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Archive for June, 2012

While walking in an upscale shopping district the past week I passed by a women’s fashion store; in its front window display there was a nice designer dress with a price tag next to it of 17,999 shekels. That price kept me puzzled: Are shoppers truly expected to perceive this price as lower than 18,000 shekels? More pointedly, would women shopping for this type of clothing item not notice how close the quoted price is to 18,000, just one shekel off?  Dropping a price a little below a round number has some good reasons for it and can be advantageous. Yet, the context in which psychological pricing is used (e.g., type of product, relative price, magnitude of price level) and how it is actually practised may determine its effectiveness.

  • The dress is relatively a high-priced clothing item (it is worth about 2.4 times the average monthly income from salary in Israel). An equivalent price of similar format in euro would be  €3,999.

Psychological pricing relates to setting retail selling prices “just-below” a round number (e.g., 14.99 instead of 15.00 or 299 instead of 300); prices quoted this way are also known as “just-below” or odd prices. The digit “9” does not always have to appear last (e.g., 19.90) and sometimes odd prices use “5” as the right-most digit (e.g., 595).  The logic of psychological pricing relies on the notion that shoppers read price numbers from left to right but often do not perceive the prices in full. Instead, consumers tend to encode the price level based on its left-most digit(s) (e.g., 159 may be encoded as “hundred fifty and something” or even “hundred something”), and that is how the price is stored in memory. According to the “underestimation” explanation for using psychological pricing, rounding down a price even when the nearest round number is from above may cause consumers to underestimate the actual prices of products or services (1;2). Sometimes this underestimation can be serious: for example, encoding “219” as “200” implies an error of 10% off the actual price but doing so for “299” implies underestimating the real price by 33%.

But can that work effectively for a fashion product as described above?  The woman-shopper is supposed to truncate the price number on seeing it and encode it as “about 17 thousands”. However, a shopper that is highly involved in her choice of clothing, and is alerted by the price level, is more likely to give the price a more careful attention and then may process the price information differently, probably rounding upwards. This reservation can be extended to refer to many products that are durable or purchased less frequently (once in 2-3 years), and are higher-priced. Special attention may be awarded to fashion-oriented, discretionary or luxury, and of more complex quality (e.g., technology-based) products.

Consumers have greater motivation to process the just-below prices as expected of them when they are in a hurry (e.g., at a railway station, on their way to work) or when they need to purchase multiple items during a single shopping trip at a store (e.g., supermarkets and alike, Do-It-Yourself store). Shoppers go through displays relatively fast, eye-scanning and picking-up product items, hence the appeal of a simplifying rule that helps them to save time and to burden less on their memory. Consider the following examples:

    • A sandwich priced at £3.29 at a food-bar has a good chance to be perceived as 3.20 or even just 3;
    • A cup of cottage cheese that costs £1.47 may be taken as 1.40 (odd prices may also end with 6, 7, or 8 but they are less frequent and there is less conclusive evidence of their effectiveness);
    • A pack of discs priced 49.50 shekels may be “read” by a shopper as “40 and something”.

Psychological pricing has been prevalent also in mail-order catalogues as it is now on the Internet. An experiment carried out with a clothing catalogue (selling prices range between $7 and $120)  has shown a positive effect of a “xx.99” ending (against “xx.00”)  on the amount purchasers spend in their mail orders, though without increasing the percentage of catalogue recipients who choose to buy any item (weaker and less conclusive findings were obtained with regard to the effect of price-ending of “xx.88”)(1). Online retail sites, particularly those that specialise in facilitating price comparisons between multiple brands and third-party suppliers (e.g., mysupermarket.co.uk from which the price for Tesco cottage cheese was retrieved) engage e-shoppers in navigating between several to many price figures. In this setting e-shoppers are especially inclined to reduce price information (i.e., to aid price recall and comparisons) in a way that benefits psychological pricing.

When consumers, nevertheless, go shopping for electronics like TV sets and washing machines, or more elegant and fashionable clothing, they usually do not do this in a hurry and they focus on a single or very few items they are going to purchase on that single occasion. Determining the level of prices based on their left-hand digits can be very useful in early stages of a purchase decision process in order to facilitate and speed-up initial search and screening of alternatives. Imagine for example that you are in an electronics store and observe the flat-screen TVs hung on the store’s wall to get an initial idea of latest models and their prices. It may be sufficient to rely on the left-most digits to review price levels and screen-out models with unacceptable prices — a “just below” price can make the shopper retian an alternative in the consideration set by designating it to a lower price bracket.  But as the decision process progresses one needs to study and evaluate the more relevant product models in greater detail and accuracy, and prices are usually also considered more closely. Likewise, a woman who passes-by and haphazardly glances at the dress and its price in the front window may recall the price as inaccurately lower before moving on, but the effect on her decision-making is probably going to be short-lived. With products typically characterised by high involvement, consumers are likely to “cancel-out” odd price endings later on in the decision process.

