Ben Shoemate's Notebook

From research done the Inon Inon Pricing Research Centre, and Leigh Caldwell:

Everyone knows – or thinks they know – that prices such as £1.99, £5.99 or £9.99 are optimal price points for retail goods. Customers read the first digit first, and the last two are ignored – or at least, they have much less cognitive impact. In general, consumers were thought to put a subjective value estimate of about ten per cent less on an item priced at £3.99, than one at £4.00.

This has been a fairly robust result in the past, and is intuitive for a number of reasons, “but WAIT!” say Leigh:

[And] the results were a surprise. At first we thought that the effect we have discovered was just a previously unnoticed artefact, hidden by the fact that no proper experiment has been published before. But after further exploration, we think it is also an effect of changing consumer preferences. As customers become more aware of marketing tactics and more cynical about any communication from companies, their psychology and behaviour inevitably changes.

So, to the results. The summary points are:

1. Prices ending in .99 no longer have any advantage in consumer value perception, and do not lead to higher sales.
2. The optimal penny value varies by country. In the United States, it is .01. So, instead of $3.99, companies should charge $4.01. In European countries, the optimal price point is different for different product categories, but there is a peak at .04 for many products. So, British or European retailers currently charging, say, £0.99 should increase the price to £1.04.
3. By switching in this way to a “dollar-plus” price instead of “dollar-minus”, retailers can increase sales volume by an average of 8% and increase profit margins by 1-3% (depending on the exact price point).
4. Consumers, when presented with the new price point, report an increased level of trust and affinity with the brands of the retailer and manufacturer. We believe this arises from the “honesty signal” that comes from abandoning a discredited and manipulative sales practice.

This is indeed very interesting, and I eagerly await reading the full study (which Leigh is offering as a pre-print!). Head over to Leigh’s blog for more rather counter-intuitive findings from his new research!

Update: If not a bit late, April fools!

Filed under: Economics, Society