Charm Pricing - one of the origin stories of charm pricing involves an aggressive newspaper publisher looking to increase sales.

Charm Pricing

Charming pricing, the practice or ending prices with the number nine, is one of the most common pricing tactics.

We probably see more prices that end in nine than any other number. This practice is known as charm pricing and it has a long history. It is almost universally accepted that charm pricing implies a discount and motivates spending, with many studies suggesting that charm prices typically increase sales by 24%.

 

 

History

There are different stories about the origin of charm pricing. In one an enterprising newspaper published persuaded local merchants to end their prices in nines so that his customers would always have a penny to spend on his newspaper. Another story tells that a merchant, concerned about his employees not ringing in sales, started ending prices in nine so that they would have to ring the sale in so they could open the drawer and make change.

Either story seems equally credible, but for our purposes the origin doesn't matter. All that matters is that anyone that is reading this has grown up in a world where charm pricing dominates.

 

 

Why It Works

Here too there are conflicting theories about why charm pricing is so effective at convincing buyers that they are getting a discount.

One of these is called the left digit effect, and the idea is that the leftmost digit is both the most important number in the price and the one that we, at least in the left-to-right reading world, see first. The result? We place too much importance on that left-most digit. There might only be an almost insignificant one cent difference between $199.99 and $200.00, but the left digit effect means that we place much more importance on the very obvious fact that 1 is much less than 2.

 

What remains largely unexplained by our work is ‘‘Why 9?’’ The data and explanations are silent on how customers form beliefs that $9 endings convey favorable information that increases demand for an item.

Effects of $9 Price Endings on Retail Sales:
Evidence from Field Experiments
Author(s): Eric T. Anderson, University of Chicago, Graduate School of Business
Duncan I. Simester, Sloan School of Management, MIT,
Source: Quantitative Marketing and Economics, 1, 93–110, 2003. # 2003
Copyright: Kluwer Academic Publishers

 

Again understanding how charm pricing works is less important than accepting that it does work and taking advantage of the practice – something too few florists do.

 

 

Effectiveness

Many consumers find charm pricing to be "ugly" and believe themselves to be immune from the effects. An example often used is the self-service pump at the gas station. Almost everyone tries to round their fillip off to an even number, almost nobody tries to stop pumping at exactly $39.99.

A dislike of charm pricing is however almost always a case of stated vs revealed preference as ample research proves that charm pricing is incredibly effective at motivating buyers. People that dislike charm pricing and consider it a shallow trick are still very likely to be influenced by it.

This lack of understanding often causes small business owners to make an expensive pricing mistake. Because they themselves don't "like" charm pricing, and may consider it to be ineffective, they try and rise above it and use rounded pricing in their own stores... completely missing out on the benefits of charm pricing. Anyone who sells a product needs to be more focussed on research and what works and less focussed on what they think they like.

Under the leadership of Ron Johnson retailer JC Penney tried to move away from charm pricing, mocking it very effectively with this television ad:

Ultimately the larger pricing changes instituted by Johnson (of which a move to rounded pricing was a part) would fail spectacularly. Charm pricing works, and retailers ignore its power at their own peril.

 

 

Research

One of the most famous experiments on the subject of charm pricing involved a mail order catalog. Three different versions of the catalog were printed, with each of the three versions including the exact same shirt at three different prices. Since the shirt was the same this allowed researchers to isolate how the price affected purchasing. 

 

Effects of charm pricing on sales – results from a famous experiment.

Not surprisingly the shirt sold better at $39 (21 units) than $44 (17 units) perfectly illustrating price elasticity of  demand, which says that as prices go down demand goes up. We expect the same shirt to be more popular at a lower price, and this experiment proved that it was indeed more popular at $39 than at $44.

This is good information, but not necessarily good news for retailers as it suggests prices should always be rounded down.

It could also be assumed that the same shirt would sell better at $34 than at $39...

But that is not what happens. The same shirt is more popular at $39 (21 units) than at $34 (16 units). Charm pricing is so powerful that it can get people to pay more.

The same experiment found consistent results across several price ranges. It was most pronounced when an item priced at $79 sold 24 units, versus 12 units at $84 and 15 units at $74.

 

 

Effect on Perceived Quality

Charm pricing is very effective at suggesting a relatively low price and/or discounts, but what does it say about quality?

 

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.

Image Communicated by the Use of 99 Endings in Advertised Prices
Author(s): Robert M. Schindler & Thomas M. Kibarian
Source: Journal of Advertising, Vol. 30, Issue. 4 (2001), pp. 95-99

 

This is the downside of charm pricing – it can have a negative effect on perceived quality. This is why many high-end retailers user rounded prices – they are more concerned about projecting an image of quality than value.

Here is an example of just such a retailer:

 

Rounded pricing, a less common alternative to charm pricing used to suggest higher quality.

 

And here is another price tag from a different retailer, one that doesn't charge quite as much as Tiffany but is still focussed on quality.

 

A premium retailer using rounded pricing to suggest quality on non-sale items.

 

Please notice that a very interesting thing happens when these upscale retailers have a sale...

 

sporting_life_price_tag__clearance.jpg

 

Suddenly they love charm pricing!

Once you have a sale, especially a 50% off sale, you are now selling savings not quality, and even these retailers are quick to take advantage of the power of charm pricing.

 

Recent Research

So we know two things about charm pricing – it implies savings and increases sales, and it can have a negative effect on perceive quality. To some extent those things contradict each other, but recent research helps make sense of it...

 

…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.

This Number Just Feels Right:
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

 

When the purchase is based on feelings consumers gravitate towards round numbers. When making a rational decision non-rounded prices make more sense.

In retail floral, florists deal with both. The office manager purchasing five arrangements during admin week, the event planner looking for 50 centrepieces… these are very different from the lovestruck twenty-something buying flowers for the girl of his dreams, or the bride choosing centrepieces for the greatest day of her life.

 

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.

 

It turns out it's not just about the product or the relative price or a focus on sales vs perceived quality... it's about the buyer and the way they approach the purchasing decision.

 

Second, our results show that not only do rounded versus non rounded prices affect the anticipated satisfaction and purchase intention, but it could also affect the perceived product performance. For example, participants perceived the quality of the pictures taken from a camera they were purportedly buying for a vacation to be better when the camera was priced at a rounded number than a nonrounded number. In contrast, they reported the quality of the pictures taken from the camera they were purportedly buying for a class to be better when the camera was priced at a nonrounded as compared to a rounded price.

 

It turns out price also affects the way people experience the product once they buy it. The emotional buyer will enjoy the product more if they were charged a rounded price. The logical buyer will better enjoy a product if they paid a charm price.

It sounds crazy but anyone who has ever splurged on something can relate to this. Say you splurge on a bottle of wine – with every sip you’re convincing yourself that it was worth every penny. Same thing if you decide to cut corners and buy a cheaper alternative to what you really wanted – you convince yourself that what you bought was really just as good, and a much better value.

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Related Material

At What Price Does Charm Pricing Become Irrelevant?

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Rounded vs Non-Rounded "Charm" Prices: New Research

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