“Ending prices that end in 99 cents” by Al McLain and 29 Retail Experts via Retail Wire

“Ending prices that end in 99 cents” by Al McLain and 29 Retail Experts via Retail Wire

Retailers might want to rethink doing away with prices that end with “.99” if they believe the results of new research from researchers at The Ohio State University’s Fisher College of Business.

The study found that setting prices “just below” round numbers (i.e., $19.95, $19.97 or $19.99 instead of $20) can make consumers less likely to spend to upgrade to a more expensive version or size of the product or service.

In a coffee stand experiment done on campus, the researchers changed prices hourly, offering a small coffee for 95 cents, or a larger cup for $1.20. Every other hour they would change the offering to $1 for a small cup or a larger cup for $1.25, so both sizes of coffee cost more. When using the latter pricing scheme, 56 percent of customers upgraded to the larger size, versus 29 percent who did so with the first pricing scheme.

The researchers concluded that while the just-below price makes a product seem like a bargain, it also makes the step up to the premium product seem too expensive.

“Going from $19.99 to $25 may seem like it will cost more than going from $20 to $26, even though it is actually less,” lead author doctoral student Junha Kim said in a statement. “Crossing that round number threshold makes a big difference for consumers.”

Students in a lab study were also more likely to choose a costlier car or apartment options when base prices were just above round numbers, rather than just below.

The study appears to indicate a shortcoming in the theory around charm pricing, or psychological pricing, that holds that goods priced using odd numbers (e.g., $4.99, $4.97 or $4.95 instead of $5.00) are perceived to pack greater value than ones priced with a round number.

The Ohio State University’s research found that the threshold-crossing effect does not occur when there are small price differences on expensive products or when people are familiar with price levels, such as travelers who book hotels regularly.

DISCUSSION QUESTIONS: Does the “threshold-crossing” theory in the study — holding that charm pricing, or “just below” round number pricing, may backfire when it comes to premium upgrades — make sense? Are you a fan of charm (odd number) pricing?Please practice The RetailWire Golden Rule when submitting your comments.

Join the Discussion!

29 Comments on “Ending prices that end in 99 cents”

Jeff Weidauer (Principal, SSR Retail LLC)

As is often the case with good questions, the answer is: it depends. Is your goal to sell more of this item, or entice shoppers to upgrade? Does your pricing have “Easter eggs” in it, e.g., prices that end in 97 cents are on clearance and won’t be back? It’s a big question. The right answer? It depends.

Camille P. Schuster, PhD. (President, Global Collaborations, Inc.)

Does this principle hold for products other than coffee and for non-student consumers?

Xavier Lederer (Business Growth Coach, Founder & CEO of Ambrose Growth)

This is a very insightful finding. It would be interesting to find out the effect of the price difference (99 cents vs. $1) on volume though. Most retailers set “charm pricing” primarily to increase volume, not to motivate upgrades.

Kathleen Fischer (Director of Retail Marketing, enVista)

I agree, the study only looked at part of the equation. It would be more compelling to see this test done over a longer period of time and also track the volume sold.

Lee Peterson (EVP Thought Leadership, Marketing, WD Partners)

Funny we should discuss this as I was in a new coffee shop recently with prices on the menu as, “Coffee: 2”, “Roll: 3”, “Sandwich: 5” etc. and I felt like it was a huge relief. “5” — ’nuff said. I totally get the 99 cent stuff from back in the day, but in this time, with our new customers (Generations Y, Z, A), I think it’s time to stop the tomfoolery and move on to simplicity. The “psychology” of 99 cents is dead!

Georganne Bender (Principal, KIZER & BENDER)

I still follow old school retail standards: Prices ending in .00 indicate full price and 97 cents/99 cents indicates the item is on sale or a special buy. White price stickers are preferred and red neon stickers mean “This stuff sucks and we can’t give it away.” How you price your merchandise says a lot about the store.

Richard Hernandez (Director, Main Street Markets)

I could write an entire paper on last digit pricing.

I do not like prices like $2.06 – it’s an odd price. I get more positive reaction from $1.99, $2, and 2/$4

I will agree that once you break a price point you take the risk of the customer not buying the item. As I said, I love this topic – lots of different ways to slice the bread.

Paula Rosenblum (Managing Partner, RSR Research)

Okay, here is a story my friend and fellow analyst (now retired) told me. The 99 cent ending did not start as a “charm pricing” concept. It started as a shrink prevention measure. By forcing the clerk to “make change” it made him or her less easily able to just pocket the cash, and instead had to open the register which, one way or another, kept track of the number of transactions.

