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Psychological pricing (also price ending, charm pricing) is a
pricing and marketing strategy based on the theory that certain prices have a psychological impact. In this pricing method,
retail prices are often expressed as just-below numbers: numbers that are just a little less than a round number, e.g. $19.99 or £2.98.
There is evidence that
consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...
s tend to perceive just-below prices (also referred to as "odd prices") as being lower than they actually are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 may to some degree be associated with spending $1 rather than $2. The theory that drives this is that pricing practices such as this cause greater demand than if consumers were perfectly rational. Psychological pricing is one cause of
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 origi ...
s.
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 coin in 1969, prices often ended in 11d (elevenpence halfpenny: just under a shilling, which was 12d); another example (before 1961) was £1/19/11¾d. (one pound, nineteen shillings and elevenpence three farthings) which is one
farthing
Farthing or farthings may refer to:
Coinage
*Farthing (British coin), an old British coin valued one quarter of a penny
** Half farthing (British coin)
** Third farthing (British coin)
** Quarter farthing (British coin)
*Farthing (English coi ...
under £2. 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$2.199).
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:
* Thomas and Morwitz (2005) coined the term "left-digit effect" and suggested that this bias is caused by the use of an anchoring heuristic in multi-digit comparisons.
* Another rationale for just-below pricing is prospect theory. This theory holds that "consumers facing uncertainty in decision making, base the value of an alternative on gains or losses offered by the alternative, relative to some reference point, rather than on final absolute states of wealth or welfare." The theory also incorporates evidence that small deviations from a reference point tend to be over-valued. So, based on prospect theory, pricing something only a few cents under a whole dollar could be beneficial. This theory works well because of how the reference point is established by the consumer. The reference point for something that is $19.98 would be $20. This leads the just-below price to be seen as involving a gain, thus making it feel like a better deal.
* 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. 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 (for example, $19
99).
* 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.
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. Results from research using modern scanner data are mixed.
Now that many customers are used to just-below pricing, some restaurants and high-end retailers psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Theories
Kaushik Basu
Kaushik Basu (born 9 January 1952) is an Indian economist who was Chief Economist of the World Bank from 2012 to 2016. He is the C. Marks Professor of International Studies and Professor of Economics at Cornell University, and academic advisory ...
used
game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
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. Ruffle and Shtudiner's (2006) laboratory test shows considerable support for Basu's 99-cent pricing equilibrium, particularly when other sellers' prices are observable.
The introduction of the
euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
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, also known as the Newcomb–Benford law, the law of anomalous numbers, or the first-digit law, is an observation that in many real-life sets of numerical data, the leading digit is likely to be small.Arno Berger and Theodore ...
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 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 origi ...
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).
Several studies have 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 favorably as a result.
Psychological pricing in consumer behavior
Thomas and Morwitz (2005) suggested that this bias is a manifestation of the pervasive anchoring heuristic in multi-digit comparisons. (The anchoring heuristic is one of the heuristics identified by Nobel laureate Kahneman and his co-author Tversky.) Judgments of numerical differences are anchored on leftmost digits, causing a bias in relative magnitude judgments. This hypothesis suggests that people perceive the difference between 1.99 and 3.00 to be closer to 2 than to 1 because their judgments are anchored on the leftmost digit.
Stiving and Winer (1997) examined the left-digit effect using scanner panel models. They proposed that 9-ending prices can influence consumer behavior through two distinct processes: image effects and level effects. Image effect suggests that 99-ending prices are associated with images of sales promotions. Level effect captures the magnitude underestimation caused by anchoring on leftmost digits of prices. Their results suggest that both of these effects account for the influence of 9-ending prices in grocery stores. Manning and Sprott (2009) demonstrated that left-digit anchoring can influence consumer choices using experimental studies.
Choi, Lee, and Ji (2012) examined the interactive effects of 9-ending prices and message framing in advertisements. The researchers found that when pairing nine-ending prices with positive messages, advertisements were much more positively received by consumers. This in turn increased their likelihood of making a purchase decision.
Psychological pricing in financial markets
Left-digit effect has also been shown to influence stock-market transactions. Bhattacharya, Holden, and Jacobsen (2011) examined the left-digit effect in stock market transactions. They found that there was excess buying at just-below prices ($1.99) versus round numbers ($2.00) right above them. This discrepancy in buy-sell can lead to significant changes in 24-hour returns, that can meaningfully impact markets.
Psychological pricing in public policy
Research has also found psychological pricing relevant to 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 ending digits. Further, it was found that citizens’ evaluations of public-school districts in a Danish population changed noticeably based on the leftmost digit. In particular, the researchers looked at minuscule changes in average grades that shifted the leftmost digit. Once this value changed, citizens responded more drastically and as such their stance in terms of public policy on the issue changed.
MacKillop ''et al.'' (2014) looked at how the left-digit effect affects the relationship between price hikes and smoking cessation. There was a very clearly demonstrated inverse relationship between the price of cigarettes and individual's motivation to smoke. Researchers found that price hikes that impacted the leftmost digit in the price (i.e. $4.99 vs. $5.00) were particularly effective in causing change among adult smokers. These findings can be utilized by public policy researchers and legislators to implement more effective cigarette tax policies.
