The $.99 pricing trick really does work. Sometimes.2 min read . Updated: 26 Oct 2020, 02:02 PM IST
- New research shows that this ‘left-digit bias’ fools consumers when they see products side by side
Go to any grocery store and you’ll see examples of what behavioral-pricing researchers refer to as “the left-digit bias." When an item is priced at $2.99, the idea is that consumers will think of it as $2.00. That’s because the mind compares the left-most digits before it can round up the numbers. People look left first.
It’s a common marketing strategy that every consumer will recognize. The question is whether it works. According to new research, it does—sometimes.
Knowing when it does and doesn’t work can save a company a lot of money. Consider if a multibillion-dollar consumer packaged-goods company with a 9% net profit margin were to change its product prices from $2.00 to $1.99. If this strategy of pricing a product just below a round number doesn’t produce a big increase in demand, it could reduce the company’s profits by millions of dollars.
In a recent paper published in the Journal of Marketing Research, Tatiana Sokolova, an assistant professor at Tilburg University in the Netherlands, concluded based on a series of studies that “just below" pricing is more powerful when consumers evaluate multiple prices side by side, and less powerful when consumers compare the price in their heads with what they think the product should cost based on their own experience.
Prof. Sokolova found that when consumers see a jar of peanut butter by itself for $2.99, in their minds they round the price up to $3.00. But not so when two jars of peanut butter are displayed side by side. When study participants were shown a premium brand priced at $4.00 alongside the store brand priced at $2.99, the mind compared the left-most digits first, before rounding any numbers.
“When we see $4.00 versus $2.99 presented side by side, our brains are actually comparing $4 to $2," says Prof. Sokolova. Thus we instinctively think that a drop from $4.01 to $3.00 is less than a drop from $4.00 to $2.99, even though the difference is identical.
However, when competing peanut butters were shown one at a time to other participants in the study, the consumers showed almost no left-digit bias. “When we have to call up a comparison price from memory, the left-digit bias is diminished," she says.
Prof. Sokolova also looked at scanner data from 11 locations of a major grocery-store chain, and found that just-below pricing was most likely to boost sales among light users of a category.
“They have less-developed price knowledge and are thus prone to compare the prices of other products on the shelf," she says. Heavy users of a product, on the other hand, will draw from past purchases and their memories of those prices to determine whether a .99 pricing strategy represents a good deal.
Pricing managers should understand their consumers’ purchasing patterns, says Prof. Sokolova. “I would price heavy-use items with round numbers and use just-below pricing for infrequently purchased items, like canned goods, so that the left-most number is low," she says. “And always provide a reference point on price tags when discounting prices to boost sales."
This story has been published from a wire agency feed without modifications to the text