Retail prices are often expressed as odd prices: a little less than a round number, e.g. $19.99 or £6.95. Psychological pricing is a theory in marketing that these prices have a psychological impact that drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.
The psychological pricing theory is based on one or more of the following hypotheses:
- Consumers ignore the least significant digits rather than do the proper rounding. Even though the cents are seen and not totally ignored, they may subconsciously be partially ignored. Some suggest that this effect may be enhanced when the cents are printed smaller - $1999.
- Fractional prices suggest to consumers that goods are marked at the lowest possible price.
- Now that consumers are used to psychological prices, other prices look odd.
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. Research using results from modern scanner data is mixed.
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Research supporting odd pricing theory
Kenneth Wisniewski and Robert Blattberg at the University of Chicargo's Center for Research in Marketing showed that when the price of margerine was lowered from 89 cents to 71 cents, sales volume increased a mere 65%, but when it was lowered from 89 to 69 cents, sales volume increased by 222%.
In another study, the perceived value of all the numbers between 1 and 100 were studied and 77 was shown to have the lowest perceived value relative to its actual value.
Schindler & Kibarian (1996) tested odd pricing using three versions of a direct mail catalog for women's clothing. The catalogs were identical except for the prices which ended with 00, 99 or 88. The version with prices ending in 99 generated 8% more sales volume and had more purchasers than the 00-ending version. The 88-ending catalog produced a similar sales volume and number of purchasers to the 00-ending version.
Research disputing odd pricing theory
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Historical origins
Historically the practice of odd pricing was developed primarily to control employee theft. For cash transactions with an odd price, most consumers must be given change. Creating change requires the employee to open the cash register, recording the sale. This reduces the risk of stealing from the shop owner by not recording the sale and pocketing the money.
The practice is said to have been invented in 1875 by Melville E. Stone, the publisher of the Chicago Daily News, who introduced it in cooperation with his advertisers.
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