Rounded vs Non-Rounded "Charm" Prices: New Research
Prices that end in the number nine are referred to as “charm” prices and we see them every day.
While there might not be any consensus on how the practice got started (although there are some very colorful stories) there is ample research proving that charm prices effectively value and motivate buyers.
This is generally attributed to something called the "left digit effect" which proposes that people place disproportionate importance on the leftmost digit shown in a price. This means that $49.99 seems closer to $40 than $50.
In a well known study famous three different versions of the same mail order catalog were printed and mailed, with each version showing the identical shirt at a different price: $34, $39 and $44. Which would sell better?
Not surprisingly the shirt sold better at $39 than $44. This is expected, and it illustrates the law of demand quite nicely: as price goes down demand goes up.
This is where it gets interesting. The shirt also so sold better at $39 than $34, demonstrating that charm prices have an almost magical power and are even capable of undermining our basic expectations on how price influences demand.
So - should all prices end in the number nine? Research from 2001 showed that, when confronted with non-rounded charm prices, customers are more likely to perceive the price as being relatively low and representing a discount.
Charm prices also say something about quality, and this can present a problem. That same research demonstrated that prices ending in nine had a negative effect on perceived quality.
Image Communicated by the Use of 99 Endings in Advertised Prices
The 99 ending increases the likelihood that viewers judge an advertised price as relatively low and as representing a discount. However, in addition to these price-image effects, the 99 ending has negative effects on quality image in the ads sponsored by higher quality retailers. These results suggest that the choice of rightmost digits is an important executional variable in price advertising.
Author(s): Robert M. Schindler & Thomas M. Kibarian
Source: Journal of Advertising, Vol. 30, Issue. 4 (2001), pp. 95-99
The best upscale retailers understand and take advantage of this. Look at the price tags from a high-end store you will notice that they are almost inevitably rounded. These stores are not in the business of selling value – they sell quality and luxury. Rounded numbers convey these attributes and are used almost exclusively.
At least until items are marked down for sale. The high-end shirt that normally sells for $400 is marked down 50%, but the price rage doesn’t show $200, it shows $199.99. When you put an item on sale you are now selling value and even high-end retailers are anxious to fully exploit the power of charm pricing.
Some new research, published just last month, does a great job of looking at when the different practices (rounded number pricing vs nonrounded “charm” pricing) is most effective.
This Number Just Feels Right:
…because rounded numbers are more fluently processed, rounded prices (e.g., $200.00) encourage reliance on feelings. In contrast, because nonrounded numbers are disfluently processed, nonrounded prices (e.g., $198.76) encourage reliance on cognition.
First, our results show that when the purchase decision is driven by feelings, marketers are likely to benefit from pricing the products at rounded prices.
In contrast, when the purchase decision is driven by cognition, marketers are likely to benefit from pricing the products at nonrounded prices.
The Impact of Roundedness of Price Numbers on Product Evaluations
Author(s): Monica Wadhwa and Kuangjie Zhang
Source: Journal of Consumer Research, Vol. 41, No. 5 (February 2015), pp. 1172-1185
Published by: The University of Chicago Press
Consider the implications for a small business owner (like 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, and the research suggests that the prices presented in their quote should use rounded numbers.
If on the other hand the vendor were dealing with an event planner and quoting on a business event or fundraising gala things would be very different. In this case the purchasing decision would likely be more intellectual in nature, and the research suggests they would be better off using non-rounded charm prices.