Everyday, we see countless "charm" prices (prices that end in the number nine).
There might not be any consensus on how this came to be (a few different apocryphal stories exist) but there is little disagreement with the idea that charm prices convey value and motivate customers.
These charm prices work because of the "left digit effect," which proposes that people place more importance on the leftmost digit in a price. There for $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 showing the same shirt at a different price. The shirt sold better at $39 than $44. This result is not surprising, and it illustrates the law of demand; as price goes down demand goes up. But the shirt also sold better at $39 than $34; illustrating that charm prices have an impactful effect and can undermine even our most basic expectations about the effect of price on demand.
When charm prices don't work
Many people say that they don't like non-rounded charm prices, and research supports this. When pumping gas nobody tries to stop at $29.99, they try and get to a nice round number like $30. But what people like often has very little impact on what influences them, and sellers ignore the power of charm pricing at their peril.
Recently, ousted CEO Ron Johnson tried to do away with charm pricing as part of an effort to revamp JC Penney. Although getting rid of charm pricing was just part of much larger changes to their pricing strategy, the changes were not well-received and the damage was significant.
The perceived value when pricing
So, should all prices end in the number 9? Research has clearly demonstrated that charm prices imply value in a very powerful way. 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; research has similarly shown that prices ending in nine had a negative effect this other valuable 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 will see that they are almost always rounded. That is because these stores are not selling value, they are selling quality and luxury. Rounded numbers convey that, so they are used almost exclusively in a setting where quality is of utmost importance.
But when these luxury items are marked down for sale, non-rounded and charm numbers come back into play. The high-end shirt that normally sells for $400 is marked down 50% and sold at.... $199.99. As soon as you put an item on sale, you are selling value over quality, and even luxury retailers are eager to tap the power of charm pricing.
Related Article: What Is Dynamic Pricing & How Does It Affect Ecommerce?
The use case for rounded & non-rounded pricing
So when is each mode of pricing most effective? Round numbers are more fluently processed and encourage reliance on feelings. On the other hand, non-rounded numbers are not as easily processed, which creates for reliance on cognition. What this means is that when the decision to purchase is driven by emotion and feeling, so for example, buying yourself a nice handbag as a reward for getting a bonus, it is better to use round numbers. If the decision is instead driven by cognition, i.e. the type of "I should buy this because it's a good deal" thought, it is better to use charm prices.
Consider the implications for a florist or caterer that is quoting on a wedding. If they're dealing with bride or her family the decision is likely to be largely emotional in nature, and they should use rounded number when pricing. If, on the other hand, they're dealing with an event planner and quoting on a convention dinner or fundraising gala things are very different. This purchasing decision would likely be more intellectual in nature, and they would be better off using non-rounded prices.
At the end of the day, pricing comes down to who your ideal customer is.