Have you often wondered why a lot of shopkeepers tend to keep prices ending in 99 cents ? Or why would a shopkeeper rather not price the item for sale at a round figure in dollar than keep it priced at one cent short of a round figure?
It’s nothing but psychological pricing. Psychological pricing or ‘price ending’ as it is more commonly referred to is nothing but a marketing theory based on the assumption that certain numbers in prices have a psychological effect on the consumer or buyer. This theory rests on the principle that the use of price endings drives demand for the product much higher than what it would be with perfectly rounded prices. For example if the price of a product is mentioned at $299.95 instead of $300, the consumer would ‘perceive’ much higher value of the product and chances of purchase increase.
The theory of psychological pricing is based on one or more of the few hypotheses discussed here. One of the hypothesis states that consumers often tend to ignore the lesser significant digits – in this case the cents. Rather than doing proper rounding of the price, the consumer tends to overlook the value of the cents and compares the dollar value to dollar value. This may also be the reason why sometimes the cents are printed in superscript font – to make them appear even smaller and insignificant.
Another hypothesis is that fractional prices tend to make the consumer believe that the products are being sold at the least possible price – that the seller has made every possible deduction to make the price appear as it does – in decimals and fractions.
Another hypothesis points to the correlation between the price and perceived quality of a product. This correlation states that customers may perceive products with a higher price to be of better quality. So in effect this hypothesis implies that some premium products are better priced as round figures rather than fractions – for example a $10 product would be perceived as superior to one priced at $9.99.
Psychological pricing is so common today that some brands are known for using the fraction pricing in setting the price of their products.
That said, the theory of psychological pricing is controversial. Some studies challenge the psychological pricing theory stating that buyers as young as children are well aware of the relative and ‘true’ pricing of the product; and psychological pricing does not do much to influence them. Pricing remains as one of the most important and complex part of the marketing mix, and one needs to research well in order to arrive at the right solution which means that without testing different prices the real effect on demand will remain a theory.
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