Why isn’t this price just $400?

Prices that are not rounded (like the $399.99 above) are known as “charm prices” and are more the rule than the exception. According to a 1997 study, 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. I have often wondered why stores go to the trouble to list a product for $19.99 when they could just sell the product for $20.00.  I mean, how stupid do they think the consumer is?  We know that $19.99 is basically $20.00?  Or do we?

The practice of using prices other than a round number such as $20 was supposedly done to force clerks to open the register, record the sale and make change to reduce the possibility of the clerk pocketing currency.

In the age of credit cards and debit cards the practice has continued because that it works – use of charm prices increases sales. The leading reason for this is the “left digit effect” which states that the left-most digit of a price most effects our perception of price. For example, a $2,00 bagel seems much more than $0.01 expensive than a $1.99 bagel because we read the price from left to right and our initial impression is of $1 vs. $2. Of course, our brains then kick in (usually) and we know that the price is virtually the same, but the psychological impact still leaves us feeling like the $1.99 bagel is relatively more cheaper than the $2.00 bagel than it is.

Studies support that using charm pricing is effective.  A study at the University of Chicago showed that when the price of margarine was reduced from $0.89 to $0.71 sales volume increased by 65%. But when the margarine was reduced to $0.69 volume increased 222%!!!  Similarly, researchers from Rutgers and Wharton working with a women’s clothing catalog retailer sent out some catalogs with prices ending in .99 and other catalogs with the same items with prices ending in .00. They found that there were 8% greater sales in the catalog with prices ending in .99.

But not all prices end in .95 or .99, and use of charm prices actually doesn’t make sense in all situations. Research has found that charm prices signal a good deal or a low price, but that is not always desired for some goods because along with the low price consumers also perceive lower quality. Some high-end retailers such as Nordstrom use .00 prices to lend an aura of prestige to their products.

There are additional psychological reasons to use rounded prices in some situations. A 2014 study published in the Journal of Consumer Research found that ” because rounded numbers are more fluently processed, rounded prices (e.g., $200.00) encourage reliance on feelings. In contrast, because non-rounded numbers are disfluently processed, non-rounded prices (e.g., $198.76) encourage reliance on cognition. Thus, rounded prices lead to a subjective experience of “feeling right” when the purchase decision is driven by feelings.” Thus, products that are recreational or luxurious benefit from rounded prices. So, consumers are more likely to buy a $40 bottle of champagne than one that is $39.95. An experiment in the research paper about purchasing a camera was interesting. The participants were told that a camera was purchased for leisure (a family vacation) or for a class project. The study participants preferred rounded prices when it was for vacation, and non-rounded prices for the class project.