$196.54 or $199 or $200? Pricing quirks.

I’m working on my Pricing for Profits online class this month and revisiting some of the primary research done in the field. I’m feeling a little bit like I’m back in grad school as I do some literature review of the work done on when and why to choose “just-below” pricing (ie ending the price with a 9, or perhaps a 7, as we see frequently these days). I’ve also found some interesting research on the benefits of ‘precision-pricing’ (ie pricing that is very precise and not round at all, like $354,672.) I was familiar with both streams but found some interesting background on some of the wonderful decision-making quirks of humans.

I like untangling the hypotheses and statistics to see what really holds true in empirical research and not just anecdotally. And, I uncovered an interesting paper that indicates that round prices are sometimes a signal of quality. In fact, higher end stores tended toward round prices (of their data set, Neiman Marcus had round prices over 80% of the time compared to Target and Walmart with round prices less than 20% of the time). Of course, this was countered by the precision-pricing article with information about how people perceive precise prices and even in high price situations are more likely to pay more if it’s a precise price (this work had a focus on real-estate so it was very high-priced!)

Do you test your pricing? One interesting take-away is that the ‘just below’ pricing is more useful when there are reference prices to compare for the buyer. The perception of the difference between the prices is swayed by the first digit in the price (so imagine comparing $29.99 to $40.00 vs. $30 to $40). In the first case, the difference is sometimes perceived to be as much as 50% lower, while the in second case, only 25% lower. If you’re offering more than one option on your sales page, consider how the differences look between each of your prices/packages.

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