Thursday, August 5, 2021

Does $.99 pricing really work? Read inside

Go to any grocery store and you’ll see examples of what behavioral-pricing researchers refer to as “the left-digit bias.” When an item is priced at $2.99, the idea is that consumers will think of it as $2.00. That’s because the mind compares the left-most digits before it can round up the numbers. People look left first.

It’s a common marketing strategy that every consumer will recognize. The question is whether it works. According to new research, it does—sometimes.

Knowing when it does and doesn’t work can save a company a lot of money. Consider if a multibillion-dollar consumer packaged-goods company with a 9% net profit margin were to change its product prices from $2.00 to $1.99. If this strategy of pricing a product just below a round number doesn’t produce a big increase in demand, it could reduce the company’s profits by millions of dollars.

Prof. Sokolova found that when consumers see a jar of peanut butter by itself for $2.99, in their minds they round the price up to $3.00. But not so when two jars of peanut butter are displayed side by side. When study participants were shown a premium brand priced at $4.00 alongside the store brand priced at $2.99, the mind compared the left-most digits first, before rounding any numbers.

However, when competing peanut butters were shown one at a time to other participants in the study, the consumers showed almost no left-digit bias. “When we have to call up a comparison price from memory, the left-digit bias is diminished,” she says.

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Prof. Sokolova also looked at scanner data from 11 locations of a major grocery-store chain, and found that just-below pricing was most likely to boost sales among light users of a category.

“They have less-developed price knowledge and are thus prone to compare the prices of other products on the shelf,” she says. Heavy users of a product, on the other hand, will draw from past purchases and their memories of those prices to determine whether a .99 pricing strategy represents a good deal.

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Pricing managers should understand their consumers’ purchasing patterns, says Prof. Sokolova. “I would price heavy-use items with round numbers and use just-below pricing for infrequently purchased items, like canned goods, so that the left-most number is low,” she says. “And always provide a reference point on price tags when discounting prices to boost sales.”

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