The whole field of marketing is strongly based in psychology. And this is absolutely true when it comes to pricing strategy.
We’re all familiar with price tags that read US$ 9.99 or US$19.99. Do these really move more product than tags reading US$ 10 or US$ 20? What about adding the decimal and zeros: US$ 10.00 and US$ 20.00? Does any of this make a difference? Research says it does.
Setting the right price can have a powerful effect on the success of your direct marketing campaigns. So let’s look at the factors that determine what your most attractive price is.
Prices that charm
No one knows when marketers first started shaving pennies off their prices, although much of the lore points to events in the 19th century. One story is that doing it required the store clerk to make change. This meant opening the cash register and recording the sale – a big discouragement to the clerk who otherwise might occasionally pocket the cash himself.
Another more complex story tells of a clever Chicago newspaper publisher who, in 1875, priced his newspapers at a penny (one centavo) to compete with other newspapers that charged a nickel. Pennies were rarely used at the time, so he got his advertisers to set their prices lower by subtracting a penny from their whole dollar prices. This assured his readers always had the right change to pay for the paper. It sounds like a great story, but no one knows for sure if this really is how “.99” at the end of prices became so popular.
What we do know is that this kind of pricing has a powerful effect on buyer behavior. It’s sometimes referred to as “charm” pricing, fractional pricing, or odd-even pricing. Setting a price even a cent or two below the full dollar amount can increase sales by 21-34 percent. That’s a huge amount that can make or break your campaign.
Marketers are well aware of this. According to a survey of prices that was published in the Marketing Bulletin in 1997, 60 percent of prices ended in a 9; 30 percent ended in a 5, and only 7 percent ended in a 0. This study is still very relevant to your marketing campaigns today.
So now, the question is, why do these numbers work so well?
Why a centavo less can make the difference
We may think we make rational decisions, but we’re all influenced by subconscious parts of our own minds that make us perceive things in ways we’re not aware of. Rationally we know that US$ 9.99 is only one cent less than US$ 10.00 and therefore doesn’t amount to much, but unconsciously, we react as though it’s a huge difference. There are a number of theories as to why this is so. Here are a few of the more prevalent ones.
1. The reference price. While it’s a largely unconscious process within us, we’re always placing a value on things. We do it all the time without realizing it. And to help us make more accurate valuations, we use a process of comparison. We set some kind of reference point in our minds, and then we ask ourselves, is this price higher or lower than the reference point I’m comparing it to? If something is priced at US$ 9.95, the reference point we compare it to would most likely be US$ 10, and compared to that, US$ 9.95 looks like a good deal.
Clearly, pricing something at US$ 10.05 in this case would not be a good idea. We would still likely use a reference point of US$ 10 rather than a reference point of, say, US$ 11. But now the price of US$ 10.05 is higher than the reference point, and would not look like a good deal.
So, with the right pricing, you establish a reference point in the prospect’s mind that’s higher than the price you’re asking, and that therefore makes your lower price look attractive. Shaving off a cent or two does the trick nicely.
2. Ignoring the “insignificant.” We tend to gloss over things that seem insignificant to us. Dollars seem important to us. Cents not so much. So we focus on the dollar amount, and don’t notice that 99 cents is essentially another dollar.
This illusion is strengthened by taking what we want to appear insignificant, and making it physically smaller. That’s why the “.99” part of a price is often made small and superscript, so it’s lifted out of view where it can be more easily ignored.
3. The appearance of being the “lowest price.” Using fractional prices gives the impression that the company has really fine-tuned their pricing to give you the best price. A price of US$ 6.94 says “bargain.” Large chain stores work on this principle. Walmart always lists prices with odd amounts of change: .88, .94, .96. By contrast, Macy’s usually lists its prices with a “.00” at the end – unless the item is on sale. Then it usually ends with “.99” or something like it.
4. The anchor of the left-most digit. We read from left to right, and the first thing we see when we look at a price is the left-most digit. As a result, that first digit carries the greatest psychological weight.
Remember, it’s all about how a prospect’s perception makes them feel about the price. It’s easy for us to understand that US$ 1.99 may feel like a lower price than US$ 2.01. But it goes even further.
If people are given two prices, say US$ 4.99 and US$ 6.00, and were asked to estimate the difference without actually doing the math, they are more likely to perceive that the prices are about US$ 2 instead of the closer US$ 1 difference.
Why is that? Well, that left-most digit commands the way we see a price, and shaving a penny or two off a price to change it from US$ 20.00 to US$ 19.98, can make a huge difference in sales.
5. When the item falls into a different price point. An additional reason for using fractional pricing is that it may seem to put the item into another category. This has to do with an item’s price point – where it falls in relation to other competitive prices. Many people have a price point in mind before they look at the actual price tag. For example, say a prospect has a price point of US$ 20 in mind for the kind of product you sell. If an item is below US$ 20 it seems inexpensive; if it’s more than US$ 20 it seems more expensive and purchasing it would require more thought.
If you can keep the price of your product below a common price point so it falls in the less expensive category, you can boost your sales. And even a few pennies, at the critical point, can make a huge difference. A price of US$ 19.99 means the item fits in the right category. Making the price US$ 20.19 raises it into the next category in the mind of the consumer, and can reduce sales.
When a higher price point means more
Some businesses don’t want to look like the cheapest choice out there. Their success is based in appearing to be expensive – and worth it.
Businesses like these use something called “prestige pricing.” They deliberately make their prices higher, and the people who choose to buy from them love it. They will rarely shave off the penny. They will price in full dollars.
This is something you see a lot on menus in fine restaurants. They’ll just say:
Grilled Caesar Salad: 15
They may not even use a dollar sign. That way it doesn’t feel like money and a lot of their target customers will appreciate that.
You have to know who your best consumers are. If they want to see themselves as being so wealthy and elegant that they just want the best, regardless of the cost, then more may be more.
Testing your prices is essential
As always, I’m back to my old mantra: you have to test. You can’t guess at the best price – the price that will bring the most sales. You have to experiment and find out.
You can bet that Walmart has a whole team of marketers who are always testing prices. I have clients who are always running A/B split tests with different prices. And the results are often surprising. Sometimes the higher price does better.
But you never know until you do the testing to find out.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by Entrepreneur.com.ph.