Why 99 Is the Magic Number for Product Pricing
Why do most prices end in 99 cents?
I was so curious as to why many prices end in 99 cents that I wrote an entire doctoral thesis about it! My conclusion? Consumers are lazy subtractors.
Let me explain.
The Psychology of Subtraction
Suppose you are comparing two pairs of shoes in a department store. One is more expensive, so naturally you wonder if the higher price is 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.
Here's the psychology, proven by endless research: 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.
How is this relevant? Customers are most likely to ignore right-hand digits, so why wouldn't companies charge the highest "right hand" price? This is why we see .99 so frequently, and why you should consider using it.
Specifically, you should use .99 for any product where your customers will be comparing your prices to a competitor's. This is especially true if your business model involves competing on price. This is not a hard and fast rule, but a good general guideline.
95 Versus 99
Which brings me to another point that may have crossed your mind: Why do some companies use .99 and others use .95?
My research has not uncovered any truly valid reason, but I can give you one compelling reason for 99 cents. A bike shop I knew changed the prices of all of their tubes from $4.95 to $4.99. They claimed this resulted in more than $100 additional profit (2,500 tubes at an additional 4 cents).
Action: Identify all products you carry where your customers believe price is an important criterion for making the decision between your product and your competitors'. What price endings are you using? Try changing some to .99 and see how your customers respond.
