Chapter 7 - 4

04 Business

Psychological Pricing

Nearly everyone is aware that prices displayed in odd fractions, like $9.99, are meant to encourage the belief that an item costs significantly less than the whole number, although it is just a penny less.

Yet, most people claim not to be fooled by this tactic.

They say they simply round up the figure to $10.

The fact is, this strategy would not be used consistently for so many years if it were not effective.

Studies have shown that not only does the penny difference increase sale disproportionately, but many more pricing strategies are also effective despite working against consumer’s best interests.

Together, these are known as psychological pricing.

Psychological pricing consists of techniques to improve sales by using certain numbers in prices.

Many economic theories assume that consumers always act rationally.

This assumption is the basis for standard pricing formulas that predict, for example, that for every ten percent drop in prices, a retailer will see a twenty percent increase in sales.

Psychological pricing strategies like setting a price to end in 99 contradict these assumptions, since it should be in consumers’ rational interest to notice that a penny difference is negligible.

Yet, multiple studies have shown that sales can be increased greatly by using psychological pricing strategies.

A study at the University of Chicago found that towering the price of margarine from 89 cents to 71 cents increased sales by sixty-five percent.

But when the price was lowered to 69 cents-just two cents less-sales increased by 222 percent.

A 1996 study found that prices ending in 99 generated eight percent more sales than prices ending in 88 or 00 for otherwise identical products from mail-order catalogs of women’s clothing.

Psychological pricing may work because consumers try to save time and effort in their calculations by focusing less attention on the fractional, right hand part of a price than on the more significant, larger digits.

This would explain why a price ending in 99 generates even greater sales increases when the extra penny would bump the price by another digit, as from $9.99 to $t0.

A different study in 2007 found the opposite “right-digit effect”.

Consumers saw a bigger discount when the last digit of a price was small.

Thus, a $222 item on sale for $211 was considered a better deal than a $199 item on sale for $t88, even though the discount is the same in both cases.

The researchers in that study concluded that “comparative price advertising can distort consumers’ perceptions in ways unintended by the seller”.

In other words, not only do the sellers stand to gain by using some type of psychological pricing effectively, they also stand to lose by remaining unaware of its effects.

This suggests that there is more at stake behind the widespread use of psychological pricing strategies than sellers thinking they have nothing to lose by trying except the need to stock up on pennies.

Even retailers who do not use fractional pricing often turn out to be applying psychological pricing strategies, in contrary fashion.

People have grown so accustomed to thinking of prices ending in nine or five as a good value that prices ending in 00 project an image of quality and sophistication, according to a study from Ohio State University.

Luxury shops, restaurants, and catalogs reject fractional pricing because they want to appear exclusive rather than low-priced.

“By consistently looking at the numbers in prices and making a determination of the quality of those items, we learn what to expect, and it becomes a part of our culture,” says researcher H.G Parsa.

” It’s a subconscious learning”.

Indeed, social psychologists have found that people do not always make decisions in their best interest on the basis of reason.

Often, they exhibit what is called cognitive dissonance.

This means that they might hold two inconsistent ideas simultaneously and adopt various forms of rationalization and -self-justification to ease the resulting tension.

For example, it makes sense to save money for retirement, yet many people fail to do it.

The reason may be that they fear contemplating old age and saving would force them to think about it.

Instead, they choose not to save and defend their choice with all kinds of reasons and justifications.

The fact that psychological pricing works even though almost everyone sees through the ruse demonstrates the significant role that subconscious desires and thoughts play in economic decisions.