Regulation
According to Davidovich-Weisberg (2013), in Israel several high-profile regulatory commissions have joined to ban retailers from charging prices ending in 99. These regulatory bodies have claimed that this was an attempt to make prices look less expensive to customers. In addition, due to the phasing out of certain denominations of coins in Israel, these quirky prices also made little practical sense in terms of everyday shopping.
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
newspaper
A newspaper is a periodical publication containing written information about current events and is often typed in black ink with a white or gray background.
Newspapers can cover a wide variety of fields such as politics, business, sports a ...
pricing competition.
Melville E. Stone
Melville Elijah Stone (August 22, 1848 – February 15, 1929) was an American newspaper publisher, the founder of the ''Chicago Daily News'', and was the general manager of the reorganized Associated Press.
Biography
Stone's parents were R ...
founded the ''
Chicago Daily News
The ''Chicago Daily News'' was an afternoon daily newspaper in the midwestern United States, published between 1875 and 1978 in Chicago, Illinois.
History
The ''Daily News'' was founded by Melville E. Stone, Percy Meggy, and William Dougherty ...
'' in 1875, intending to price it at one cent to compete with the
nickel
Nickel is a chemical element with symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel is a hard and ductile transition metal. Pure nickel is chemically reactive but large pieces are slow to ...
papers of the day. The story claims that
pennies
A penny is a coin ( pennies) or a unit of currency (pl. pence) in various countries. Borrowed from the Carolingian denarius (hence its former abbreviation d.), it is usually the smallest denomination within a currency system. Presently, it is th ...
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 a just-below price, the cashier must nearly always make change for the customer. This generally means opening the
cash register
A cash register, sometimes called a till or automated money handling system, is a mechanical or electronic device for registering and calculating transactions at a point of sale. It is usually attached to a drawer for storing cash and other v ...
which creates a record of the sale in the register and reduces the risk of the cashier
stealing
Theft is the act of taking another person's property or services without that person's permission or consent with the intent to deprive the rightful owner of it. The word ''theft'' is also used as a synonym or informal shorthand term for some ...
from the store owner.
In the former
Czechoslovakia
, rue, Чеськословеньско, , yi, טשעכאסלאוואקיי,
, common_name = Czechoslovakia
, life_span = 1918–19391945–1992
, p1 = Austria-Hungary
, image_p1 ...
, people called this pricing "baťovská cena" ("Baťa's price"), referring to
Tomáš Baťa
Tomáš Baťa () (3 April 1876 – 12 July 1932) was a Czech entrepreneur and founder of the Bata shoe company. His career was cut short when he died in a plane accident due to bad weather.
His half-brother Jan Antonín Baťa took over his compa ...
, 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 prices 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
The 2005 United Kingdom general election was held on Thursday 5 May 2005, to elect List of MPs elected in the 2005 United Kingdom general election, 646 members to the House of Commons of the United Kingdom, House of Commons. The Labour Party (U ...
manifesto, the
Official Monster Raving Loony Party
The Official Monster Raving Loony Party (OMRLP) is a political party established in the United Kingdom in 1982 by the musician David Sutch, also known as "Screaming Lord Sutch, 3rd Earl of Harrow", or simply "Lord Sutch". It is notable for its ...
proposed the introduction of a 99-pence coin to "save on change".
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 or down to, for example, the
nearest 0.05. This may have an effect on future just-below pricing so as 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, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
is a good example of this practice where
5 cents has been the smallest denomination coin since 1992, but pricing at .98 or .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
Finland ( fi, Suomi ; sv, Finland ), officially the Republic of Finland (; ), is a Nordic country in Northern Europe. It shares land borders with Sweden to the northwest, Norway to the north, and Russia to the east, with the Gulf of B ...
and the Netherlands, the first two countries using the euro currency to eliminate the 1 and 2 cent coins.
See also
*
Infomercial
An infomercial is a form of television commercial that resembles regular TV programming yet is intended to promote or sell a product, service or idea. It generally includes a toll-free telephone number or website. Most often used as a form of dire ...
*
Pricing
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acqui ...
*
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 origi ...
*
Marketing mix
The term "marketing mix" is a foundation model for businesses, historically centered around product, price, place, and promotion (also known as the "4 Ps"). The marketing mix has been defined as the "set of marketing tools that the firm uses to ...
*
Mental accounting
Mental accounting (or psychological accounting) attempts to describe the process whereby people code, categorize and evaluate economic outcomes. The concept was first named by Richard Thaler. Mental accounting deals with the budgeting and categor ...
*
Microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
*
Numerical cognition
Numerical 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 r ...
*
Take a penny, leave a penny
"Take a penny, leave a penny" (sometimes "Give a penny, take a penny", penny tray, or penny pool) refers to a type of tray, dish or cup meant for convenience in cash transactions. They are often found in the United States in gas stations, conveni ...
References
Citations
General and cited references
*
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)
"Perfect Pricing: The psychology of online prices"
{{DEFAULTSORT:Psychological Pricing
Business terms
Cognitive biases
Consumer behaviour
Pricing