Why prices have 99 cents

Ron Johnson's claim to fame was that he had created Apple's retail stores for Steve Jobs. He spent 12 years at Apple, revolutionized what a computer store could be, and generated a billion dollars of revenue in only two years. Johnson had a vision for the store: he wanted to eliminate the "game" of retail pricing. He felt that shoppers, namely women, were confused by the almost sales JC Penney was offering every year. He felt sale prices were just a tired scheme where regular prices were artificially inflated, just so they could be slashed down to sale prices.

He believed couponing didn't just discount the product, it discounted the brand. Johnson felt there was a disease in the pricing, and that disease was spreading. And that's why JC Penney was ailing. The store would drop prices by about 40 per cent and offer those low prices everyday in round figures.

They would also eliminate coupons, and only have 12 sales a year instead of It was a radical change of direction, not just for —year old JC Penney, but for any major discount retailer. The commercial ended with the words, "No games, just great prices. That's fair and square. JC Penney. While there were many reasons why Johnson's new plan didn't succeed, it did reveal some truisms about retail pricing. By removing the context for low prices, shoppers didn't know how to evaluate the new price tags.

Put another way, by removing the original price and not showing the markdown price, shoppers couldn't determine whether the "everyday low price" was a good value. As Time Magazine noted, it also showed how irrational shoppers can be. You have the choice between three bottles, and you are not familiar with the brands or quality.

Which wine do you buy? Few people will stand in a supermarket aisle calculating the optimal price for one product. Customers tend toward the middle, especially with decisions that seem insignificant. Choice architecture can play a fundamental role in the pricing of a wide range of products and services. Providing an adequate number of available options can nudge the customer to a more valuable product choice, and by that we mean also valuable for you, the seller.

For some products, customers have certain price points in mind. For others, they need an anchor. The trick is to create a reference price that is higher than the final price. Both groups were actually offered the same radio for the same price, but the group offered the discount were much more willing to buy the product. This can be explained by transaction utility theory, where the price itself is what signals and generates value in the eyes of the customer.

The willingness to pay for services or products that customers already own in a perceived or factual way is higher than for services or products that they have to actively acquire. Possessing something, even if just figuratively, triggers emotional responses in customers.

In other scenarios, mechanisms such as trial periods and free samples give customers ownership of the product before buying. Therefore when they do make a purchase, they act in a way to avoid loss, and this increases their willingness to pay.

This is especially effective for upselling bundles. If one price option clearly dominates another, it is easier to make a decision based on an existing reference point.

Creating inferior dummy options as such reference points within your offering nudges the customer toward the more valuable product or package. Now imagine you are on a beach on a hot day and want a beer. A friend offers to bring you one from the only nearby place where beer is sold. This could be either a fancy resort hotel or a small run-down grocery store. What is your willingness to pay for the beer from each place?

You are likely willing to pay less for the store-bought beer, and more for a beer from the hotel. Customers are willing to pay a higher price for a comparable product if they think this is acceptable. Make your product the resort hotel.

This an important value creation task. Explicit recallers such as specifying uses and risks, or using pictures and other cognitive support help customers to understand the value that the product can have for them. I mean, sure, to most of you it might be super intuitive. Obviously, you knock off a rupee or a dollar from the price, it's only better for the customer, right? But in this article, my aim is to share with you what is the psychological hack that really makes it work.

Not just that, I share with you the history of the 99 pricing and where does its origin lie hint: it's not in marketing or psychology and how much can 99 price ending impact your sales basis a research experiment that I will share with you.

I am also talking about all of the following:. So now that we know what question we are set out to answer, let me take you through the story of why do prices end in 99? It would be interesting for you to know that the origins of the 99 pricing were not in marketing or psychology. But this kind of pricing became popular and got picked up by marketers. The 99 price ending became a regular pricing hack even after the cash registers got much more sophisticated to ensure proper deposit of the cash.

If I were to answer why do prices end in 99, and why did the 99 pricing phenomena pick up so much, then here would be the simplest answer to it:. Because we are human beings and we are not rational. Prices ending in 99 is more about psychology and less about marketing or pricing mathematics.

The 99 price ending is so effective because of what we call the left digit effect. The way we look at a price is from left to right. And therefore, the impact of the left-most digit, in this case, 4, is the highest. This makes you as a buyer perceive that the price is in the s and not Now, basis the logic behind pricing a product with a 99, it is also possible to use a 5 ending or a 7 ending pricing instead of 9. Let me tell you, this works on the same psychology as the 99 price ending. Here's the 5-ending pricing of Bluehost, the web hosting where my blog resides.

So, if you see a price ending with 5 or 7, or any odd number for that matter, you can safely assume that this is got to do with the left digit effect that I talked about i. While it is great to work with heuristics that seem to work really well, it is crucial for a manager like you to be backing your decisions with data.