In a competitive environment, determining the optimal price for a product or service is a complex business problem—and it’s made more difficult by the reality consumers struggle to determine or remember the price of common products. This challenge has been exploited for our entertainment on The Price is Right for decades, but it can be a frustration if you’re trying to market a product. Price, after all, is one of the most powerful means of communication between a business and its customers—and poorly positioned pricing can have a serious negative impact on brand and product perceptions.
So what does your price say about your product? This is an interesting question that has been explored extensively through research. Perhaps the most famous application of this research is ending prices with “.99” instead of a whole dollar amount. Doing this, researchers from Rutgers University discovered in 1996, encouraged catalog orders leading to an eight percent increase in revenue.
The theory underlying this finding is that the trailing nines act as a signal, communicating an item is discounted, on sale, or in some other way represents savings. Some retailers, like J. Crew and Ralph Lauren have emphasized this message, using rounded prices for regular items and adding a “.99” only to those on sale.
The decision whether to use rounded or non-rounded prices has other implications as well. Just as the use of trailing nines can trigger a certain attitude toward a product among consumers, using other types non-rounded prices can influence the way products are evaluated as well. One surprising set of research, for example, found that non-rounded prices cause consumers to misinterpret the magnitude of the difference between prices. When asked to compare an item that was listed as $395,000 and one listed as $395,425, most participants selected the latter as the cheaper item. Perhaps more interestingly, the study was extended and found when prices were present with greater precision, consumers were willing to pay more for an item.
Clearly, the influence of price is more complex than it may first appear and determining the best strategy requires more than pinpointing the best range based on the elasticity of demand—a task that can be tough enough on its own. Beyond matching price to the sensitivity of the consumer, business must match the presentation of price to the specific mentality of the shopper. This can include approaches like increasing or limiting uncertainty, emphasizing certain biases like the endowment or anchoring effect, or—as recent research has found—leveraging the emotional or cognitive predisposition of consumers. By using rounded numbers, which are more fluently processes, researchers found consumers relied more on feelings to make their purchase decisions. When non-rounded numbers were used, consumers were encouraged to rely more on the evaluation of facts, logic, and careful thinking. When the presentation of price matched consumer disposition, participants repeatedly reported it “felt right.”
All of this research illustrates the importance of price as a means of communication between a business and its customers. Price testing, of course, can be a complicated and risky endeavor—though the insight it provides is clearly very valuable. Testing price as a type of messaging, however, by subtly shifting prices to include trailing nines or rounded versus unrounded numbers could provide insight not only into the price sensitivity of your consumers, but their mentality as well.
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