Charm Pricing

How to Work the Magic of Charm Pricing

Charm prices have endings that are just under round numbers and are known as psychological prices, just-below prices, or odd prices,

How to Work the Magic of Charm Pricing

By:

Date:

Charm prices have endings that are just under round numbers, for example $4.99 and $2,999.00. Also known as psychological prices, just-below prices, or odd prices, charm prices have been in use for well over a century. There are rumors that retailers introduced them to reduce employee theft — odd prices forced cashiers to open the cash register to make change, thus making harder for them to pocket the bill — but this doesn’t explain why, in an age of rampant credit card use and online consumption, 9-ending prices are still very popular. Happily, researchers have spent 70 years investigating this pricing tactic, and they can give you plenty of reasons to use it.

9-ending prices increase revenues

Some research has found that giving a product a just-below price increases demand for that product, especially if it’s a low-priced, fast-moving consumer good. Combinations of 9-ending and round prices can be used to shift choice toward lower- or higher-priced alternatives. In one study, participants were presented with two similar pens, one of which had a slightly more refined design and a slightly higher price. When the prices for both pens was set at $2.00 and $2.99, 55.8 percent of the participants chose the lower-priced option, but when the prices were set at $1.99 and $3.00, 81.7 percent of the participants chose the lower-priced option.

Other research has found that 9-ending prices don’t actually increase the number of customers who buy a product, but rather the amount of money that each customer spends.

For example, customers of a grocery store in the southwest of France were not significantly more likely to buy cheese when it had a price ending in “99” than when it had a round price, but the overall transaction amount went up when customers bought cheeses with 9-ending prices; the average purchase amount for cheese with round pricing was €5.08, whereas the average purchase amount for cheeses with charm pricing was €6.53. Which leads nicely to the next point.

9-ending prices make it harder for customers to keep track of what they spend

In one study, a team of researchers asked participants to estimate how many items they could buy for $73. When the participants saw items with 9-ending prices, they invariably overspent. For example, when items were priced at $3.99, customers spent, on average, $76.52, but when they saw a $4.00 price tag, they spent $57.96. In other words, dropping the price by one cent led to an increase in average spending of $18.56.

9-ending prices make it harder for customers to notice prices rises

This was recently demonstrated by a team of researchers from Texas A&M University in a series of lab and field studies. In the first experiment, 206 undergraduate students were shown pairs of prices and asked to identify the smaller of the two. Not only were the students more likely to give the wrong answer when both prices ended in a 9, in cases where a round price was being compared with a 9-ending one, the students wrongly identified the 9-ending price as being smaller 4 percent of the time. When the researchers then went out to interview shoppers in various Israeli supermarkets and drugstores, their questioning revealed that just over one in 10 people were less likely to notice a price increase if the new price ended with 9. Also, because shoppers paid more attention to the right- and left-most digits than they did to the middle ones, they were up to 29 percent less likely to notice a price change if the change occurred in the middle digit.

9-ending prices make guilty pleasures feel a little less guilty

Recently, a team of American researchers coined the term “odd-ending price justification effect” (OPJE) to describe the fact that 9-endings make us more likely to choose hedonic products over utilitarian ones. They gave students the choice between two functionally similar laptops, one of which was attractive, the other less so. When the laptops were priced at $600, the students were pretty much evenly split over which to choose. But when the computers were priced at $599, 85 percent chose the attractive one. The thinking is that 9-ending prices convey a discount image which soothes any guilt that a buyer might have over buying something that would feel good as well as be useful.

How do 9-endings work?

A variety of mechanisms have been suggested to explain why we fall under the spell of charm prices, including the intriguing possibility that “9-ending prices attract attention because they are perceived by consumers as eyes looking at them,” according to Bizer and Schindler in a 2005 article in Psychology & Marketing. The more conventional theories tend to fall into two main categories. The first category groups together the underestimation theories, which propose that customers routinely distort their perceptions of just-below prices, mentally transforming them into prices that are lower than their actual value. Basically, we tend to overweight the left-most digits and ”dropnoff ” the right-most ones. Why would we do this? Scientists have come up with a variety of explanations.

The most well-known of these is the left-digit effect. It proposes that because we (in the West) tend to process digits from left to right, we process the first digit slightly ahead of the others and just before our brains calculate the value of the whole number. Now the left digit serves as an anchor for the whole number, which leads us to perceive the whole number as less than its objective quantity. For example, we tend to interpret $39 as “30-dollars-something” rather than “almost-40-dollars”. Even though $39.99 is only slightly below $40.00, the left-most digit pulls our perception of the entire number closer to 30 than 40, and the product feels substantially cheaper. 

