Why do companies charge amounts like $4.99 or $37? Why not just charge $5 or $40? It’s a question I find interesting, and fortunately Wikipedia offers some insights on such pricing practices.
This phenomenon is known as “psychological pricing”, “price charming”, or “price ending”. I have only heard it described as “psychological pricing”, so that is the term I will stick with.
There are multiple reasons why companies would use such pricing, according to a fascinating article on psychological pricing from Wikipedia:
- There is evidence that consumers tend to perceive “odd prices” as being significantly lower than they actually are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 are associated with spending $1 rather than $2. The theory that drives this is that lower pricing such as this institutes greater demand than if consumers were perfectly rational.
- Fractional prices suggest to consumers that goods are marked at the lowest possible price.
- When items are listed in a way that is segregated into price bands (such as an online real estate search), price ending is used to keep an item in a lower band, to be seen by more potential purchasers. In other words, if you are searching online for a house less than $400,000, then a $400,000 house would not show up in the search results but a $399,000 house would.
As to how/when psychological pricing got started, some people refer to the time when the Chicago Daily News, in 1875, priced its paper at one cent to compete with the nickel papers of the day. The story claims that since pennies were not common currency at the time, the Chicago Daily News colluded with advertisers to set whole dollar prices a cent lower—thus guaranteeing that customers would receive ample pennies in change.
Another possible reason for this type o pricing may be its powerful control on employee theft. For cash transactions with a round price, there is a chance that a dishonest cashier will pocket the bill rather than record the sale. For cash transactions with an odd price, the cashier must make change for the customer. This generally means opening the cash register which creates a record of the sale in the register and reduces the risk of the cashier stealing from the store owner.
To me, the last story makes the most sense. I would think the majority of consumers are savvy enough to know the difference between $1.99 and $2.00, or $37 vs $50.
So why keep doing it?
Part of it is tradition; another part may simply be the control it offers over cash-based transactions.
Whatever the reason, I don’t see it going away anytime soon.