There is a simple reason why prices often end in 99 cents rather than rounding up to the next dollar. It’s all about the psychology of pricing – marketers use prices ending in 99 cents to make products seem cheaper than they are. This pricing strategy is used extensively in retail, with the most common prices being $X.99 or $X9.99 rather than round numbers like $X.00 or $X0.00.
In this article, we’ll explore the psychology behind prices like 19.99 in detail:
The Illusion of Getting a Discount or Bargain
Prices ending in 99 cents create an illusion that customers are getting a deal or saving money, even though the actual difference between a price like $19.99 and $20.00 is only one cent. When people see a price like $19.99, their brain focuses more on the “19” than the “99 cents”. This makes the price seem significantly lower than $20 in the customer’s mind.
Marketers take advantage of this quirk in consumer psychology. Customers are more likely to buy a product at $19.99 because their brains are tricked into thinking they’re getting a discount or bargain compared to $20. This perceived discount increases the chance of a purchase.
The Left-Digit Effect
There is something called the left-digit effect in pricing. People pay more attention to the left-most digit in a price than the right-most digits. This again explains why $19.99 seems like a much better deal than $20.00 – the left-most digit is 1 less.
Interestingly, once a price crosses the 9.99 threshold and the left-most digit increases, consumers perceive it as a significantly higher price. For example, $10.99 seems only slightly more than $9.99 to most customers. But $11.99 seems like a much bigger jump from $10.99. This is why most prices end in 99 cents rather than rounding up.
Odd Pricing Seems Like a Discount
Odd pricing like 19.99 just seems like a price that’s been marked down from a regular price. Even numbers like 20.00 are associated with the “regular” or “full” price of an item. So odd prices ending in 99 cents give consumers the impression that the price has been lowered from its original even number price point. This makes them more appealing than rounded, even prices.
Avoiding the 9-Ending Price Cycle
Retail prices often go in cycles of 9-endings to maintain the illusion of discounts over time. For example, a product might be priced at $29.99 originally, then discounted to $19.99, increased again to $24.99, etc. By always using 9-endings, retailers can make higher prices seem like they are discounted compared to an earlier price. If they priced a product at $20.00 instead of $19.99, they would lose this ability to make continual incremental price increases seem like discounts.
Setting prices at .99 amounts allows retailers to maximize profits by tricking customers into believing they’re getting the best possible deal. The retailer keeps the extra penny per sale while maintaining the perception that the price has been dropped as low as possible. This combination of profit maximization and presentation of “bargain” prices is why retailers overwhelmingly favor prices ending in 99 over round numbers.
Exploiting Consumer Psychology for Higher Profits
Ultimately, 99 cent pricing exploits quirks in consumer psychology to increase profits. Retailers know customers focus on the left-most digit and associate odd prices with discounts. By keeping prices at $X.99, they can increase sales and maintain continually increasing price points while still presenting prices as discounted bargains. Professional marketers have done extensive testing and research on pricing strategies. The ubiquity of 99 cent pricing demonstrates it is an extremely effective tactic.
History of 99 Cent Pricing
Now that we understand the psychology behind it, let’s look at the history of 99 cent pricing:
Late 19th Century Origins
The practice of 99 cent pricing is often credited to retailers F.W. Woolworth and S.S. Kresge in the late 19th century. As pioneering five and dime stores, they sold inexpensive household goods and set many prices at 5 and 10 cents. But they also sold higher priced goods like clothing and toys and realized odd pricing ending in 9 drew more interest.
Proliferation in the 20th Century
The strategy grew in popularity through the early 20th century. By the 1970s, research showed nearly all prices ended in 9 cents. The wide adoption showed retailers saw it as an effective tactic. Studies found consumers were more responsive to 99 cent endings than rounded prices.
Gas Station Price Wars
A notable era that drove adoption was gas station price wars in the 1970s. Gas stations began pricing gas at amounts like 33.9 cents per gallon to appear the lowest. This forced competitors to also use 9-ending prices to stay competitive. The public became very used to prices ending in 9 cents.
