The Rule of 9s: Will Charm Pricing Work for Your Business?

What is charm pricing?

Charm pricing is the idea that the way you price a product affects its sales and that figures ending in an odd number — such as five, seven or nine — will sell better than others. A wide body of research has confirmed that this effect occurs because consumers process prices from left to right with rapidly decreasing attention spans. This means that people interpret $4.99 as $4 rather than $5, and $497,500 as $400,000 rather than $500,000.

This might sound counterintuitive, but humans are naturally wired to avoid pain — and prices that start with a lower initial digit feel psychologically better than higher ones. The lower the price of a service or an item, the lazier consumers get. Emphasizing the first digit works for all sorts of businesses.

What is the rule of nines?

The rule of nines is a popular method of charm pricing to increase sales. This method uses a nine, usually at the end of the price, to help sell a product. Consider the classic sale price of $49.99. Your brain processes this price as $49, not $50 and, as a result, it seems more attractive to customers. However, nine is just one of the numbers used in charm pricing — for instance, fives and sevens are frequently used as well. Charm pricing is effective for products and services for which people want the best possible deal.

Marketers refer to prices containing the number nine or other odd numbers as precision prices. Walk into any big-box store and you’ll find products priced at $9.97 or $14.99. Every person walking into Walmart, for example, is there primarily to save money. The lower the price appears, the less “pain in paying” customers experience.

What types of customers like charm pricing?

Whether charm pricing will work depends on the type of customers you target and their motivations.

Bargain-driven buyers

Customers who are looking for the best deal on a product or service are bargain-driven buyers. A person might focus on bargain hunting for certain essentials, such as groceries and household goods. This is the prime target for charm pricing because buyers are looking for the lowest-priced version of what they need. It makes them feel good to get things at the best price.

As two researchers explain in an article in The Observer, an online magazine produced by the Association for Psychological Science, people create mental measuring sticks that run in increments away from any opening bid. They walk into a big-box store thinking that a bag of dog food should cost around $20, so if it’s $19.95, they escape the “pain of payment.” They may even get a slight jolt of glee at besting Walmart. The $19.95 price feels like a discount and a win.

This discount thinking applies to major purchases as well. Consider the housing market. The same researchers analyzed five years of real estate sales in Alachua County, Florida, and found that the more precisely a seller priced a home (for example, $497,500), the quicker it sold. Additionally, initial offers for these charm-priced homes were higher than for homes with even prices like $500,000. Home buyers who encounter a charm price assume the price has already been reduced and the owners are motivated to sell. This perception gives buyers a psychological advantage, and makes them believe they have more power.

Value-driven buyers

Charm pricing works effectively on buyers seeking the best deal, but that’s not every customer’s primary motivation. For value-driven buyers, charm pricing can actually backfire. In a seller’s market, homebuyers could be looking to purchase anything in the neighborhood they desire. In that sense, they will be value buyers.

Value buyers have goals other than finding the lowest price or saving the most money. They desire a product that delivers the most for their status or life goals. Those looking for a home may value the quality of local schools just as much as the price. Particularly if operating in a seller’s market, these buyers will already know the prices of other available homes. To get the home and the premium school, they will be more flexible about the price. Making the smartest deal or getting a discount is not as important for such buyers.

Value buyers are particularly prevalent in the luxury clothing market. For example, high-end brands like Ralph Lauren and Calvin Klein typically use rounded prices. A dress shirt from these retailers might cost $165, while a tie might be priced at $85. The value of these items extends beyond their practical function — they signal status, power and achievement. These stores may feature precision prices, but typically only in their sale sections, which are often less prominently displayed.

In contrast, if you browse the websites of Kohl’s or JCPenney, you will find numerous items priced at $19.99 or $29.99 on the homepage. These consumers typically focus on price because they prioritize other financial expenses, such as housing costs and groceries.

Knowing whether your clients are bargain-driven or value-driven is crucial when you’re determining your pricing strategy. Bargain versus value buyers can be a matter of income level, but another dimension buyers should consider is whether their products speak more to emotions or reason.

Emotional buyers

For buyers who are motivated by emotions such as anticipation or excitement, research shows that rounded numbers actually create less of an obstacle to purchase. A study published in the Journal of Consumer Research found that this is because rounded numbers are easier to process. Rounded prices support the forward momentum the feelings incite. [Read related article: Your Best Asset: The Power of Customer Loyalty and its Significance]

The study authors illustrated this with camera buyers. A buyer who’s excited about an upcoming vacation is more willing to spend a rounded number like $350. Someone who needs to buy a camera to document items for a garage sale, however, is more likely to go for the $297 price. This second buyer operates in a more rational, analytical mode and focuses more on the price than the added value or enjoyment the camera will provide.

Rational buyers

Rational buyers apply logic to their purchasing decisions and will carefully evaluate the best price for their purchase. For example, a rational buyer might see a brand of toothpaste on sale for $4.99, which is less than the $5.25 price of their usual brand of toothpaste. The rational buyer sees the deal that they are getting for a product they already intend to buy, even though it isn’t the same brand. It makes sense to pull the trigger and buy it now.

The sale makes the obstacle to purchase lower and motivates the consumer to buy now while they can get the most for their money.

Does charm pricing apply online?

Charm pricing creates a perception of value for buyers, regardless of whether an actual discount exists. This is why many online retailers use charm pricing; the psychology is the same online as it is in a brick-and-mortar store. Customers who are looking for bargains and taking the time to rationalize the sale will be more highly motivated when buying something that ends in a nine, seven or five.

Take a look at Amazon’s pricing strategy. Its business model is built on offering competitive prices for products, which means Amazon frequently adjusts prices based on market conditions, competitor pricing and demand — a practice known as dynamic pricing. If you examine Amazon’s product listings, you’ll notice they consistently employ charm pricing, with many items ending in .99, .97 or .95. 

The effectiveness of charm pricing has been confirmed by research. A Capital One Shopping article, for example, showed that sales increased about 24 percent when using this methodology. It is important for online businesses to understand their target audience and product positioning when deciding to implement charm pricing strategies for their online business.

Erik Wahl contributed to the reporting and writing in this article.