Although my friends have shared the intimacies of their lives, my life is far less interesting, meaning I do not have much to share. However, what I would like to share with you are the answers to odd questions. It could be that you want to know where a saying came from? Perhaps you want to know whether or not a piece of information you heard is true? Or maybe you just want to know if something could actually happen? Regardless of your question, I intend to partake in my favorite activity (reading empirical research) so that I may answer your question!
If you have a random question for me to research and answer please submit it as a comment, or send it to ELKronos@aol.com / Facebook.com/ELKronos. Submit your name and location if you wish to opine.
THE QUESTION:
The question of the day (week, month, year, whenever I feel like updating) was submitted by Justin LeBreton of Milford Maine. Justin writes....
"Would a customer really feel they were getting a better bargain if the price of an item was listed as $4.99 as opposed to $5.00?"What Justin is referring to is the notion of "odd pricing". For those of you who are unaware, "odd prices" are said to lead to increased sales. These odd prices have also been referred to as "magic prices", "charm prices", "psychological prices", "irrational prices", and "intuitive prices" (Boyd & Massy, 1972; Dalrymple & Thompson, 1969; Gabor, 1977; Kreul, 1982; Monroe, 1990; Rogers, 1990; Sturdivant, 1970). In the retailer realm, it is commonly accepted that if a price is reduced by one penny, the item is more likely to be purchased.
THE ORIGINS:
There are some discrepancies regarding where these prices originated. One source (Schindler & Winman, 1989) theorized that odd pricing originated after pricing became fixed in the United States. Before the Civil War ended, customers used to haggle with retailers over the price of an item (Georgoff, 1971). However, shortly after the war ended, prices were fixed. Retailers at the time wanted to remain competitive, and given that the value of a penny was worth $1,009,374,100 in the 1860*, many prices were listed as ending with .99.
Another theory regarding odd prices is derived from an explanation of anti-theft (Harper, 1966; Hogl, 1988, Sturdivant, 1970; Twedt, 1965). Before the introduction of odd pricing, cashiers used to pocket money from the register. However, with the introduction of ending items with .99 cents, cashiers were forced to open the register after nearly every transaction, which made it more difficult for them to pocket cash.
Finally, another theory of the odd pricing is said to have evolved from a price war in at a Texaco in Waco, Texas. Retailers were so anxious to get the upper hand, they started slashing prices by the cents to offer customers a better deal. However, regardless of the origins, odd pricing is extremely common in modern retailing (Schindler & Wiman, 1989), and it is here to stay.
WHY MIGHT THE EFFECT OCCUR:
The next time you go to a store, look around, and you will likely seem items listed as $19.99 or $49.95, as opposed to $20 and $50. According to Wilkie (1990) there are several reasons why this phenomenon may occur.
- Rounding Illusion: It has been theorized that customers approximate prices they pay by a lower integer/decimal rather than a higher price. Thus, if a price is 19.99, people will believe the price is $19 as opposed to $20 (Boyd & Massey, 1972). As a result, consumers may be more likely to "anchor" (Tversky, & Kahneman, 1974), on the first numbers (e.g. "19") as opposed to the full price ("19.99").
- Getting Change: People like to get change, and it is theorized that by reducing the price of an item by a few cents, customers may feel that they are getting more back for their purchase.
- Attractive Digits: Some have claimed that people feel that a number like 9,999 is "nice", which serves as an advertising mechanism, as it will attract the attention of more customers.
- Image of Discount: Stores try to create the illusions that they have slashed prices, and by cutting the cost of an item (even by one cent) they can claim that the item is on sale.
- Memory Constraint: It has also been theorized that consumers have a limited capacity for storing accessible information. This means that reducing the price of an item by even one cent will be likely to produce an increased expectancy in sales (Brenner & Brenner, 1982).
DOES THE EFFECT ACTUALLY OCCUR:
According to Georgoff (1971), although a price illusion may occur for some products, the net effect of sales is weak at best. Lambert (1975) goes on to suggest that reducing based on odd prices is only likely to produce increased sales under some circumstances. Additionally, Dodds and Monroe (1985) found no evidence for a difference in perceived quality, value, or willingness to buy products regardless if the prices were reduces by one cent. Furthermore, Gabor and Granger (1964) found some support, noting that consumers had a higher intention to purchase items when they were reduced by one cent.
This is a tough question to answer, because economic research would dictate that purchasing is related to price, such that as a price decrease, it stands to reason that more people would buy it. Thus, the real question is not whether dropping the price of an item by one cent will increase sales (because lowering the price by any amount should), but rather whether or not decreasing the price of an item by one cent increases sales beyond that which would be predicted by the price index.
