Almost all marketing revolves around trying to get into customers’ heads. What do they want? How much are they willing to pay for it? Which words or images will increase their purchase intent? How can we create a sense of urgency?
While we like to think of ourselves as rational beings, humans make decisions frequently, including purchase decisions, based on emotions, assumptions, shortcuts and logical fallacies. When businesses understand what lies behind their target market’s thought processes, they can use this information to increase sales and maximize profits.
We see countless “charm” prices (prices that end in the number 9) daily.
There’s no real consensus about how this came to be while a few different apocryphal stories exist. Still, there is little disagreement with the idea that charm prices convey value and motivate customers, ultimately, increasing sales.
Charm prices work because of the “left digit effect,” which proposes that people place more importance on the leftmost digit in a price. Therefore, $79.99 seems closer to $70 than $80.
In one famous study, three different versions of the same mail-order catalog were printed with each version showed the same shirt at a different price. The shirt sold better at $39 than at $44. This result is not surprising because it illustrates the law of demand: As the price goes down, demand goes up. However, the shirt also sold better at $39 than at $34. This illustrates that charm prices have an impactful effect and can undermine even our most basic expectations about the effect of price on demand.
Many people say that they don’t like nonrounded charm prices and research supports this. When pumping gas, nobody tries to stop at $29.99. They try to get to a nice, round number like $30. But what people like often has minimal impact on what influences them and sellers ignore the power of charm pricing at their peril.
In 2012, ousted CEO Ron Johnson tried to do away with charm pricing as part of an effort to revamp JCPenney. Although getting rid of charm pricing was only part of many more extensive changes to the business’s pricing strategy, the changes were not well-received and the damage was significant.
Charm pricing uses prices ending in the digit 9. Interestingly, studies have shown that ending prices in other odd numbers, such as 7 and 5, can work too. Since consumers associate prices ending with an odd number with a lower overall price than one ending in an even number,
In contrast, prestige pricing seeks to avoid the taint of anything associated with bargain hunting. Luxury goods are often priced ending in even digits. Whole numbers convey that price is not a salient issue compared to other criteria like product quality and social status.
The previously mentioned left-digit bias study showed that raising the price of a product to $5.00 from $4.99 resulted in 4.5 percent fewer sales.
So, should all prices end in the number 9? Research has demonstrated that charm prices powerfully imply value. Customers are more likely to perceive the price as being lower and representing a discount. That being said, charm prices say something very different about quality.
Upscale retailers know this and use it to their advantage. If you look at the price tags from a high-end department store, you’ll see that they’re almost always rounded. These stores aren’t selling value – they’re selling quality and luxury. Rounded numbers convey quality and luxury and are used almost exclusively in settings where quality is of utmost importance.
But when these luxury items are marked down for sale, nonrounded and charm numbers come back into play. The high-end shirt that normally sells for $400 is marked down 50 percent and sold at $199.99. As soon as you put an item on sale, you are selling value over quality and luxury retailers are eager to tap the power of charm pricing.
When is each pricing model most effective? Round numbers are more fluently processed and encourage reliance on feelings. Meanwhile, nonrounded numbers are not as easily processed, creating a reliance on cognition. This means you must understand consumer emotions when creating a pricing strategy. For example, if someone wants to buy a nice handbag as a reward for getting a bonus, round numbers are best. But if the decision is driven by cognition, such as a thought process of “I should buy this because it’s a good deal,” charm prices are better.
Consider the implications for a florist or caterer submitting quotes for a wedding. If they’re dealing with the couple and their family members, decisions will likely be emotional in nature and they should use rounded numbers when pricing. In contrast, if they’re quoting on a convention dinner or fundraising gala while dealing with an event planner, things are very different. This purchasing decision would likely be more intellectual in nature and they would be better off using nonrounded prices.
At the end of the day, pricing comes down to identifying your target customer.