The Psychology of Price

psychology-of-price

“It’s like when a 39-year-old turns 40, the birthday feels like a big deal,” says Robert Schindler, a professor of marketing at UCLA. He’s talking about the effect of prices that end .99, how just a single penny between two larger amounts creates this symbolic buffer in our minds. So we perceive £3.99 as being closer to £3 than £4, just as the 39-year-old man still believes he’s in his mid-30s: it’s both completely irrational and perfectly understandable. Welcome to the world of psychological pricing.

Shoppers have to process a lot of prices, especially online, to the point where it becomes overwhelming. Our memories only process the first couple of digits of a figure at a time so pounds inevitably take precedence over the trifles of pence. The effect is powerful. When a Chicago grocery store dropped the price of margarine from 89 cents to 71 cents it saw sales rise by a modest 65%. But then it lowered the price again, by just two cents, to 69 cents. The result was a sales jump of 222%. Subtracting that single penny or dollar to reveal a pair of nines is a magic trick for retailers, but it can come at a larger price.

What the industry calls ‘just-below’ prices are linked in our minds with special offers and promotions. According to marketing professor Robert Schindler, the format was introduced in the 1870s as a way for retailers to distinguish discounted products from their full price stock. But at some point the just-below prices simply became the norm, sale or no sale. And so, in 1894, James Eaton & Co could assure the public that its $9.99 check suits were ‘Always the Cheapest’ in newspaper adverts that did away with whole number prices altogether. Today, however, certain stores still retain the approach’s original meaning.

Take Nordstrom, by Wikipedia’s admission an upscale fashion retailer. They price their clothes in whole numbers: a pair of swimming trunks can be yours for precisely $152 and a bow tie will set you back exactly $55. There are cheaper places to buy your swimwear but even Nordstrom have clearance sales. Then you’ll see all sorts of prices: a wool fit suit is now $465.65 and a pair of toe cap boots are down to $126.96. The discounted prices are left with ragged edges. So why use whole numbers in the first place? [Read more…]