GENERAL DISCUSSION:
Economic theory purposes that quantity demanded increases when price is reduced. This means that as a price is decreased, people are willing to be more likely to buy it. One study conducted by Gendall, Holdershaw, & Garland (1996) found that individually, the differences between expected and actual purchase probabilities were not significant; however, the overall effect is unlikely to occurred by chance. This suggests that some items may not produce an effect, but collectively, marking items down by one cent may increase sales.
While the cause of odd pricing has yet to be determined from the studies mentioned, it has been noted that pricing an item to end in 99 cents creates a marked odd pricing effect as opposed to ending the item with 95 cents. This may tentatively support the notion that prices ending in ".99" are more likable than those which end at a more "even" integer.
Collectively, the notion of odd pricing is still debatable. However, it does appear that odd pricing is likely to produce an increase in sales among specific items, for a specific portion of the population. The next time you are out, and see a price listed at $19.99, ask yourself, do you round down to $19, or up to $20 when describing the price? Pending how you answer this question may reflect whether or not this tactic is effective toward your purchasing habits.
Finally, as a side note, it should be mentioned that the first few numbers may be most likely to stick with an individual when considering the purchase price. However, any priming effect this focus has elicited on an individual is unlikely to result in persuading individuals to buy the item who originally had not intent to purchase said item. According to North, Hargreabes, & McKendrick (1999), subliminal priming effects do not persuade individuals to do what they had not considered, but rather serve as a means to push them in a specific direction. Thus, if an individual focuses on $19 as opposed to $20, and decides to buy an item, the intent to buy said item must have originally been present.
CITATIONS:
Boyd, H.W. and Massy, W.F. (1972), Marketing Management, Harcourt Brace Jovanovich, Orlando, FL.
Brenner, G.A. and Brenner, R. (1982), “Memory and markets, or why are you paying $2.99 for a widget?”, Journal of Business, Vol. 55 No. 1, pp. 147-58.
Dalrymple, D.J. and Thompson, D.L. (1969), Retailing - An Economic View, The Free Press, New York, NY.
Dodds, W.B. and Monroe, K.B. (1985), “The effect of brand and price information on subjective product evaluations”, Advances in Consumer Research, Vol. 12, pp. 85-90.
Gabor, A. (1977), Pricing: Principles and Practices, Heinemann Educational Books Ltd, London.
Gabor, A. and Granger, C.W.J. (1964), “Price sensitivity of the consumer”, Journal of Advertising Research, Vol. 4, December, pp. 40-4.
Gendall, P., Holdershaw, J., & Garland, R. (1996). The effect of odd pricing on demand. European Journal of Marketing, 31, 799-813.
Georgoff, D.M. (1971), Odd-Even Retail Price Endings, Michigan State University Press, Ann Arbor, MI.
Harper, D.V. (1966), Price Policy and Procedure, Harcourt, Brace and World, New York, NY.
Högl, S. (1988), “The effects of simulated price changes on consumers in a retail environment - price thresholds and price policy”, Esomar Congress Proceedings, Lisbon.
Kreul, L.M. (1982), “Magic numbers: psychological aspects of menu pricing”, Cornell Hotel and Restaurant Administration Quarterly, Vol. 23 No. 1, pp. 70-5.
Lambert, Z.L. (1975), “Perceived prices as related to odd and even price endings”, Journal of Retailing, Vol. 51, Fall, pp. 13-22, 78.
Monroe, K.B. (1990), Pricing: Making Profitable Decisions, 2nd ed., McGraw-Hill, New York, NY.
North, A.C., Hargreabes, D.J., & McKendrick, J., (1999). The influence of in-store music on wine selections. Journal of Applied Psychology, 84, 271-276.
Rogers, L. (1990), Pricing for Profit, Basil Blackwell, Cambridge, MA.
Schindler, R.M. and Wiman, A.R. (1989), “Effects of odd pricing on price recall”, Journal of Business Research, Vol. 19, pp. 165-77.
Sturdivant, F.D. (Ed.) (1970), Managerial Analysis in Marketing, Scott, Foresman and Company, Glenview, IL.
Tversky, A. & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185, 1124-1130.
Twedt, D.W. (1965), “Does the ‘9 fixation’ in retail pricing really promote sales?”, Journal of Marketing, Vol. 29 No. 4, pp. 54-5.
Wilkie, W., (1990), Consumer Behavior, New York: John Wiley & Sons, 2nd edition.
*NOTE: The value of a penny in the 1860s may not actually have been $1,009,374,100.
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