99 Cents – Should your prices end in it?

I’ve always been very curious why most prices end in 99 cents.  In fact, I was so curious that I did an entire doctoral thesis about it.  Why does it work?  Because we are lazy subtractors.

Which difference is bigger?

Recall in an earlier post that we make the “Will I?”, “Which one?” decisions.   The which one is when we compare two products.  Which one do we want to buy?  Imagine the simple scenario where you want to buy a new pair of shoes.  You’ve narrowed it down to two pair.  One pair you like more than the other, but of course they are more expensive.  The question is, are they worth the additional cost?  There is the subtraction. The only way to know the additional cost is to subtract the two prices, but we rarely do that.  Instead we simply estimate the difference because … we are lazy subtractors.

We tend to compare two prices starting with the left-most digits.  If they are different, we stop there and make our estimate.  If they are the same, we move right one digit and compare them and so on.   In example A) people will start with the left hand digits, 8 and 5.  Since they are different, they will subtract them and get 3 and estimate the difference between these prices as 30.  In example B) people compare the 7 and 5 and estimate the difference at 20.  So most people believe the difference in the prices in A are larger than in B.  (Take your time and do the subtraction and you’ll find that both differences are 25).

Example A could have been $1.82 and $1.57 and people will tend to behave the same.  They start with the left digit, the 1, realize they are the same so move to the next digit to the right.

So how is this relevant?  Notice this behavior is similar to shoppers ignoring the right hand digits.  If customer ignore the right hand digits, then why wouldn’t we use the highest possible right hand digits?  This is why we see 99 cents so frequently, and why you should consider using it.  Specifically, you should use 99 cents for any product where your customers will be comparing prices between your product and another, especially if you believe you are competing on price.

This is not a hard and fast rule, but a good general guideline.  In a future writing I’ll describe why you want to use round pricing endings ($.00) for higher priced goods and random price endings for custom products.

99 vs 95 – I’ve never heard a valid reason for using 95 instead of 99.  The most common excuse provided is they don’t want to look like they are pricing everything with 99.  My gut says this is not valid, but I’ll keep looking out for the research.  In the meantime, a bike shop I worked with several years ago changed the prices of all of their tubes from $4.95 to $4.99 and claimed to make more than $100 additional profit on tubes alone due to that decision (2,500 tubes at an additional $.04).

Action:  Identify all products you carry where your customers believe price is an important criteria for making the decision between your product and your competitors.  What price endings are you using?  Try changing some of them to 99 and see how your customers respond.