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Psychological pricing
Psychological pricing (also price ending or charm pricing) is a pricing and marketing strategy based on the theory that certain prices have a psychological impact. In this pricing method, retail prices are often expressed as just-below numbers: numbers that are just a little less than a round number, e.g. $19.99 or £2.98. There is evidence that consumers tend to perceive just-below prices (also referred to as "odd prices") as being lower than they are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 may to some degree be associated with spending $1 rather than $2. The theory that drives this is that pricing practices such as this cause 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); another example (before 1961) was £1/19/11+3⁄4d. (one pound, nineteen shillings, and elevenpence three farthings) which is one farthing under £2. 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 at US$0.009 (e.g. US$3.599).
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, in some jurisdictions the addition of sales tax makes the advertised price irrelevant and the final digit of the real transaction price effectively random.
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.
Now that many customers are used to just-below pricing, some restaurants and high-end retailers psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Kaushik Basu used game theory in 1997 to argue that rational consumers value their own time and effort in calculation. Such consumers process the price from left to right and tend to mentally replace the last two digits of the price with an estimate of the mean "cent component" of all goods in the marketplace. In a sufficiently large marketplace, this implies that any individual seller can charge the largest possible "cent component" (99¢) without significantly affecting the average of cent components and without changing customer behavior. Ruffle and Shtudiner's (2006) laboratory test shows considerable support for Basu's 99-cent pricing equilibrium, particularly when other sellers' prices are observable.
The introduction of the euro in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. A European wide study (el Sehity, Hoelzl and Kirchler, 2005) investigated consumer price digits before and after the euro introduction for price adjustments. The research showed a clear trend towards psychological pricing after the transition. Further, Benford's law as a benchmark for the investigation of price digits was successfully introduced into the context of pricing. The importance of this benchmark for detecting irregularities in prices was demonstrated and with it a clear trend towards psychological pricing after the nominal shock of the euro introduction.
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Psychological pricing
Psychological pricing (also price ending or charm pricing) is a pricing and marketing strategy based on the theory that certain prices have a psychological impact. In this pricing method, retail prices are often expressed as just-below numbers: numbers that are just a little less than a round number, e.g. $19.99 or £2.98. There is evidence that consumers tend to perceive just-below prices (also referred to as "odd prices") as being lower than they are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 may to some degree be associated with spending $1 rather than $2. The theory that drives this is that pricing practices such as this cause 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); another example (before 1961) was £1/19/11+3⁄4d. (one pound, nineteen shillings, and elevenpence three farthings) which is one farthing under £2. 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 at US$0.009 (e.g. US$3.599).
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, in some jurisdictions the addition of sales tax makes the advertised price irrelevant and the final digit of the real transaction price effectively random.
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.
Now that many customers are used to just-below pricing, some restaurants and high-end retailers psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Kaushik Basu used game theory in 1997 to argue that rational consumers value their own time and effort in calculation. Such consumers process the price from left to right and tend to mentally replace the last two digits of the price with an estimate of the mean "cent component" of all goods in the marketplace. In a sufficiently large marketplace, this implies that any individual seller can charge the largest possible "cent component" (99¢) without significantly affecting the average of cent components and without changing customer behavior. Ruffle and Shtudiner's (2006) laboratory test shows considerable support for Basu's 99-cent pricing equilibrium, particularly when other sellers' prices are observable.
The introduction of the euro in 2002, with its various exchange rates, distorted existing nominal price patterns while at the same time retaining real prices. A European wide study (el Sehity, Hoelzl and Kirchler, 2005) investigated consumer price digits before and after the euro introduction for price adjustments. The research showed a clear trend towards psychological pricing after the transition. Further, Benford's law as a benchmark for the investigation of price digits was successfully introduced into the context of pricing. The importance of this benchmark for detecting irregularities in prices was demonstrated and with it a clear trend towards psychological pricing after the nominal shock of the euro introduction.
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