Balance Just-Below & Whole-Dollar Pricing

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Suppose I offer your shopper two versions of a little toy. One version is priced at about $2.00 and the other—an upgraded version of the same toy—is priced at about $4.00. Which one is your shopper more likely to choose? The answer depends, of course, on what additional benefits the upgraded version offers to the shopper. But it turns out that it also depends on how I state the price.

In one comparison devised by Colorado State University and Washington State University researchers, the lower priced item was offered at $2.00 and the higher priced one at $3.99. About 45% of the shoppers in the study chose the higher-priced version.

Now let's change each price by a penny and see what happens with another group of the same sorts of shoppers. Let's make the lower price $1.99 instead of $2.00 and the higher price $4.00 instead of $3.99. When the researchers did that, the percentage of shoppers selecting the higher-priced option shrunk from about 45% to about 20%. Fewer than half as many shoppers selected the item that would almost surely carry a higher profit margin for you if you were to try this out in real retailing life.

The lesson is to set prices at just below a whole dollar amount. Set the price at $10.99 instead of $11.00. And since very few people will buy an item at $10.95, but not the same item at $10.99, set the price at $10.99 instead of $10.95. Over time, those extra pennies do make a noticeable difference. For Global Toy News readers who think in currencies other than the dollar, make the just-below pricing translation from dollars and pennies. It’s all so simple.

Play-money Well, no, actually it’s not. If just-below pricing always earns the best profit margin, why do retailers like Walmart set price points like $11.37 and $4.19? A significant exception to the $.99 rule is if you want your price points to carry the message that the major advantage of your store is low prices. “We've trimmed every last penny off the price,” is what you'd be saying. Please keep this in mind for the near future, since consumer price sensitivity goes up as consumer sentiment gets worse. The Thomson Reuters/University of Michigan’s reading for last month, announced yesterday, is at the lowest level since November 2009.

Another exception to the just-below rule is in ads for products where you have good-better-best choices in a feature comparison format. Once the customer has decided to purchase a toy or game from a product category, they might consider an upgrade. Consumer psychology research finds that the customer is more likely to choose the more expensive alternative if the prices for the two are presented as rounded-dollar prices instead of as just-below prices. So if the prices on the bin tags are $29.99 and $39.99, a good-better ad would list side-by-side features of each version likely to be most important to the purchaser and then end with, “All this for less then $30” and “All this for less than $40.” In the store, the salesperson says, “For only ten dollars more, here are the additional benefits you would get.”

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