Party Like It's 19.99: The Psychology of Pricing
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.)
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.