Party Like It's 19.99: The Psychology of Pricing

by Julie Rains on 21 April 2011 12 comments
Photo: Kevin Walter

Why does everything on sale — well, nearly everything for sale and not simply "on sale" — have a .99 price ending?

From what I can tell, .99 is a signal to consumers that either means "Wow, this widget is a great bargain," or "Whoa, you're manipulating me into thinking that this widget is a great bargain." (See also: What Clearance Price Is Your Achilles Heel?)

I did some poking around to see why prices tend to end in 9s and .99s — and what retailers are trying to communicate to consumers when prices end with other numbers as well.

The Rationale for $19.99 and Similar Endings in 9

The use of "9" sends a signal that an item is a great value and possibly the lowest price available. Sale prices end in 9s and .99 so often that shoppers associate these numbers with a markdown even when the starting price contains a 9.

Consumers tend to place more emphasis on left digits than right ones (also known as the left-digit effect). And they "ignore the least significant digits rather than do the proper rounding." I like to think that I round $19.99 up to $20.00 rather than mentally truncating the last two digits to $19.00, but research suggests that most people retain the first two numbers only, possibly because people have gotten used to .99 as a price ending.

The .99 ending seems to be a default pricing strategy. Retailers intentionally price items as $X.99 to send the message that an item is a great buy and has been recently marked down. Or they simply don't put much thought into pricing and end all prices with .99 to match pricing schemes of most competitors.

In situations where items can be sorted by price, such as e-commerce and real estate databases, using $.99 or $399,999, for example, allows the seller to keep an item in certain price bands or break points unavailable to those charging $1.00 or $400,000 for similar items. (See "The Psychology of Pricing" relating to real estate from The New York Times.)

ARTICLE CONTINUES BELOW

The Meaning of 0 and .00

Sellers use 0s and .00 to convey that products are of premium quality.

From the buyer's perspective, these prices seem arbitrary, not reflecting cost but rather the seller's preference. Actually, that is the message intended by those selling luxury and high-end brands. A designer handbag at Neiman Marcus is priced at $625.00, not $624.99; similarly, Godiva sells its chocolate truffle assortment for $36.00, not $35.99. The seller can, theoretically, name a price rather than be subject to clamor by consumers for lower pricing.

Some mid-range retailers also use .00 for standard pricing (J.C. Penney and L.L. Bean for example) and .99 for sale pricing. Still others use .00 for higher-end product lines but retain fractional pricing (e.g., .99 or .97) for value product lines. (See Psychology of Pricing from Happen.)

The exceptions to this premium-quality rule are the many "dollar" stores

The Differentiating Power of 4 and 7

Unusual prices ending in 4s or 7s tend to be seen as precisely priced items. The signal is that the seller has scrutinized its costs and determined the optimal price, fair to both the seller and buyer.

Certain companies may also use non-standard pricing (that is, avoiding the use of 9s and 0s) just to be different. Lowe's and The Home Depot sell certain items for $1.74 or $294 rather than $1.99 or $299.

Pricing that ends in anything besides a "9" (not just 4 and 7) typically stands out to the buyer. Some sellers adopt certain endings as a signature pricing signal. Walmart, for example, ends many of its prices in 8, positioning itself as just a tad less expensive than retailers that price items ending in 9.

Tips for Consumers

Recognize that numbers speak to your subconscious and have meaning based on previous shopping experiences and retailers' wiles. Compare prices to make sure you are getting a bargain. Don't assume that anything priced at $19.99 is a great deal.

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Guest's picture

And don't forget that every gas station in America takes it one step further and adds 9/10 of a cent to the price of every gallon. But it works, because nobody ever answers the question 'How much did you pay for gas' with 'Three ninety-nine and nine-tenths per gallon', do they?

Julie Rains's picture

Yeah, they squeeze the last -nth out of you. A week or so ago, my son was asking me what those numbers after the regular decimal points were on the signs at the gasoline station, and I did my best to explain. We've become accustomed to this pricing scheme even if it doesn't really make sense -- except to charge us more.

Guest's picture
Guest

I hate that type of pricing scheme!
I want to see what they tell me when I ask for 38 dollars, 42 cents, and 3 tenths of a cent's worth of gas! Hand them two 20s and wait for my change.
It's ridiculous!

Guest's picture
MaloMonster

Another personal finance "Thank you" to my mother! When I'd go shopping with her, she would encourage me to round all the prices up. It was a game for me as a kid (since I was such a smart big girl who knew her numbers...), but I believe it's paid off for me as an adult. I'm more critical of prices now, since $1.74 and $1.99 are the same number to me ($2.00), and it helps me to recognize when something IS a bargain!

Julie Rains's picture

I try to mentally round up but I am not sure if my brain recognizes the deception or not.

I think it's funny that so many retailers still charge .99 -- there are a few things that are such bargains I'd gladly pay a full dollar for them!

Guest's picture
Guest

Many of home depots prices reflect the products department or category. All items in electrical would have one set of cent-prices, and items in lumber would have another

Julie Rains's picture

Thanks for your comment -- I did read in one article that in some cases, for administrative reasons, retailers used certain unique price endings but I hadn't yet seen the pattern.

Guest's picture

I've always rounded things up... if it's 1.99, to me it's $2 bucks. I've never understood people that go "hey that's only a dollar"... like confused the hell out of me they'd think that way. But when I worked retail (at Home Depot btw) customers did it all the time... I'd say $10 for a 9.97 item and they'd turn around to their wife/husband and say "hey it's only $9bucks"... like EVERY time lol... I just don't understand it.. but obviously I'm the minority in thinking there as retailers still use the tried and true methods.
Nice post - thanks.

Julie Rains's picture

That's interesting -- I appreciate the perspective from the retail sales floor.

I try to round like I mentioned earlier but I guess there are many people who don't. I did wonder if some folks didn't round up simply because comparisons are typically made from x.99 to x.99, so that they were looking simply at the differential between two similarly priced items. Your observations though tell me that people focus on the left digits.

Guest's picture

I've always rounded things up... if it's 1.99, to me it's $2 bucks. I've never understood people that go "hey that's only a dollar"... like confused the hell out of me they'd think that way. But when I worked retail (at Home Depot btw) customers did it all the time... I'd say $10 for a 9.97 item and they'd turn around to their wife/husband and say "hey it's only $9bucks"... like EVERY time lol... I just don't understand it.. but obviously I'm the minority in thinking there as retailers still use the tried and true methods.
Nice post - thanks.

Guest's picture
Matt

I know, it's shocking that it works. I spoke to my boss about it once, and said, why don't you just put it down at £x,00.00, why all the .99s all the time? And he told me that people just don't round up. They genuinely think it's that much cheaper. And the maddest thing is it STILL works even now.

BTW Julie, I didn't know about the 4's and 7's, I always wondered why they didn't make those 9's too, so thanks

Guest's picture

You see this a lot on home shopping channels, in kind of a strange way. For example, let's say they are selling a set of cookware for $119.99. The host will go out of his or her way to stress "for LESS than $120 you get this marvelous collection." It's a penny off the $120 - and when you add in tax and shipping and handling the actual cost is about $150. But that initial figure is so compelling...