Like many of us during the holidays, it was hard to escape the shopping frenzy stimulated and supercharged by big BLOW OUT SALE banners, provocative advertisements touting Deals of the Year, and creative promotions supported by huge discounts. Popular media reported breathlessly how salivating consumers braved inclement weather, traffic snarls, aggressive crowds, pesky relatives, and overworked sales staff to buy, buy, and then buy more some more.
For decades, consumer brands have relied on psychological trick, a technique called “charm” pricing, “odd-even pricing”, or “fractional” pricing to whet consumer apetite and ratchet up sales. Charm pricing has a lot of historical context, such as artificially creating a supply of loose change in the form of pennies, preventing cashier theft, or simply undercutting competitor’s prices without giving away the store.
In the modern day era, we often see this strategy reflected in such prices like $2.98, $4.95, or $49.99 from everything from Gasoline to Garments. (A 1997 Marketing Bulletin Study found that close to 60% of advertised prices end in the number 9). The technique has consistently worked well because the human brain perceives the fractional amounts to be disproportionately more attractive than they actually are when compared to the nearest rounded number. Second, most people read from left to right – therefore a lower number on the left tricks our brain so we become more favorable to the lower price even though the difference is marginal at best ( $19.99 vs. an even $20) That perception matters. According to some analysts, charm pricing can increase sales of a product by up to 34%.
But a recent Cornell University survey suggests the psychology of how this pricing approach is perceived s dramatically shifting. According to the report, modern consumers appear to overwhelmingly favor paying in whole numbers instead of fractional numbers. A whopping 56% of consumers paid for gasoline at the pump in numbers that ended in 0, and an additional 7% paid in numbers ending in 0.01 suggesting that they narrowly missed stopping the pump at the proverbial “0”. Similar evidence is bearing out in consumer directed payments or “pay what you want” models that are currently gaining traction in the music, food,fitness (in particular, yoga) and gaming industry. But the most glaring find was in everyday tipping – the survey found that a whopping 73 percent of customers tipped a whole-dollar amount, and an additional 8 percent rounded their tips to a half dollar) signalling that consumers prefer to pay in round numbers.
The study also disturbingly seems to suggest that modern day consumers are begining to associate fractional pricing with poor quality and less honesty (therefore discounted). And increasingly, the simplicity of mentally processing a round number is begining to trump the complexity of processing fractions.
Moving forward, I believe that this has profound implications for marketers, as it questions the very essence of psychology based pricing that has been engraved in stone for decades. Not everyone is a believer – yet. Everyone from airlines to retailers continue to use charm pricing. Even Apple, the beacon of everything simple uses charm pricing across its entire product line. But, if the Cornell study is an indication, the tide might be about to turn in 2014.
Will payer induced simplicity replace seller prescribed charm? What do you think?