Does it work? In my mind, I always just round up. The house is $699,000? In my mind, that’s $700k. The item is 99 cents? It’s a buck.

For me, it’s a nothing burger. And the 97 cent ending that Georganne mentioned was used by some chains so that sales associates could quickly identify markdowns, not shoppers.

Does it juice some people? I don’t know. I did recently hear that if you break the price of items out at dollar stores into unit pricing, they’re actually more expensive. Who knew?

Georganne Bender (Principal, KIZER & BENDER)

I hadn’t heard that .99 cent story before, Paula. It makes perfect sense!

Paula Rosenblum (Managing Partner, RSR Research)

I forgot to give props. Thanks to Greg Girard!

Richard Hernandez (Director, Main Street Markets)

Paula, that is exactly the way I learned about the 99 cent pricing strategy as well!

Ben Ball (Senior Vice President, Dechert-Hampe)

I believe there is a legitimate consumer resistance to crossing the “next” whole price threshold. But it is temporal and gradually disappears until the next meaningful threshold looms. Dating myself, the most obvious example of this in my experience was crossing the threshold to the “two coin vend.” For our younger viewers, stuff in vending machines used to cost a quarter or less. As inflation pushed the envelope on the 25 cent price ceiling, manufacturers panicked and did everything possible to avoid going over it. Customers demonstrated their frustration when vendors tried to move to 30 cents or more by dropping unit volumes in those machines by as much as half. So snack manufacturers went to great system and inventory expense to reduce weights of their regular snack size products. Many introduced duplicate lines of “vend-size” products at reduced weights to keep retail pricing at a quarter. Eventually those costs out-weighed the feared volume losses so much that those practices were abandoned. Manufacturers and vendors sucked it up and made the move to “two-coin vending.”

Rich Kizer (Principal, KIZER & BENDER)

Georganne, great perspective based on your over 30 years of ground level retail experience. Right on!

Georganne Bender (Principal, KIZER & BENDER)

30 years! You are being kind, it’s a lot longer than that.

Jenn McMillen (Chief Accelerant, Incendio)

Let’s make it even more interesting with the Williams Sonoma three bread makers example covered in Dan Ariely’s Predictably Irrational. Williams Sonoma only had two models, and the lower-priced one sold better. Williams Sonoma introduced a top tier option, and then the sales of the now mid-tier model took off exponentially because it looked like a better value. I think pricing is one of those things for which just one study can’t set the benchmark, as there is a lot of difference between a cup of coffee at $1.29 and a washer at $1,290.29.

Dr. Stephen Needel (Managing Partner, Advanced Simulations)

Not the best designed study in the world. College students, brewed coffee, and not answering whether they buy or not, just which size. Stay with charm pricing.

Dick Seesel (Principal, Retailing In Focus LLC)

“Going from $19.99 to $25 may seem like it will cost more than going from $20 to $26, even though it is actually less,” said one of the doctoral students conducting the study. Yes, but what about going from $19.99 to $24.99? If the test results are limited to sales of cups of coffee, was the study comprehensive enough to draw any conclusions one way or the other?

Gene Detroyer (Professor, International Business, Guizhou University of Finance & Economics; Executive Director, Global Commerce Education)

Way back in the day, similar studies indicated there was a perception that the 99, 97 or 95 cents had value. Shoppers would round $9.99 to $9 not $10. I never understood that, but the handful of studies were very consistent. Maybe then if you saved 1 cent, you could buy a piece of candy?

Today that penny has a value of about one-sixtieth of what in was in 1970. Essentially meaningless. Even today when you ask someone “oh, how much was that?” they will respond “$9” to what actually cost $9.99.

The 99 cent price point is unique to the U.S. I have been to many countries and find most every retailer prices at the rounded number. (What do they do in Canada?)

Maybe in the study, with the round pricing, people would think the upgrade is only a quarter more — but they can’t do the math which comes with 99 cents.

Ian Percy (President, The Ian Percy Corporation)

In reference to your “way back in the day” comment, Gene:

The .99 cent idea began in 1860. And the nine-tenths addition to gas prices I mention on this thread was the result of a federal tax implemented in 1932 as part of the Revenue Act of 1932. Back then, apparently, a full penny more was a deal-breaker. That “tax” was supposed to expire in 1934. What does all this say about us?

Rich Kizer (Principal, KIZER & BENDER)

Red denotes value. It is a retailer’s best friend. The next time you’re in the grocery store, look carefully at the packaging; 90 percent of packages do have red on them.