Over time, retailers refined their price ending strategies. Researchers found prices ending in 9 became less effective due to overuse. This led to variations like .97 or .95 endings to regain effectiveness through novelty. But the default of .99 remained dominant overall.
Psychologists have studied 99 cent pricing extensively. Here are some key explanations for why it works:
Image of Discounts
As discussed earlier, people tend to perceive 99 cent prices as a bargain or discounted price. This is due to comparison with rounded numbers.
Unusual prices ending in 99 cents stand out more than round numbers. The brain naturally notices them more, which helps increase sales responses.
A 99 cent price anchors the perception lower. When presented with a higher price later, that price seems excessive compared to the anchor. This makes customers more resistant to buy.
Sense of Advantage
Saving that penny gives people a sense they came out ahead in the transaction. This provides a feeling of gain.
Having prices end in 99 cents makes it harder to mentally calculate and compare costs. This leads to less price sensitivity.
Does 99 Cent Pricing Actually Work?
The ubiquity of 99 cent pricing demonstrates retailers believe it is an effective strategy. But what does research say about actual effectiveness?
Evidence of Effectiveness
Numerous studies over decades have shown 99 cent pricing can boost sales. A frequently cited study found that women purchasing identical stockings priced at $1.99 sold twice as many as the same stockings priced at $2.00. This type of sizable increase is unlikely without an underlying psychological effect.
Increased Customer Response
Research shows customers are more receptive to 99 cent prices. There is increased purchase interest, higher perceived value, and greater willingness to buy products with 99 cent pricing. Customers also report being more satisfied with a 99 cent purchase compared to rounded pricing.
However, effects may be diminishing over time. As consumers become familiar with 99 cent pricing, they are less influenced by it. But it remains impactful, especially with new customers and products.
Most Effective on Small Purchases
The tactic appears most effective on smaller purchases under $10. For expensive items, rounded prices are more common. Consumers likely perform more careful cost analysis, minimizing influence of 99 cent pricing.
While commercially effective, 99 cent pricing raises some ethical concerns:
Does 99 cent pricing deceive consumers by implying discounted prices and tricking them psychologically? Some argue it is an ethically dubious manipulation.
Restricts Rational Choices
Behavioral economists note 99 cent pricing limits rational choice by inhibiting price comparisons and promoting decisions based on irrational biases.
Obscures True Costs
Presenting prices like $19.99 obscures the true cost from customers and impedes their ability to make informed decisions and evaluate costs.
Disproportionately Affects the Poor
Some researchers argue 99 cent pricing most affects lower income shoppers who have less buying power and more difficulty calculating best values.
Potentially Unethical Power Imbalance
Experts note the information and psychological manipulation advantages retailers hold over customers regarding pricing. This potentially unethical power imbalance enables exploitative pricing strategies.
The Future of 99 Cent Pricing
Will 99 cent pricing remain prominent in the future? Several factors could impact its ongoing effectiveness:
Ongoing Consumer Familiarity
As more shoppers become familiar with the pricing tactic over generations, its influence may decline. But it will likely retain some effect, especially on new customers.
New Purchase Contexts
New purchase contexts like online shopping may diminish psychological effects compared to physical retail environments. However, e-commerce provides consumer data to refine pricing strategies.
If public perception grows that 99 cent pricing is deceptive or unethical, retailers may need to modify strategies to avoid customer dissatisfaction and backlash.
Governments could legislate to restrict certain forms of retail price presentation to curb anti-consumer effects. This would compel retailers to use more transparent pricing.
Ongoing behavioral science and consumer psychology research will provide retailers further insight into effective pricing strategies that balance ethics and profitability. This knowledge could reshape approaches.
The use of 99 cent pricing clearly leverages human psychology to increase profits. Retailers will likely continue this tactic as long as it boosts revenues. But overuse could diminish effects, and ethical concerns may prompt reevaluation. Ultimately, consumer psychology and shopping behaviors will determine if and when this prominent pricing strategy evolves. Careful research and appropriate regulation can help balance business needs, consumer interests, and ethical practices.