When a $20 price is better than $19.99

Topics: Pricing | Brand & Strategy
For: B2C
Research date: October 2014
Universities: Fox School of Business, Temple University & Nanyang Business School, Nanyang Technological University

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📝 Intro

To round or not to round prices?

We know, for example, that non-rounded prices like $2.99 (vs $3.00) generally make products seem cheaper due to people’s ‘left-digit bias’.

We’ve also seen before that non-rounded prices are very useful when selling negotiable high-price products (e.g. you will sell a house for more - after negotiations - if your starting price is $448,880 rather than $450,000).

So should we even use rounded, simple prices like $10 at all?

Yes, we should. Let's take a look at one at when that’s the case.

📈 Recommendation

When people are buying based on their feelings (e.g. hedonic products such as food and fashion, a spa experience), use round prices (e.g. €15, $200).

When people are buying for rational reasons (e.g. utilitarian products such as a washing machine, business services), use non-rounded prices (e.g. €15.95, $229.50).

Your customers will have higher preferences for your product and will be more likely to buy.

🎓 Findings

• Rounded prices (e.g. $200), intensify judgments of a product (for better if it’s good, for worse if it’s bad) when people’s decision to buy is driven by feelings (e.g. scented soap).

• Non-rounded prices (e.g. $198.98), intensify judgments when a decision to buy is rationally driven (e.g. antiseptic hand sanitizer).

• The effect influences intention to buy, expected satisfaction from the product, and expected product performance.

• For example, in experiments, people:

  • Said they were 30.2% more likely to buy a bottle of champagne (hedonic, emotional product) when it was priced at $40 compared to $40.28

  • Rated pictures of a Canon camera 14.3% better if they were buying it for a class project (rational purpose) and it was priced at $101.53 compared to $100. The effect reversed if they were buying the camera to go on vacation.

• When people are mentally occupied or distracted, they’re more likely to make purchases based on feelings, in which case rounded prices may be better (if the product has at least some emotional elements).

• Note: what counts as a ‘rounded’ price is relative to how large it is. $25,000 is a rounded price for a car, while $24,973 isn’t (without the need for decimals, e.g. $24,973.49).

People’s purchase intentions were higher when a champagne bottle had a rounded price and a calculator had a non-rounded price

🧠 Why it works

• Rounded numbers are more frequent in our life, so we find them easier to mentally process - which increases how likely we are to use our feelings.

• Non-rounded numbers are harder to process but feel more rational - as if they are more grounded in facts.

• When the price matches our state or emotional vs rational, our judgment about the product “feels right”.

• In turn, this intensifies our judgment of the product (i.e. good becomes great, bad becomes terrible).

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✋ Limitations

• This study focused on rounded ($20.00) vs very precise prices ($19.78, $20.28). It did not investigate moderately rounded prices ($19.50, $16), which likely sit in between, depending on how easy they are to mentally process.

🏢 Companies using this

• Products on Amazon, especially when utilitarian (e.g. electronics charger) use non-rounded prices ($16.99). Many hedonic products use relatively rounded prices (e.g. Levi’s jeans for $109).

• Fashion retailers, especially if they are on the upper spectrum of pricing, often round their prices, without using decimals (e.g. Everlane uses prices such as $27 and $110).

⚡ Steps to implement

• If your product is hedonic, lean towards using rounded prices (e.g. $20) - or at least moderately rounded prices (e.g. $28).

• If your product is utilitarian, lean towards using non-rounded prices, taking advantage of the 99 and left-digit bias effects when possible ($19.99).

• If in doubt, because your product has both hedonic and utilitarian benefits, think of the situation in which most of your customers will buy your product. If they are most likely to be busy or use their feelings, use rounded prices. If they are most likely to make a very rational purchase, use non-rounded prices.

🔍 Study type

Online experiments.

📖 Research

This number just feels right: The impact of roundedness of price numbers on product evaluations. Journal of Consumer Research (October 2014).

🏫 Researchers

• Monica Wadhwa. Fox School of Business, Temple University

• Kuangjie Zhang. Nanyang Business School, Nanyang Technological University

Remember: This is a scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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