Psychology of pricing: Businesses work the numbers to work your wallet
Henry Lemonte of Batavia hates marketing ploys. And right at the top of his list of pet peeves is a price tag that reads $99.99.
“Do they think I can’t round up in my head? I know darn well that I’m going to shell out over $100 with tax,” he said. “Why on earth are stores under the impression that that’s going to trick me into saying ‘Oh, that’s an amazing deal I can’t pass up?’”
Like Lemonte, most consumers are savvy enough to see through pricing maneuvers merchants use in hopes of moving more products and boosting profit margins. So why employ them?
“There are different schools of thought,” said Ryan Soukup, owner of Soukup’s True Value Hardware & Appliance Store in Glen Ellyn. “Stores like sevens and nines at the end of their prices. I don’t really know why, and people I’ve been around did it that way, so we kind of adopted that philosophy, too.”
But according to Gurram Gopal, a business and economics research chair at Elmhurst College, prices end in sevens and nines for a very specific and “sneaky” reason.
“You don’t want customers to make easy price comparisons between products (of different brands),” he said. “If it’s 5 ounces priced at $2, you can quickly figure out it’s 40 cents an ounce. You don’t want it to be simple to do the math, so you don’t want numbers that are easy to divide in your head. If it’s 6.5 ounces for $5.99, you’re not going to immediately figure it out.”
The same conceptual methodology is applied to promotional deals, Gopal added. Making produce two for one is a snap to determine the price per unit. But three for two or five for four prices complicate things for the consumer and lead them to believe they are getting a great savings without figuring out how little they are being discounted.
Other experts point to research conducted on “99-cent” pricing and attribute its success to the nuances of the psychological perceptions of buyers. Among them is Marlene Jensen, pricing strategist for American Express, AARP and “Playboy” and author of “Pricing Psychology Report” and “The Tao of Pricing.”
“It’s all about barrier numbers, and you’re going to see 10 to 15 percent more sales if you’re coming in under a threshold,” she said. “You don’t want to go up that extra digit — from nine to 10, 99 to 100, 999 to 1,000 — because you lose a lot of people who want to justify that purchase in their minds and convince themselves that it wasn’t that expensive because the tag didn’t break $100.”
It’s not that consumers really believe one penny is that much of a savings, Jensen said. It’s more about placating the cognitive dissonance. In many market scenarios, she said a $9.99 price will probably move 10 percent to 20 percent more products than a $10 one.
“There’s a learned pattern response in our brains that makes us see $9.99 as much lower than $10. And it persists, even though most of us know this trick,” Jensen wrote in her book.
Part of this phenomenon is due to the American number system, where thousands appear on the left and pennies on the right, she added.
“Your brain learns to ignore things that aren’t important because there is so much stimulation around that it needs to prioritize information to process, so the same thing happens with numbers,” Jensen said. “It’s a screening technique. And our mind tells us that nine is smaller than 10. We’re predisposed to think that way.”
Yet contrary to popular opinion, she warned, lower numbers don’t always solicit more consumer interest when prices are not on the brink of a price threshold.
In her own market research, Jensen said an item priced with a medium ending digit “bombed and performed terribly — were a complete disaster” while the same product ending in a higher digit sold more successfully.
“So you can usually go up a little without losing anyone,” she said.
Also, in today’s age of Internet shopping, there is another reason why “99-cent” pricing has been reinforced, according to Gopal.
Search engines allow shoppers to choose items within price ranges.
“So if you’re looking for shoes in the $25 to $49.99 category, you aren’t going to see selections marked at $50,” Gopal said. “Merchants want to avoid getting bumped up into a more expensive category where they might not get as many hits. Going for that lower threshold, however small the difference, will make the product seem more attractive.
“It’s not that this is actually fooling anyone,” he added. “It’s just the way things work.”