Why do companies price at .99?

“Consumers ignore the least significant digits rather than do the proper rounding.”

Even though consumers can see the last digits of a price label, be they .95 or .99, they may still subconsciously be partially ignored. Some research suggests that this effect is enhanced when the pennies are printed smaller e.g. £1999. The effects is that consumers irrationally discount prices by much higher margins than the one or five pence discount offers, perceiving that they are being given a better deal, and thus encouraging a purchase. Various research pieces and case studies have shown that consumers are more likely to purchase items when they are suffixed by a .99 or 95 as opposed to either .00 or any other decimal combination. It would thus appear that consumers have become accustomed to such a pricing structure.

“Fractional prices suggest to consumers that goods are marked at the lowest possible price.”

In the search for lower prices, many consumers have become bargain hunters - meticulously comparing different prices and judging intuitively which products and services represent best value for money. A price which is not rounded to the nearest pound suggests that the retailer is offering the goods at a price which is closer to cost. A car sold for £3452.22 suggests that the price is closely matched to the construction costs, which implicitly have been kept to a minimum, whereas the same car offered for £3500 may suggest to the consumer that there is a rather arbitrary pricing strategy and profit motivated behaviour by the seller. Thus, products which have .99 or .95 at their tail suggest to a greater extent than .00 that there is a push to drive down the price on the part of the retailer - making the consumer feel more comfortable that they are getting value for money.

“When items are listed in a way that is segre-gated into price bands (such as an online price comparison site), price ending is used to keep an item in a lower band, so it can be seen by more potential purchasers”

The enormous rise in internet shopping has resulted in a plethora of online search engines which rank goods and services on the basis of their price. Since searches are often conducted in ascending price order or in price bands (eg <£200) then a product which is priced at a round number may miss out on inclusion in a search, which could result in a significant drop in web sales. However, pricing at .99 or other decimal intervals means that a product is more likely to be included in a search - driving retailers and sellers to marginally cut prices on a continual basis. On Amazon Marketplace and eBay for instance, rival sellers will often cut their price by just one pence in order to undercut their closest rival and move up the ranking that vital one space. This yields a bizarre collection of pricing suffixes; .39, .04, .21 etc.

Have things changed to now encourage rounded pricing?

To identify why there has been a departure from fractional pricing in some spheres, it is useful to look and see which of the motivations for .99 pricing might have disappeared so that we can identify why retailers might have moved away from this model. Below are a series of hypotheses which might explain this trend.

“Price comparison websites have changed their systems but fractional prices are still required to achieve good positions in search results”

Though the price comparison sites seem to have extended their search brackets to include rounded pricing, it is still the case that when products and services are displayed after a price search, they are displayed in ascending order, and thus those which are positioned as .99 or .95 will appear above those priced at round numbers. There still exists an incentive therefore to price at .99 or other fractional values, in order to undercut their competitors.

“Consumers still appear to be treating fractional prices as better value for money”

There does not seem to have been a move away from the consumer perception that frac-tional prices indicate a willingness on the retailer’s behalf to match the price as closely as possible to the cost. Thus, those retailers targeting the value segment of the market have maintained their pricing strategies - Argos, WIlkinson, Dixons - all three predominantly still employ fractional pricing, and higher end retailers, even Harrod’s continue to use fractional pricing for their lower end products which they presumably wish to present as a better value option. Fractional pricing therefore still has a role to play for goods and services positioned at the lower end, better value for money end of the market.

“Consumers have become aware of the importance of psychological pricing and don’t like to be taken for fools. Some Retailers have reacted by using rounded pricing to win back trust”

In the post-credit crunch, post-expenses scandal world. consumer confidence in business and institutions is at a low point. In a bid to win back consumers’ trust and reassure them of their integrity, retailers have perhaps begun pricing at rounded intervals to avoid accusations of trickery and deception. However, this fails to stand up to scrutiny. When we take a look at individual companies. John Lewis, Marks & Spencer and WHSmith for instance, offer many of their products at rounded pricing intervals but yet still price certain lines fractionally. If these retailers are trying to win consumer trust and convince customers that they are not being deceived then it seems irrational that they would not have a consistent pricing strategy across different product lines. As such, the hypothesis that retailers are moving to rounded prices in order to win consumer trust (which has been damaged by a general disaffection with business) seems to lack a basis.

“Retailers are using rounded pricing as a signal to consumers for higher quality products”

A quick look at premium retailers such as Harrods, YSL, Armani and BA shows that rounded pricing seems to accompany products and services which are typically perceived as higher value. The underlying idea here seems to be that those consumers which are looking to purchase higher end goods are not concerned with ‘penny-pinching’ and the retailers realise this - they are keen to portray their offering as premium rather than too closely linked to cost. As such, price labels will be £150 rather than £134.99 or equivalent. One explanation of rounded pricing then is that retailers are trying to build a quality brand proposition around their products, or at the very least, their high end products.

Again however, this approach does have some potential flaws - a look at one online retailer - Dixons, shows that whilst iPods are priced at clean rounded price intervals e.g. £170, their most expensive LED and LCD TVs are still subject to fractional pricing, with one top end Sony model being sold for £2849.65 rather than any sensible and rounded price interval. This would appear to contradict the idea that retailers are using rounded pricing as a quality signal.

Conclusion

The above explanations for rounded pricing are all subject to criticism and weaknesses. There does not seem to have been a significant enough shift in the online price comparison mechanism to explain the move away from fractional pricing. Positing that rounded pricing is an attempt to win back consumer trust is also problematic since many retailers offer products priced in both ways - inconsistent. Additionally, consumers still seem to view prices of a fractional nature as better value than those which are rounded - they are perceived to be more closely aligned with the underlying costs: this presents therefore, a motivation for retailers to price fractionally.

“A deliberate move to rounded pricing is likely to indicate that the retailer wishes to signal the premium nature of a product”

The only explanation which seems to have any traction is the idea of rounded pricing as a premium product signal. Historically, high end retailers have not priced fractionally, and this seems to be an identifier of products which are unashamedly higher priced and of better quality. Certainly, there are inconsistencies in this explanation - some firms as we saw have priced some high end products fractionally and others as rounded. As such, any conclusion must acknowledge the possibility that rounded pricing is not the only signal of premium products. However, a deliberate move to rounded pricing is likely to indicate that a retailer is trying to signal the premium nature of a product.