Friday, 22 August 2008

$9.99 v's $10.00

A standard argument in economics is that retailers set their prices just under whole numbers, say $9.99, to force their employees to open the till for change, reducing the chances of them pocketing the bill or because they think, mistakenly, that consumers will somehow read more into the one cent price reduction than a one cent price reduction, all because the first number changed. Economists assume that consumers aren't actually fooled into buying a lot more at $6.00 than at $5.99, because honestly, who's that stupid?

May be the French. According to this this story from the BBC
... according to a French study the phenomenon still swings a considerable number of shoppers. Researchers found that lowering the price of a pizza from 8.00 euros to 7.99 euros boosted sales by 15%.
The BBC report says that Robert Schindler, professor of marketing at Rutgers Business School in the US, argues 0.99 idea was introduced for sale items, to emphasise the discount.
"I studied adverts in the New York Times from 1850 - where there were no 99 endings - to the 1870s and 1880s where they started to appear. Although department stores were doing it - which would fit with the cash register hypothesis - they were advertising discounts. But for the regular price they would use a round number," he says.

He thinks the retail practice developed from there, to communicate discount or the impression that things are on sale - even when they are not.


Matt Nolan said...

When I was younger and working part time at the Warehouse a maths lecturer came in to the store to buy some stuff.

He picked up three things that were $7.99 and was surprised when I asked him for $23.97 - he said, shouldn't it be $21?

As a result, I think changing the front number does have an impact on how we view the price.

Paul Walker said...

This just shows that what you teach you can't do. Engineers' machines never work, the accountants are always broke and mathematicians can't add! :-)

Heterosexual middle-class white male said...

And economists don't respond to incentives???

Paul Walker said...

I hope we do, but 0.01 euros isn't much of an incentive and a 15% increase in sales is one hell of an elasticity.

Matt Nolan said...

"And economists don't respond to incentives???"

Don't respond optimally to incentives I think :D