By Billy Liang Wu
Do you ever wonder why prices mostly end in the number .99 instead of rounding up to whole dollars? No matter if you shop in stores, eat out, or shop online, you will come across items priced at $4.99, $19.99, or $99.99. Although the difference is of just one cent, people tend to perceive these prices as much lower prices. However, this is no accident. Pricing that takes place in the field of
psychology is an age-old phenomenon adopted by the businesses.
Pricing not only deals with covering costs and profit margin; it also shapes
people’s perceptions about the item they purchase. The choice of price in such
instances matters since business organizations make conscious choices.
Knowledge about pricing from psychological perspective makes sense of
situations where people overspend.
There is a widespread pricing strategy, called charm pricing. It means that pricing
should be 99 instead of 100 as well as 95 instead of 100. While the difference is
actually insignificant, people tend to see the leading digits when making choices.
As an example, when being offered two items with a price of 9.99 and 10 dollars,
the price of 10 appears much higher compared to the price of 9.99 dollars.
Businesses can also apply the anchoring strategy, according to which clients
usually compare prices with each other. As an illustration, when a customer sees
a piece of clothing marked at $120 and reduced to $80, he or she perceives it as
a good bargain despite the fact that there was no initial plan to spend as much as
$80 on that jacket. In that way, $120 become an anchor price influencing the
value of the sale price.
Companies even implement decoy pricing by bringing up another third option for
influencing consumers to go for their preferred product offering. For instance, a
cinema might come up with three offers for popcorn; $5 for the small popcorn, $8 for the medium one, and $8.5 for the large one. The price difference of only 5 cents between large and medium popcorns influences many customers to
consider the latter an appropriate choice. Medium popcorn in such case plays the role of a decoy and forces customers to pick the largest one.
Such approaches could be easily detected all around us. Supermarkets display
special discounts, subscription packages on streaming platforms, and meal
packages in restaurants. All companies do not assign prices randomly; they do
everything strategically.
On the other hand, knowing pricing psychology does not make business trick
consumers. On the contrary, these approaches allow for successful
communication and promotion that is needed by competing organizations. Also,
consumers will benefit from learning about these methods as they will learn to be
more critical when it comes to purchasing something. One must learn to think
whether he or she needs the good or is buying it only because of pricing.
Knowing about the topic is necessary for consumers and future entrepreneurs.
Being a consumer we need to know the impact that prices have on people’s
choice. However, being an entrepreneur of the future we need to learn how
business can compete using the help of economics, marketing and consumption.
The penny makes a great demonstration of what role human behavior can play
for business.
When you see a price tag ending in numbers like .99, stop to reflect on why such
a figure was selected. If you believe that this was a sheer coincidence, guess
what? You couldn’t have been further from the truth. There is nothing coincidental about such an effortfully selected cent.
Sources:
https://www.investopedia.com/terms/c/charm-pricing.asp
https://www.investopedia.com/terms/a/anchoring.asp
https://www.investopedia.com/terms/d/decoy-effect.asp
https://www.psychologytoday.com/us
https://www.khanacademy.org/economics-finance-domain