From book retailers to grocers, pay TV companies to Telco’s, marketers the world over use an unusual technique when pricing their goods. Rather than pricing a product at $3.00 they price it at $2.99.
The question is, does the technique work or is it just a left-over marketing convention from a time when 1 cent was a valuable amount?
The Two Pens Experiment on Pricing Psychology
To find out Vikki Morrison, a professor of marketing at NYU Stern, invited people to rate how expensive or cheap they thought a particular pen felt. Each participant was presented the same pen, the same advertisement and the same decision. The only difference was that some participants received an advert pricing the pen at $2.99, while others received an advert pricing the pen at $3.
How much of a difference would 1 cent make?
The participants rated the $2.99 pen as better value than the $3 pen, even though it was the same pen and only 1 cent cheaper.
Other studies have confirmed Morrison’s finding, showing that reducing the price by one cent can signal better value.
How the Left Digit Effect Works
The reason lowering the price by 1 cent works is that it changes the perception of the price by changing the left most digit. As the diagram below shows customers perceive $2.99 closer to $2 even though it is only 1 cent less. That is, $2.99 feels and registers as close to being $2 and thus makes the product appear cheaper and better value than a similar product priced at $3.
Morrison’s findings and their implications for marketers are summed below.
When a 1 Cent Difference Does and Does Not Influence Buyer Behaviour
1. One cent does not make a difference in and of itself.
For two competing products priced at $4.00 and $4.01, the one cent will not make a difference in consumer behaviour in and of itself. It is only when the left most digit gets changed that it makes a difference.
2. One cent makes a difference when it changes the left most digit.
For two competing products priced at $4 and $3.99, the one cent will lead consumers to buy the $3.99 product over $4.00 because it changes the left most digit.
3. One cent makes a difference when prices are similar
For competing products that are in the closer price range ($4 and $6) a one cent difference will be greater than for products that are in a different price range ($4 and $10). That is, if two competing products are priced $3.99 and $5, the one cent drop will lead more people to buy the $3.99 product. Whereas, if the competing products are priced $3.99 and $10, the one cent difference will have little or no impact on consumer choice.
4. One cent does not make a difference when consumers buy gifts
When people buy gifts, the left digit effect disappears as people are more concerned with buying the better present than saving a dollar.
If that is all a bit confusing and if you just want a simple answer for pricing your goods and services, then the answer is to reduce the price of your product(s) or service(s) by 1 cent or dollar so that the left digit is reduced.
If you sell a $4 item, price it at $3.99.
If you sell a $50 item, price it at $49.99.
If you sell a $6,000 item, price it at $5,999.