Getting to the Point on Price Points

By September 1, 2013 February 4th, 2020 No Comments

If you’ve ever watched late night TV, you’ve undoubtedly heard the phrase “just five easy payments of only $9.99!”  But when the infomercial discusses the price of competing products we hear “they can cost up to $100!” Wow!  Suddenly the advertised product’s cost seems like an even bigger bargain. The next thing you know, you’re rushing off to find your phone to buy some wireless waffle-maker.
Wait, what just happened?
This phenomenon is known as psychological pricing, also called “charm pricing.” It is the simple theory that some price points have a psychological impact. So, in the case of our waffle-maker infomercial, even though consumers rationally know that $9.99 is really closer to $10, and that the total price of the product is nearly $50, they tend to think more emotionally when it comes to prices and, ultimately, making a purchasing decision.
So what’s so special about these charm points? In the words of the Beatles, “Number nine, number nine, number nine.” This magic number pops up everywhere in prices. One theory is that consumers tend to only see the explicit whole number when making mental calculations, instead of rounding the price to its nearest dollar.
Kushik Basu, Senior Vice President and Chief Economist of the World Bank, says this unusual choice can be explained with game theory, one of the most basic studies of strategic decision making. Game theory suggests that a consumer will process the price of a product from left to right, and often mentally replace the last two digits of the price “with an estimate of the mean ‘cent component’ of all goods in the marketplace.” When the marketplace is very large, this means the consumer will essentially write-off the cent component and value the product at its lowest whole dollar.
Under this theory, the dismissal of the cent component would happen no matter what the value of the component was (i.e. consumers will read the price of a product as $3 whether the true price is $3.01, $3.34, $3.86, etc.). However, because the consumer will round down anyway, the best way to optimize profit is to choose the highest cent component – 99.
Look to any store, whether brick-and-mortar or online, and the magic number nine will be there, and that’s because charm pricing works.
In 2003, MIT and the University of Chicago published “Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments.” To study the effects of the magical number nine price ending, they tested the sale of a specific women’s clothing item at three separate price points: $34, $39, and $44.
Their conclusions were huge for retailers. According to their publications, the use of $9 price ending increased demand in all experiments. That means consumers were choosing the $39 price even over the cheaper $34 price!
Author William Poundstone built off of MIT and University of Chicago’s research in his book Priceless, an in-depth analysis of eight separate psychological price point studies. While Poundstone studies many different types of behavioral consumption – from price tag design to corporate buyouts – his findings on the use of the number nine is price points is particularly profound. Poundstone found that the use of charm pricing increased sales by 24% versus a rounded price point.
While the basis of a great business may be a great product, setting prices that will maximize profit is essential. Though there are many aspects and variables that go into pricing your products, do not overlook the value of psychological pricing. Remember that consumers have the tendency to make irrational, emotional decisions when purchasing. And maybe we should not take all our marketing advice from late night infomercials selling wireless waffle makers, but we can certainly learn a little something about the effectiveness of psychological pricing.