Shep Hyken (Chief Amazement Officer, Shepard Presentations, LLC)

I’m a fan of the “charm” pricing, but question the effectiveness as you get into more expensive items. A suit at a clothing store that’s $1950 or $1,995 versus $2,000 may not have as big of an impact as lower priced items. People spending that much money may not be impacted by an odd number. I’d like to see the study at different price points, from very low to very high. Even into the thousands of dollars.

Ananda Chakravarty (Retail Thought Leader)

The problem with the study is that it has two competing pricing theories involved, one with the charm pricing, one with anchoring, where a separate price point ($1.20) sets the high point and value of the product. A broader spread between price points could greatly change the outcome. Not sure of the reliability of the study in suggesting charm pricing limits upgrades.

Michael La Kier (President, What Brands Want, LLC)

Price relativity and price illusions play a big role in our decision-making. We’ve long known that there is a distinct difference between what people say and what they do. Behavioral economics is the field that has shown us this on multiple occasions. Interestingly, this “study” only had one real-world field application so it’s hard to extrapolate it to all fields and all businesses. But one takeaway is to constantly test and shake consumers out of their automatic behavior.

Matthew Pavich (Managing Director, Global Strategic Consulting at Revionics)

An interesting study, but one that might prove the opposite. A larger percentage purchased the lower price when it was 95 cents than when it was a dollar. More people traded up when it was a dollar. This study is actually evaluating several different concepts. It implies that “psychological” pricing works because the 95 cent price had more success than the $1. It also evaluates “trade up” pricing and also concludes that more people will trade up when there isn’t a more enticing lower price once again validating the value of the 95 cent coffee vs. the $1 coffee. Having said that, we know nothing about the total volume of sales, total revenue or cost structure of the different sizes of coffee so, from a retail perspective, it’s not apparent which price structure was optimal. The reality is that a 25 cent premium for the trade up was probably sub-optimal all along and an advanced pricing solution might have ended up with a 99 cent small and a $1.29 large.

Jeff Sward (Founding Partner, Merchandising Metrics)

We’ve spent several decades teaching the consumer that a .99 ending is a “sale” price and a round number is a “regular” price. It’s not surprising that there is a reluctance to go from a higher perceived value to a lower perceived value. If I am a “value” retailer I don’t see dropping the .99 ending anytime soon. And if I’m Nordstrom I don’t see converting the day in/day out pricing to 99 cents any time soon.

Ian Percy (President, The Ian Percy Corporation)

I’m surprised that no one is mentioning the price of gas game. $2.85 and nine-tenths is ridiculous but the industry has successfully hidden that last nine-tenths from consumer conciousness. And that is brilliant if annoying. “How much did you pay for gas at Costco?” my wife asks. An incorrect answer is $2.85. Where else among retail products could we do that? Has to be an oft-repeated purchase in order to make it invisible. If you’re going to try it on milk or bread for example, make sure the “nine-tenths” part is very tiny.

Ken Wyker (President, Circular Logic)

It seems to me that the results of the study are being interpreted in an odd way. The headline suggests that 95 or 99 cent pricing backfires by discouraging upgrades, but the results actually prove that the pricing works to create a sense of value.

What is really going on here is a demonstration of the impact of “framing” which considers how we humans perceive pricing based on how it is presented. Consumers gauge the value of each item based on how it is priced relative to other options.

It shouldn’t surprise anyone that increasing the perceived price of the small coffee makes the upgrade to the large coffee seem like a more reasonable choice.

The same dynamic is what drove the Williams Sonoma bread maker sales in the story that Jenn mentioned, but it worked in the opposite direction. With the bread makers, the existence of the more expensive product made the mid-tier option seem like a better choice.

Peter Charness (Retail Strategy – UST Global)

Pricing on a relative basis a “good, better, best” assortment to facilitate trade ups makes a lot of sense. And here I thought the 99¢ price point was due to someone in finance calculating how much more gross revenue a company would make by changing all their 95¢ price point products to 99¢.

Actually, a number of retailers use the price point ending as an internal guide to when an item is really marked down, on clearance, a test product … or a multitude of other price point ending to product status mapping.

Paula Haerr (Owner, Paula’s Picks for Campus Stores)

It’s always good to have some statistics behind pricing concepts and I can see where this study clearly applies to nominally priced items where upgrading to the next size can make a big impact on checkout. However, there are so many factors behind pricing for different product categories, price tiers, time of the year, even day of the week, that instinct and margin play a big part in my pricing strategies.

For example, in the $20 range, I never use $21, $22, $23, $27 (with or without any “cents” added). $20, $24, $25, $26, $28, and $29 sound OK. Over $100, I usually go with a $0, $5, or $9 increments. However, it’s all relevant to other products in the shop and the competitive nature of a specific item or category.

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