Shop Talk: Practical answers for tough business questions
Question: I have questions about how to price our merchandise. I am talking about the actual numbers we use rather than the cost analysis behind the pricing. When my husband and I traveled around this summer and took the time to visit and enjoy other retail stores, I was puzzled. Some stores used prices ending in .99 or .98, while others had prices ending in .50 or .00. Still others used .97 and .95. Is there a science to all of this? Or a secret I should know?
Answer: There are many pricing strategies, and although I have read that some are based on scientific findings, I have been hard-pressed to come up with the actual studies. The closest I have come is a study theorizing that customers perceive $6.99 as less expensive than $7, based on memory processing time. Apparently, rounding upwards requires an additional brain step, which is more complicated than automatically storing the first digits. And because of the volume of information we, as humans and consumers, continually process and store, the most efficient and fastest way to do that is to accept the number at face value and not take the additional step required to compare it to the one-cent-higher figure. As a result, the customer thinks the merchandise is a better deal than it actually is. Incidentally, this is what’s known in the retail industry as “irrational pricing.”
In my experience, the other prices you mentioned, such as prices ending in .98, .97, and .95, are just variations on the above theory, and I have found no data about which ones work better than others.
Even dollar amounts, or prices ending in .50, may reflect a strategy designed to help retailers distance themselves from discount store pricing. For example, in higher-end retail stores, especially in the clothing industry, a dress would be marked at $600, not $599.99. A price ending in .99 in that setting might serve to cheapen the perceived value.
Still other times, as we do at our store when pricing stones, a price that ends in .50, such as $5.50, might be the best way to arrive at a fair price and still be competitive.
So, is there a secret? Not that I know of—but I would love to hear from you if you find one!
First published in Vol. 25 No. 7 of Retailing Insight. © 2011 Continuity Publishing Inc. All rights reserved.