Precise Pricing Pays Off

In my time as a catalog marketer, I almost always priced products just below the next dollar increment – a cheap item might be $9.97 rather than $10, while a more expensive item may have been $499, or even $499.99, instead of $500. My strategy was based on a couple of assumptions. First, I thought that there was probably something desirable about offering, say, a “nine-dollar-and-change” price vs. a “ten-dollar” price, i.e., even though the difference was only a few pennies, some customers would perceive the $9.97 price to offer more substantial savings. Second, I observed that big marketers like Sears, who could afford to test any number of pricing options, tended to stick with the “just below the next increment” approach. As it turns out, I was right, but for the wrong reason. New research points us toward the reasons why consumers respond better to a $499 price vs. a $500 price, and it has more to do with the apparent precision of the odd number:

University of Florida marketing professors Chris Janiszewski and Dan Uy suspected that something fundamental might be going on, that some characteristic of the opening bid itself might influence the way the brain thinks about value and shapes bidding behavior. In particular, they wanted to see if the degree of precision of the opening bid might be important to how the brain acts at an auction. Or, to put it in more familiar terms: Are we really fooled when storekeepers price something at $19.95 instead of a round 20 bucks? …

There were three scenarios involving different retail prices: one group of buyers was given a price of $5,000, another was given a price of $4,988, and the third was told $5,012. When all the buyers were asked to estimate the wholesale price, those with the $5,000 price tag in their head guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor. What is more, those who started with the round number as their mental anchor were much more likely to guess a wholesale price that was also in round numbers. The scientists ran this experiment again and again with different scenarios and always got the same result.

Why would this happen? As Janiszewski and Uy explain in the February issue of Psychological Science, people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50. [From Scientific American Mind - Why Things Cost $19.95: What are the psychological "rules" of bartering? by Wray Herbert]

So, it seems, I might have done as well selling a $499 product at $502.50 – they key thing is to avoid the dreaded round number of $500, which implies a lack of precision in pricing.

I still think there might be a slight bias toward the slightly lower number than the slightly higher number when it comes to buyer decision-making, but the researchers didn’t explore that directly.

This work should give marketers the ammunition they need to fend off requests for “simplified” pricing, though. In pre-neuromarketing days, I recall frequent admonitions that, “Nobody is fooled by a price that’s a penny cheaper – let’s keep it simple and just charge an even number.” People may not be “fooled” by the more precise price, but they may impute a higher value to the product itself.

Related: Get More for Your House with an Odd Price

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— who has written 956 posts on Neuromarketing.

Roger Dooley writes and speaks about marketing, and in particular the use of neuroscience and behavioral research to make advertising, marketing, and products better. He is the primary author at Neuromarketing, and founder of Dooley Direct LLC, a marketing consultancy. Follow him on Twitter.

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4 responses to "Precise Pricing Pays Off" — Your Turn

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Lee Freeman 2. May 2008 at 8:27 pm

In real estate, a price of $201,000 vs. $199,999 tends to be the “better” price. The reason: most search engines cluster homes into groupings (e.g, $150,000 – $199,000 … $200,000 – $249,000, etc.) So, a house at $199,000 would be at the top of a group, and would be compared to all others in the same cohort, whereas a home at $201,000 would be at the bottom of a cohort and would be perceived as being of potentially higher value vis-a-vis the others.

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Chuck McKay 23. May 2008 at 1:24 am

Claude Hopkins noted in Scientific Advertising (1923) that specific claims are more credible. He said that people assume you’ve run tests and can prove specific numbers.

In a shaving cream ad he wrote, “Multiplies itself 47 times in lather.” I believed him.

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Mike Lewitz 23. July 2010 at 4:39 am

As an Internet marketer who’s done extensive testing, the 7′s seem to sell more than the 9′s …for whatever reason. My belief was that maybe people were so conditioned to seeing the 9′s that seeing 7′s grabbed more attention -and there may be some truth to this as well. In light of your article here, it could also be that the 7′s may appear to be more ‘precise.’

We’ve also discovered that, for whatever reason, odd numbers always do better than even numbers (something that doesn’t appear to be considered), as well as the higher numbers sell more than lower numbers -example: 297 sells much more than 229 and 219 and even 249 in our extensive split-testing.

I would suggest that while the study provides some truly fascinating insight to consumer perception, it is incomplete so far and still needs more testing because the bottom line that anyone really cares about is: Which price is going to generate me the most revenue? That’s how we base our pricing decision.

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Eloise 4. April 2013 at 8:56 am

I prepare wills and trusts and health care documents:estate planning. It’s all personal attorney services at a flat fee. $2499 or $2510 or $3490 or $3515 or the like just feels awkward. After all who is fooling who:my flat fee has to be an estimate and can’t be precise. Any ideas? When I see this type of research it doesn’t usually refer not personal services.

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