£9.99 for a limited time: Psychological Price Points

A recent trip to London reminded me of something I’ve always found perplexing: the practice of retailers to mark prices at arbitrary “psychological pricing points” (usually ending in 50 or 99).   The fish and chips in London were always £6.99, not £7, and an attraction would likely be priced at £14.99 rather than one pence higher.

This isn’t just my imagination; a 1997 study of pricing in New Zealand concluded that about 60% of retail prices end in the digit 9 and another 30% in the digit 5.  Need more proof?  Look at the circulars in any Sunday paper and count how many electronic items go for $400.  Not many; they’ll all be priced at $399.

It’s a little insulting that retailers think they’re fooling us into believing that $399 is a whopper of a bargain compared to $400.  Do they really?  Are we really?

Pricing studies have indeed concluded that consumers generally respond pretty well to this type of pricing.  Still, I’ll bet many retailers just do it out of habit at this point.

There might have been a time (like when most transactions took place between individuals in street markets) when rounding to even numbers or zeroes truly made things easier: easier to calculate totals, easier to give change, less change to carry.  But most of those arguments have gone away now: cash registers compute most totals, many transactions happen without cash, and round numbers become distorted, anyway, once tax rates are applied on top.   So round numbers don’t even make a whole lot of sense anymore.

While there might have been historical rationale for round number pricing, the practice of pricing in the ‘9s’ is built quite simply on the assumption that consumers are so daft that they can’t meaningfully process much more than the left-most digit in a price.  We’re all busy and don’t have unlimited time to research perfectly efficient prices, but come on now, I mean – really.

Even if there’s a slight increase in retail demand at these strange price points, don’t you find that all those 95s and 99s come with an important quality perception trade-off? It’s like everything has been marked down in some gigantic blue light special extravaganza where the pricing guns have more 9s than any other digit.  It’s something retailers should think about, and some of them have.

High end retailers such as Neiman Marcus and Nordstrom have been pricing their goods in whole numbers for some time now.  Other retailers use a mixed model; Macys and J.C. Penney, for example, tend to price standard goods with 00 and price marked down/sale price goods with 99.  I guess that makes some sense.

Some retailers price standard goods with $x.00 and sale goods with $y.99.

It’s worth noting that wholesale pricing generally doesn’t follow this same illogical pattern. If you’ve ever seen a wholesale price list, the prices tend to be exact and all over the place. In mature categories, manufacturers will often increase their wholesale prices by an exact 2 to 3% increase each year, so the trend continues. It’s really the retailers who feel compelled to round everything in ways that dull our senses.

A few years ago I started noticing many New York restaurants rounding prices to whole dollars, excluding even the zeroes for cents.  While that’s equally arbitrary to rounding to lots of 9s, at least it doesn’t seem like a veiled attempt to insult our intelligence by assuming we’ll ignore everything after the leading digit.  I actually find whole dollar prices weighty; authoritative.  “Here’s what we’re charging.  Take it or leave it,” the $14 next to the crab salad appetizer suggests.

All this gets even more intriguing when you think about the implications of economic inefficiency driven by this type of arbitrary pricing.  This is particularly enlightening when you take a look at the same good priced in multiple currencies which have a close relative value to one another.  But let’s tackle that in a later blog entry.

I'll take that octopus at $16, but not at $15.99, thanks.