Psychological pricing
| Digit ending |
Proportion in the 1997 Marketing Bulletin study |
|
|---|---|---|
| 0 | 7.5% |
|
| 1 | 0.3% |
|
| 2 | 0.3% |
|
| 3 | 0.8% |
|
| 4 | 0.3% |
|
| 5 | 28.6% |
|
| 6 | 0.3% |
|
| 7 | 0.4% |
|
| 8 | 1.0% |
|
| 9 | 60.7% |
|
Psychological pricing (also price ending, charm pricing) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. Retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. There's evidence that consumers tend to perceive “odd prices” as being significantly lower than they actually are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 are associated with spending $1 rather than $2. The theory that drives this is that lower pricing such as this institutes greater demand than if consumers were perfectly rational. Psychological pricing is one cause of price points.
According to a 1997 study published in the Marketing Bulletin, approximately 60% of prices in advertising material ended in the digit 9, 30% ended in the digit 5, 7% ended in the digit 0 and the remaining seven digits combined accounted for only slightly over 3% of prices evaluated. In the UK, before the withdrawal of the halfpenny coin in 1969, prices often ended in 11 1⁄2d (elevenpence halfpenny: just under a shilling, which was 12d). This is still seen today in gasoline (petrol) pricing ending in 9⁄10 of the local currency's smallest denomination; for example in the US the price of a gallon of gasoline almost always ends in US$0.009 (e.g. US$1.799).
In a traditional cash transaction, fractional pricing imposes tangible costs on the vendor (printing fractional prices), the cashier (producing awkward change) and the customer (stowing the change). These factors have become less relevant with the increased use of checks, credit and debit cards and other forms of currency-free exchange; also, the addition of sales tax makes the pre-tax price less relevant to the amount of change (although in Europe the sales tax is generally included in the shelf price).
The psychological pricing theory is based on one or more of the following hypotheses:
The theory of psychological pricing is controversial. Some studies show that buyers, even young children, have a very sophisticated understanding of true cost and relative value and that, to the limits of the accuracy of the test, they behave rationally. Other researchers claim that this ignores the non-rational nature of the phenomenon and that acceptance of the theory requires belief in a subconscious level of thought processes, a belief that economic models tend to deny or ignore. Results from research using modern scanner data are mixed.
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