caught on slowly; the inconvenience placed on the vendor (printing fractional prices), the cashier (producing awkward change), and customer (stowing the change) certainly impeded adoption. Even today, small number of stores are known for pricing common items so as to minimize hassle.

Odd pricing

Given that the parity of wholesale prices is evenly distributed, it is unnatural that sale prices end more frequently in odd numbers. In modern times, this is due largely to the fact that psychological pricing produces numbers ending in nine.

However, some suggest that intentionally awkward pricing was adopted primarily to control employee theft. For cash transactions with an odd price, most customers must be given change. Creating change requires the employee to open the cash register, recording the sale. This reduces the risk of the cashier stealing from the store owner.

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