One place to start in setting reasonable and attractive “just below” prices is to scale price endings in proportion to the magnitude of prices. That is, allow for a larger difference between a price ending and the near-upper round number as the price magnitude is higher. Since there may be large differences in nominal prices between currencies such that price magnitudes can differ in scale (e.g., tens of pounds to hundreds of shekels) for similar products it is very difficult to make generalised recommendations for products. It is proposed, however, that price endings should be specified also with respect to the product type or category and its relative price.

For commodities and other frequently purchased products, that are relatively low-priced and their price magnitude is low (below one hundred), and that compete mostely on price, it is sensible to push the “9” all the way right to the decimal digits of a price (e.g., 12.99 shekels for a package of 500g spaghetti). However, for durable products and other types associated with high involvement, that are relatively high-priced and at high magnitude (from hundreds to hundreds of thousands), psychological pricing should be more flexible, applying “softer” endings (e.g., 3,890 shekels for a LCD TV).

A retailer should avoid stating prices that may seem awkward or unreliable to prospect buyers who are more involved in the purchasing products concerned as these buyers observe prices more carefully. On seeing a price of “17,999” for the designer dress, it is instinctive and natural to “fix” it to the nearest round and whole number (i.e., “18,000”). However, the store manager can set an odd price that is also reasonable and attractive to a consumer closer to make a decision by specifying a price that is just below the near-upper round number but still more easily distinguished from it. It means leaving a just-noticable-difference (JND) between the “target” price and the selling odd price. With prices such as “17,950”, “17,900” and perhaps even “17,890” a retailer can make it easier for the prospect buyer to tell herself “this price is indeed less than 18,000” and accept the offer. For a buyer who is already inclined to purchase the candidate product item,  a more clever price can help her in evoking the reason or incentive to make the purchase.

  • Even for a casual summer dress priced 499.99 shekels (seen at a fashion store in a mall) the use of “9”s is excessive and may be more disturbing than appealling. Prices such as “499”, “495” or possibly “489” can be just as effective in implying a price less than 500 shekels without losing revenue for the retailer, vice versa.

Another aspect of setting odd prices concerns the meanings consumers appear to associate with a price ending with “9”. On the one hand, it has been proposed that consumer infer a price image of discount or signalling by the retailer that a price has been reduced. On the other hand, a “9” ending seems to have an adverse effect on quality image, suggesting that the product is of lower quality or is a basic version whereas a “0” signals higher quality and superiority (1 ; 2).  Thereof, ending the price of the designer dress with “999” is likely to send a wrong message to women-shoppers. It may be perceived as a poor attempt to offer a reduced price, a false discount, and yet hurt the prestigious image the retail has probably wanted to endow on the dress. Alternately, a store owner in similar cases can set a price like “17,950” that can both benefit from rounding down the price and yet protect the product’s quality image. It may “sacrifice” the image of a reduced price implied by a “9” at the right-hand of the price but its loss can be more than offset by the  effects of “underestimation”, early in the decision process, and protecting quality image or prestige, at later stages, that are more fitting  for durable and other high-priced products of also high-involvement.

  • An odd price constitutes a kind of “contract of honour” between a retailer and his customer, where the former implicitly says: “I may manipulate you to buy a product that is somewhat more expensive than you thought but I will pay you the change from the higher round price to the last cent.” However, in Israel there are no longer coins of one agora (0.01 shekel) and five agorot (0.05 shekel). Still, unfortunately, local retailers often ignore this fact and continue to set prices like 5.99 shekels and 20.95 shekels without paying the change in cash. They thus break the informal contract with consumers and make it void of its socio-economic legitimacy.

Retailers should not apply psychological pricing out-of-hand and in an automatic manner, as trusting a general belief that showing “just below” prices, particularly ending with “9”s, increases sales. Consumers don’t simply get tempted by these prices or “fall for it”. The “just below” prices should be set with sense and sensitivity to various factors affecting shopper behaviour and especially their decision-making processes. I propose that store owners and managers should take into consideration primarily the price magnitude, type of product, and the relative price level when specifying these prices. With high-priced durable and high-involvement products whose prices are in magnitudes of thousands and above there is an opportunity to enjoy “both worlds” by placing the “9”s in the middle of the price number, thus being perceived as lower priced but without compromising a higher quality image simultaneously.

Ron Ventura, Ph.D. (Marketing)

References:

(1) Increased Consumer Sales Response Through Use of 99-Ending Prices, Robert M. Schindler and Thomas M. Kibarian, 1996, Journal of Retailing, 72 (2), 187-199.

(2) An Empirical Analysis of Price Endings with Scanner Data,  Mark Stiving and Russell S. Winer, 1997, Journal of Consumer Research, 24 (June), 57-67

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