I remember as a child being curious about how shops priced items. Why set a price at £9.99 instead of £10? Would it not be easier, I thought, for everyone to work with round numbers?
Of course, as I quickly learnt, the reason retailers adopt this strategy is that products and services can seem cheaper when they are priced just below a whole number.
This way of thinking is widely adopted – whether it is a chilli squid starter from Wagamama’s (£6.95) or a BMW i4 M50 (advertised OTR from £63,905).
But, it turns out, this strategy can have draw-backs for businesses.
According to researchers, making an item look cheaper than it really is means consumers might be less likely to upgrade to a more expensive version.
“Going from $19.99 to $25 may seem like it will cost more than going from $20 to $26, even though it is actually less,” explains Junha Kim, lead author of the study at Ohio State University.
“Crossing that round number threshold makes a big difference to consumers.”
Kim undertook the study with colleagues Selin Malkoc and Joseph Goodman.
“We found this effect works in experiential categories, as well as products. It replicated very consistently,” said Goodman, who says it applies to both small and large purchases.
As part of the study the researchers created a new coffee stand on the Ohio State campus and experimented with different pricing strategies.
Half the customers were offered a small coffee for the “just below” price of 95 cents with the option to upgrade to a large one for $1.20.
The other half were offered a small cup for $1 and a larger one for $1.25 – a higher overall price than the first group, but without the need to cross that $1 whole number barrier.
And what happened?
“We sold more of the large coffee when it was objectively more expensive than it was earlier ($1.25 vs. $1.20),” says Malkoc.
“It was amazing how increasing prices – from a $1.20 to $1.25 – actually increased sales. It is a testament to how strong the effect was.”