We could also be falling prey to a tendency to round numbers up, either because we are intrinsically motivated to preserve a price’s visual representation — 2.90 seems more visually similar to 2.00 than to 3.00 — or because our limited memories make us incapable of fully processing a number from left to right. Or it could simply be that encoding the information into our brains is more effort than it’s worth, so we actively choose to forget about the last digits.

The second class of theories argues that rather than ”dropping off” the right-most digits, customers are actually focusing on them because experience tells them that prices ending in “99” signify something meaningful, namely cost savings. Thus, they passively learn due to repeated exposure to signs and ads pairing 9-ending prices with text saying things like “Low priced,” “On sale,” and “Great value.”

9-ending prices have their limitations

9-ending prices work best when customers are not particularly motivated to think about the price of a product–for example, when they are buying staple items like canned vegetables, toothpaste, or paper towels — or when they are uninformed, either because the product is new or unfamiliar, or because the customer is not familiar with the retailer.

9-ending prices work by increasing the perceived difference in two prices, but this only works if the left-most digit changes to a lower level — like $3.00 to $2.99 — and not if the left-most digit remains unchanged — such as $3.50 to $3.49. Additionally, the closer the two prices being compared, the more likely we are to fall for the left-digit effect. This is due to something called the “distance effect.” Simply put, $3.99 versus $5.00 seems significantly cheaper than $4.00 versus $5.00, but $3.99 versus $10.00 is not perceptibly different from $4.00 versus $10.00.

As with many things in life, context is everything. 9-endings work best when paired with positive, “gains framing” messages rather than negative messages telling the customer what they may lose if they ignore the offer. So, pairing 9-ending prices with a message saying “Call now to get this premium service at the special price of $29.99!” will get you more customers than “Don’t lose your chance to get this premium service at the special price of $29.99!”. 9-endings are also less effective in the presence of (unnecessary) sale cues, like signs that read “SALE $19.99.” They are more likely to work when consumers can evaluate two prices side by side on the same tag — “From $25.00 to $19.99!” — instead of being asked to compare a discounted price to a reference price retrieved from memory.

9-ending prices tend not to fool the more price conscious among us. Nor do they fool people who are good at math. A recent study using eye-tracking technology revealed that people who are less comfortable with numbers primarily look at the left digits of prices, whereas the highly numerate among us tend to focus on the whole price, meaning that they spend more time looking at the right digits so they tend to round 9-ending prices up.

When to use round prices

The most obvious limitation of 9-ending prices is that, thanks to their association with discounted items — an image which is, incidentally, false — they tend to create a perception of low quality. This is why luxury brands like Louis Vuitton and Rolex tend to use round prices. These retailers are not in the business of selling value — they are selling quality, or at least the perception thereof. 

That said, even high-end retailers want to throw the occasional sale without compromising their luxury image. Research suggests that the solution to this dilemma may be compromise pricing. This is the practice of choosing price endings that fall below (but not just below) a round number, like $9.50 or $9.80. These prices tend to boost sales, possibly because they raise less anticipated guilt than round prices — faced with a price like $2,980 a consumer can think to herself, “I shouldn’t feel guilty about buying this bag, I’m not even spending $3000” — while avoiding the cheap and cheerful image associated with odd prices. Compromise prices even seem to indicate higher brand luxury than round prices, possibly because round prices appear to be roughly calculated, inflated, and suspicious, whereas compromise prices appear to result from a more careful pricing process, hence reinforcing the brand’s image of quality.

Round prices are easier to process than 9-ending prices, which gives them an advantage in certain situations, for example, when the purchase is emotional. Round prices “feel right,” so when a customer is shopping for a product based on feelings rather than logic — for example, a wedding gown or a vacation package — round prices perform better. Round prices also increase sales for convenience items. This is because their fluent processing saves the brain time and effort, and customers misattribute this easy feeling to the transaction, making the purchase seem faster and easier. They also work better for social items–conference tickets, green products — ostensibly because round numbers are divisible by other numbers, and customers confuse the numerical connectivity for social connectivity. 

Finally, retailers with an international market should be aware of local differences in the perception of price endings. Prices with 9-endings are less valued in some countries than they are in others — for example, in Poland and Lithuania, where consumers view them as deceptive and unfair, and in Asian countries like China, Japan, and Malaysia, where 8-ending prices are more common because 8 is a number that represents luck and prosperity. 

REFERENCES

(1) Gendall, P. (1998). Estimating the effect of odd pricing. Journal of Product & Brand Management, 7(5), 421-432.

(2) Manning, K. C., & Sprott, D. E. (2009). Price endings, left-digit effects, and choice. Journal of Consumer Research, 36(2), 328-335.

