Charm Pricing

What’s a penny to your bottom line? Retailers often assume that they need to collect every cent in improving their bottom line. But the difference in a penny can make a world of difference – depending on your product.

We’ve all seen the numbers – but have you actually thought about the psychology behind it? $3.99 instead of $4. $9.99 instead of $10.00. Retailers don’t do that to make the number sound nice (although, it does help). It’s all in the numbers – more accurately – the mind.

Consumers love a good deal. And sometimes, the mind’s perception of a good deal is completely independent of what a truly good deal. It’s all in that left number. You see, a drop in price from $3.80 to $3.79 is trivial. But the drop from $4.00 to $3.99 makes all the difference in the world. That left number is the first thing our brains start to process – and thus the “value” of the item is directly associated with that number. The cents are completely inconsequential in the mind determining the value of an item.

A study published in 1997 in the Marketing Bulletin states that “judgments of numerical differences are anchored on left-most digits, a behavioral phenomenon referred to as the left-digit anchoring effect. This hypothesis suggests that people perceive the difference between $1.99 and $3.00 to be closer to $2.01 than to $3.01 because their judgments are anchored on the left-most digit.”

Additionally, “…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.”

Though the practice of decreasing price so that consumers can conceptualize a lower price has been around for decades, only recently with the widespread adoption of plastic payment methods has the technique become essentially standard everywhere. Understandably so, cash transactions in fractions of a dollar (especially a dollar minus a cent) were less than ideal.

Many retailers continue to tinker with this concept by experimenting with various ending digits to try and make gains on the effect even more – increasingly because almost every product out there has a price ending in .99. The table below shows results from a recent study on retailer pricing and how the price ends.

Thus, in this time of rapid change and internet-ization, it is important that retailers assess their own product prices and make micro changes to pricing in order to entice consumers to purchase their products in store. This is why it is so critical that retailers adopt new technologies such as Electronic Shelf Labels – they enable quick changes and experimentation to where regular paper tags would be too burdensome to pursue the same strategies.

Additionally, according to Keith Coulter, referenced above, it is important for retailers to minimize the cents after the dollar amount in order to reduce the importance of the rounding error – or at least psychologically diminish it. Templates for price tags should be created so that all techniques are pursued.

Finally, we mentioned in the first paragraph that this technique can work wonders for most products- but some products stand alone. For instance, fancy restaurants almost never list cents, instead only listing dollar amounts. High-end products tend to utilize the same strategy, foregoing the cents in favor of dollars. In the mind of a consumer, the lack of listed cents in a world dominated by them places the product in a premium category – denoting an obvious luxury that the consumer may be willing to spend on.

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