Why £0.99 is Better Than £1.00!

I found reference to this on Dollars and Sense at www.mimiran.blogspot.com

Mark Roth, Sunday, December 17, 2006

Today's Pittsburgh Post-Gazette features patterned sweaters at Kohl's for $19.99, women's jeans at Kmart for $16.99 and a turtleneck at Macy's for $8.99.

The 99-cent pitch isn't limited to apparel, of course. There's a Nikon camera at Circuit City for $129.99, a remote-controlled helicopter at Radio Shack for $69.99 and even humble work gloves at Sears for $14.99.

In classical economic theory, consumers make rational choices based on price comparisons and other objective factors. So any shopper who's looking at a $49.99 cell phone knows he's in effect paying $50, right?

Wrong, say business researchers who have studied this issue.

Not only do people make all kinds of purchasing decisions that aren't rational, they say, but they're particularly susceptible to the kind of offers cited above, which are known in the trade as "9-ending" or "just below" prices.

Studies show the technique not only influences people's perceptions of prices, but boosts their buying.

In one of the most telling experiments, Rutgers University professor Robert Schindler and his colleagues did a real-life test with a women's clothing catalog 10 years ago.

The clothing line normally advertised items ending in 88 cents. For the experiment, the researchers divided the 90,000 customers into three groups.

One group got catalogs with the traditional prices, one got prices ending in .00 and one got prices ending in .99.

The 99-cent catalog significantly outperformed the .00 one, Dr. Schindler said, recording 8 percent higher sales even though the average price decrease was only three-hundredths of a percent.

Standard pricing formulas say that retailers will get a 20-percent increase in sales for a 10-percent drop in prices, yet the 99-cent approach generated almost half as large an increase in sales for a price cut that was minuscule.

Why does this happen? Researchers give two basic reasons: the "left digit effect" and a "right digit signal."

Manoj Thomas, a Cornell University business professor, has done experiments with graduate students showing that the biggest impact of 99-cent pricing comes when it changes the leftmost digit in the price -- $19.99 vs. $20, for instance, as opposed to $3.49 vs. $3.50.

"Generally, it can be said that this happens because we read from left to right," Dr. Thomas said, and we place extra importance on the first number we see.

When he asked students to compare the prices of $99.99 with $150 and then compare $100 with $150, they rated the gap between $99.99 and $150 as being significantly larger, even though there was only a penny's difference.

The "right digit signal" is slightly different, because it tells consumers that the item in question is a bargain.

A 99-cent ending "makes the price 'feel' less," Dr. Schindler said, "and it goes deeper than just appearances. If you give people two ads for a blouse, one priced at $22 and one at $21.99, people are more likely to judge the $21.99 item as being on sale.

"And there's an emotional kick to getting a discount that makes a difference to consumers."

Retailers also look at 99-cent pricing from the opposite direction, said Britt Beemer, chairman of America's Research Group, which interviews up to 15,000 people a week to gauge consumer behavior and marketing techniques.

"Let's say your item is $49.99 vs. $49," Mr. Beemer said.

"There is no perceived difference for most consumers between the two. The consumer looks at the dollar number and forgets the right hand digits -- I would guess that only one of four consumers looks at those right hand digits."

From the seller's standpoint, then, the $49.99 price can yield them almost one extra dollar for each item, with no perceived difference in the price on the part of the buyer.

No one knows exactly who invented 99-cent pricing or when it began.

One story, Dr. Thomas said, is that store owners in the 1930s who didn't trust their clerks created this pricing so the clerk would have to open the till to give change to the customer, rather than being able to quietly pocket the bills without the owner finding out.

A British consumer researcher, Rachel Bowlby of University College London, said she had heard an almost identical story in the United Kingdom, except that the organization credited with the invention was the charitable group Oxfam.

Once it was established, 99-cent pricing became a deeply ingrained part of consumer culture in the United States and much of Europe, so that retailers that wanted to appear distinctive had to find ways to vary the 99-cent ending.

Boscov's, the chain that recently established a presence in Pittsburgh, does it by advertising 97-cent endings. And Wal-Mart founder Sam Walton pushed for unusual cents-endings to his stores' prices to distinguish them from those at other retailers.

Mr. Walton's policy of promoting such prices as $8.44 or $3.17, Dr. Schindler wrote, "may communicate to consumers that no fine tuning was done at all -- the prices were cut 'right to the bone.' "

The 99-cent approach is not global, however.

In his native country of India and in much of Asia, Dr. Thomas said, consumers are less likely to see such numbers because the governments still set many retail prices.

One Drexel University study showed that Polish people who had grown up under the Soviet regime preferred round-number prices to 99-cent ones.

"The Polish respondents perceived retailers using [99-cent prices] as offering them an unfair price and also trying to deceive them," the study concluded.

And in China, the researchers said, 99-cent prices would be acceptable, but woe to the retailer whose prices end in the unlucky number 4, which phonetically sounds like the word for death.

If our culture has taught us that 99-cent prices equal a bargain, then certain retailers have reason to avoid them like the plague.

One Ohio State University study, for instance, found that menu prices at upscale restaurants typically end in round numbers because that speaks of "quality" more than "discount."

The same thing shows up at upscale retailers such as Neiman Marcus, where a current designer trunk sale is offering linen pants, tank dresses and cashmere sweaters that all end in fat round numbers.

"I think this is all consistent with the idea that odd prices act as an information-processing reduction, indicating a product is a deal," said researcher Russell Winer of New York University.

But if you really want a bargain, Dr. Winer added, it's good to remember that "just because the price ends with 99 cents, it doesn't mean it's a really good deal."

(Mark Roth can be reached at mroth@post-gazette.com or at 412-263-1130.)

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