As a regular item in NeedToKnow: Trade Marks, we highlight a scientific or psychological study on consumer behaviour that has caught our attention.
Price is in most, if not all of consumer decisions, a key driver. It is therefore not surprising that when seeing a price for an item for sale, our minds automatically begin to assess the price - is the price high or low, how does it compare to the price of a different brand of the same item, is it a fair price, is it value for money, is it truly discounted, what's it really worth, how much has it been marked-up, am I being “ripped-off”? All of these questions and answers play in our minds, mostly without us consciously being aware of them.
One pricing practice which we see every day is the deliberate pricing of goods at precise numbers. For example, an iPad is advertised at $329 or a toaster is advertised at $29.95. Sales data shows that we are more likely to buy goods marked with such precise numbers, versus those with round numbers. However, the cause of this effect has not been understood. Given that $29.95 is just a few cents below the whole round number, surely there has to be something more at play than simply that the item is "cheaper". In any case, the effect appears to be equally as strong for other precise numbers, such as $329. It turns out that the effect is due to "numerical price anchors", and works on an unconscious level.
Case study: How we perceive and assess different presentations of prices
A few years ago, researchers from the University of Florida1 sought to test how we perceive and assess these different presentations of prices. In their experiment, students were given a range of retail prices for various scenarios, and were asked to try to guess how much the store owner had marked-up the goods (ie. what was the wholesale price). The only variable was the retail price. So, for example, the retail price of cheese was given as either $4.85, $5 or $5.15 to different students, or the retail price of a TV as either $4,998, $5,000 or $5,012.
The researchers found that those who were given the whole rounded price ($5 or $5,000) guessed a much lower wholesale price than those who were given the other prices. That is, people perceived the rounded-price goods as being more marked-up and therefore not as value for money. The researchers suggest that this effect is due to the unconscious "anchor points" or "measuring sticks" that we establish when seeing a price. Essentially, our judgement of value is influenced by the prior consideration of a "numerical anchor". The theory is that when we see a round-number price, we think of what it is really worth in round numbers, so that a $30 toaster is only worth $15 or $17; but when we see a $29.95 toaster, we think more in cents than whole dollars, as we perceive such precise numbers to be more accurate and reliable.
The researchers also observed this "anchor point" effect in the field. Looking at house price sales, they showed that owners who had originally advertised their houses at precise non-rounded prices, such as $897,500, were more likely to get closer to their asking price than those who advertised at rounded prices, such as $900,000. Again, buyers appear to be unconsciously believing that a house advertised at a rounded price is less truthful or valid, with the "true" or "fair" price lying many (rounded) tens or hundreds of thousands below. With a simple switch to a precise non-rounded price, the reliability factor increases and our perception of fair price moves much closer to the advertised price.
Take home message
So the message is clear - Apple, the department stores, used car sellers and real estate agents are doing it right - precise non-rounded pricing can drive sales and create unexpected perceptions of value.