Mathematics with Business Applications
Business Math in Action
The Power of 9 and Other Pricing Formulas
Remember the first time you realized that $19.99 was essentially the same amount as $20? Your next thought might have been, Hey! How dumb do they think I am? The folks setting prices dont think theyre fooling you about that one cent. Theyre just basing their price on proven consumer patterns. After cost, profit margin, value to customer, and other elements are factored in, retailers must decide on a final price that shoppers will see. Thats where psychological pricing comes in. And when it comes to how consumers perceive price, the number 9 is magic.
Odd-number pricing-for example, $9.99 instead of $10-originated in the late 1800s. Although a penny bought a lot more in those days, merchants must have been astonished at the results. Clearly, shoppers werent responding in a rational way to the one-cent difference. In the years that followed, researchers have studied which prices result in the strongest sales, and why. Among their discoveries:
- When merchants changed the price of an item from $10 to $9.99, sales went up by 5-15 percent. But if they changed the price from $9.99 to $9.98, there was no increase in sales.
- Consumers are more likely to ignore the cents rather than round them up, especially if the cents are printed in smaller type.
- Fractional prices-like $4.95 or $3.49-are assumed by many shoppers to be the lowest possible price.
- One test found that sales of margarine increased 65 percent when the price was lowered from 89 cents to 71 cents. But when the price went down to 69 cents, sales increased 222 percent.
- In a study of the perceived value of numbers between 1 and 100, 77 had the lowest perceived value relative to its actual value.
- Another study tested three identical mail-order catalogues. The only difference among them was that their prices ended in 00, 88, or 99. The catalogue with a price ending in 99 produced 8 percent more sales than the one ending in 00. The catalogue ending in 88 had about the same response as that ending in 00.
- Certain prices, such as 59 cents, 99 cents, and $1.29, generate higher sales than other prices in between those points.
The power of 9 and other odd-number pricing has proved so effective over the past century that today round-number pricing is rare. Youre most likely to find it in high-end stores or restaurants, where the merchants want to stress the snob factor or the high quality of their goods. For everything else, from chewing gum to houses, odd-number pricing rules.