What is the story, or the real reason, behind odd prices, and why do most prices end in 9?
More than 60% of the prices we see in shop windows and on products online end in 9. And the reason for this strange phenomenon is more complex than it seems. In this article we look at how our brain works, the irrationality and silliness hidden behind our buying decisions, and the real story behind the 99.
The real reason most prices end in 99
The left-digit effect
The main reason prices ending in 99 work is known as the left-digit effect.
When we see a price like €19.99, our brain can’t help seeing it as 19, rather than as just one cent less than 20. This is known as the left-digit effect because our brain judges prices by the left-hand digit.
On top of that, many studies have been carried out that conclude that odd prices tend to perform better than even ones.
Our brain loves odd numbers when it comes to buying, and if, as well as being odd, the price ends in 9, we automatically perceive it as a deal.
In fact, these days sellers of information products are using 7 instead of 9. Why?
Although this was already studied in the 1980s, and the conclusion was that switching from 99 to 97 brought no increase in sales, an American hype merchant said in a talk that because consumers’ brains are now more wised up to these strategies, and they can already tell there’s no real deal in a price ending in 99, changing it to 97 makes it look more natural and may even be perceived as a better price.
And since the Spanish-speaking market tends to copy American techniques, it ended up copying this strategy too.
This pricing strategy starts from a false premise.
The brain hasn’t wised up in this respect, because the rational part of your brain already knows there’s no real discount in the number 99. Even a 7-year-old knows that. But the buying decision isn’t made by the rational part of the brain; it’s made by the most irrational part. And that part of your brain can’t escape the odd-price effect or the left-digit effect.
A US retailer experimented with this pricing strategy
The manager of a retail chain had round, even prices in his shop windows. He tried an experiment with a dress that was barely selling. The dress had a price tag of 34 dollars. Well, he changed the price to 39 dollars, and sales of the dress rose by more than 30%.
But how did he manage to multiply the dress’s sales by five?
By putting up a sign saying “Sale”:
Was €90. Now €39.99
That’s a mix of four psychological biases used at once
The opportunity bias
The word “sale” or “for a limited time” makes us see, on the one hand, a bargain in the price. On the other, it makes us feel we need to hurry and buy.
The anchoring effect
The anchoring effect is the most effective sales strategy known so far. As simple as it is powerful. All it involves is setting a high price, crossing it out and putting another price next to it, showing a “fake markdown” or “fake discount”.
And finally we have the left-digit effect, plus the odd-price effect.
Thousands of years of evolution have led our brain to not want to buy something for 30 euros, but to want to buy it for 40.
But where does the 99 really come from?
This is the real story of why prices started using 9.
For that we have to go back to 1875.
That year a newspaper called the Chicago Daily News was founded. It sold for 1 cent. It was incredibly successful, but the city had a problem: there were hardly any one-cent coins in circulation, mainly because prices tended to be rounded.
It was also a time when local merchants were being beaten by new competitors arriving in the city.
So the newspaper’s owner had an idea. He asked local merchants to knock one cent off the prices of their products so that more pennies would be in circulation and readers could pay for the paper without any hassle.
The merchants agreed to help the newspaper, and the owner had barrels full of pennies shipped from Philadelphia to supply the city with change.
Imagine the local merchants’ surprise when they saw their sales shoot up thanks to those strange prices. In fact, it helped them undercut the new competitors from out of town.
So none of this came from psychology or marketing studies, but from looking for a way to put pennies into circulation in order to sell newspapers.
And what happened 100 years later?
JC Penney’s failed pricing strategy
One chief executive wanted to change the whole pricing game.
We’re talking about Ron Johnson, a man who worked for Steve Jobs for 12 years and was in charge of revolutionising Apple’s physical stores. He is credited with more than 1 billion dollars in revenue in just 2 years at Apple.
With those credentials he was brought in to run the JC Penney chain, which was already having sales problems. And he had a wonderful idea.
He wanted to do away with all the pricing games, in a kind of act of honesty towards customers.
Through its ads, JC Penney basically told its customers that the days of inflating a price, crossing it out and showing it marked down were over, that there would be no more fake sales.
And that the game of pricing things at 19.99 was over too. Enough of fooling people.
From then on, JC Penney would follow a pricing strategy called “fair and square”.
They made a commercial that ended with words to the effect of: no games, just great prices; that’s fair.
And the truth is the plan sounded wonderful. At last, a company that was honest with its customers, a company that was done with deceiving them.
There was just one problem with the plan. IT DIDN’T WORK.
Johnson’s main mistake: treating customers as if they were rational people.
Today, if you price a shirt at 12 euros, your brain automatically thinks the shirt must be poor quality because it’s so cheap. But if you see a price of 55 euros marked down to 19 euros, your brain perceives the shirt as a bargain.
What this fair-and-square pricing strategy achieved was a fall in sales of more than 40% right in the middle of the Christmas shopping season.
To get an idea of how irrational customers are: while Johnson was running JC Penney, a side table was priced at 150 dollars, and it didn’t sell. After he left the company, they priced the table at 245 dollars and marked it down to 150 dollars (the anchoring effect). The table sold out in a few weeks.
Needless to say, Ron Johnson was fired after 15 months.
Featured image: MatthewHoobin, CC0 1.0, via Wikimedia Commons.