(3) Guéguen, N., & Jacob, C. (2005). Nine ending price and consumer behavior: an evaluation in a new context. Journal of Applied Sciences, 5(2), 383-384.

(4) Bizer, G. Y., & Schindler, R. M. (2005). Direct evidence of ending-digit drop-off in price information processing. Psychology & Marketing, 22(10), 771-783.

(5) Levy, D., Snir, A., Gotler, A., & Chen, A. (2020). Not all price endings are created equal: Price points and asymmetric price rigidity. Journal of Monetary Economics, 110, 33-49.

(6) Choi, J., Li, Y. J., Rangan, P., Chatterjee, P., & Singh, S. N. (2014). The odd-ending price justification effect: The influence of price-endings on hedonic and utilitarian consumption. Journal of the Academy of Marketing Science, 42(5), 545-557.

(7) Sokolova, T., Seenivasan, S., & Thomas, M. (2020). The Left-Digit Bias: When and Why Are Consumers Penny Wise and Pound Foolish? Journal of Marketing Research, 57(4), 771-788.

(8) Guéguen, N., & Legoherel, P. (2004). Numerical encoding and odd-ending prices: The effect of a contrast in discount perception. European Journal of Marketing, 38(1-2), 194-208.

(9) Huston, J., & Kamdar, N. (1996). $9.99: Can “Just-Below” Pricing Be Reconciled with Rationality? Eastern Economic Journal, 22(2), 137-145.

(10) Schindler, R., M. (2006). The 99 price ending as a signal of a low-price appeal. Journal of Retailing, 82(1), 71-77.

(11) Anderson, E. T., & Simester, D. I. (2003). Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments. Quantitative Marketing and Economics, 1, 93-110.

(12) Samo, A. H., Hadeeqa,  Asif, Y., Mujtaba, M. D. (2018). Role of Charm Pricing in Purchase Decision – A Study of Online Consumers of Pakistan. Journal of Business Administration and Management Sciences, 2(2), 327-336.

(13) Thomas, M., & Morwitz, V. (2005). Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition. Journal of Consumer Research, 32(1), 54-64.

(14) Choi, J., Lee, K., Ji, Y. (2012). What type of framing message is more appropriate with nine-ending pricing?. Marketing Letters, 23(3), 603-614.

(15) Chang, H-H., & Chen, F-P. (2014). When is a 9-ending Price Perceived Lower Than a 0-ending Price? The Moderating Role of Price Consciousness. International Journal of Business and Information, 9(1), 89-116.

(16) Hodges, B. T.,  & Chen, A. (2021). In the Eye of the Beholder: The Interplay of Numeracy and Fluency in Consumer Response to 9-ending Prices, Journal of Consumer Research, DOI:10.1093/jcr/ucab040.

(17) Snir, A., & Levy, D. (2021). If You Think 9-Ending Prices Are Low, Think Again. Journal of the Association for Consumer Research, 6(1), 33-47.

(18) Stiving, M. (2000). Price-Endings When Prices Signal Quality. Management Science, 46(12), 1617-1629.

(19) Parguel, B., Fraccaro, A., & Macé, S. (2021). Compromise pricing in luxury. Journal of Product & Brand Management.

(20) Wadhwa, M., & Zhang, K. (2015). This number just feels right: The impact of roundedness of price numbers on product evaluations. Journal of Consumer Research, 41(5), 1172-1185.

(21) Wieseke, J., Kolberg, A. & Schons, L.M. (2016) Life could be so easy: the convenience effect of round price endings. Journal of the Academy Marketing Science. 44, 474-494.

(22) Tripathi, A., & Pandey, N. (2018). Does impact of price endings differ for the non-green and green products? Role of product categories and price levels. Journal of Consumer Marketing, 35(2), 143-156.

(23) Yan, D., & Sengupta, J. (2021). The Effects of Numerical Divisibility on Loneliness Perceptions and Consumer Preferences. Journal of Consumer Research, 47(5), 755-771.

(24) Suri, R., Anderson, R.E., & Kotlov, V. (2004). The use of 9‐ending prices: contrasting the USA with Poland. European Journal of Marketing, 38(1/2), 56-72.

(25) Dikcius, V., & Katkuviene, K. (2014). Perception of odd prices in a post-soviet country: an impact of the ideology of planned economy. Journal of Business Economics and Management, 15(2), 356.

(26) Heeler, R., & Nguyen, A. (2001). Price Endings in Asia. In B. Murphy and L. Engle (Eds.), Proceedings of the Australia New Zealand Marketing Academy Conference. Albany, New Zealand: Massey University. 

Ann Aarvik