Is Your Client Charging the Right Price for Their Product or Service?

In 1876, the first issue of the Chicago Daily News went to press.

Founder Melville E. Stone sold each issue for a penny.

But there was a problem. Pennies weren't in wide circulation.

Stone had an idea. He convinced several Chicago merchants to drop their prices – slightly.

He sold them on the idea by telling them that people would be more likely to pay $2.99 for something versus $3.00.

The shop owners found that it did indeed work, but there was still that shortage of pennies.

Stone soon remedied the problem by travelling to Philadelphia and picking up several barrels of pennies, which he brought back to the Windy City.

The shop owners had a new pricing strategy, and Chicagoans had plenty of pennies available to them to pay for Stone's newspaper.

Another theory on how the "99-cent pricing strategy" came to be is that back in the 1930s, untrusting store owners lowered the price by a penny so clerks would have to open the till to give change to the customer – instead of being able to quietly pocket the bills.

No matter which version is correct (if either), the 99-cent pricing strategy is here to stay.

So does ending a price with ".99" really have an effect on sales?

Does a product priced at, say, $79.99 sell more than a product priced at $80?

What about a product priced at $74? Will it sell more than a product priced at $79?

As copywriters, we do everything we can to ensure our clients get the best response from the copy we write.

And if you think the way they price their product or service cuts down on sales, it's in your best interest to bring it up.

So how do you know what the “right” price is?

I decided to look into the various pricing strategies in an effort to better understand what effect the actual price of an item has on people's willingness to buy it. I've broken it down into three categories:

  1. The 99-cent strategy – All the research I've seen indicates that it does work. Experts have found two main reasons for this …

    The first is called the "left-digit effect." People generally read from left to right. And in doing so, we place added importance on the first number we see. Which means, because the leftmost digit is lower, a pricing difference of $19.99 versus $20.00 has a bigger impact than $23.49 versus $23.50.

    The other reason is because of what's called a "right-digit signal." A price ending in .99 makes us feel like we're getting a discount.

    In an interesting study conducted by researchers Kenneth C. Manning and David E. Sprott, participants were asked to consider two pens. One pen, they priced at $2.00, the other at $3.99. Forty-four percent of the people asked said they were more inclined to purchase the $3.99 pen.

    They then changed the price of the two pens to $1.99 and $4.00. Only 18 percent of the participants said they'd buy the higher-priced pen.

    The reason for the difference, they concluded, was that when the pens were priced at $1.99 and $4.00, the price difference seemed a lot bigger than when they were priced at $2.00 and $3.99.

    Here's another interesting tidbit that explains how some businesses could make more money per transaction without hampering sales.

    Britt Beemer, chairman of America's Research Group, says that consumers perceive no difference between the two prices: $49.99 and $49. Beemer says that most consumers look at the dollar number and forget the right-hand digits.

    Which means businesses who price without the ".99" extension could make almost a dollar more per transaction without changing their buyers' perception of their price.

  2. Ending your price with numbers other than 9 – Sam Walton, the founder of Walmart, was big on unusual “cent endings” (prices such as $13.24 and $163.83) to differentiate Walmart from its competitors and to make it appear that the price on the tag was the result of fine-tuning. Sam wanted to give his shoppers the impression that every effort was being made to deliver "right to the bone" prices.

    Overall, a study by Marketing Bulletin found that approximately 60 percent of prices in advertising material ended in the digit 9.

    The most popular digits to end a price with, other than 9, seem to be 8 (which Walmart often uses), 7, 5, and 0.

    So does it make sense to vary the two numbers to the right of the decimal point like Sam Walton did?

    Toronto-based Pricing Solutions Ltd. issued a report on pricing psychology, using a brewery as an example. The original price point for a twelve-pack of beer was $15.85. Research showed that an increase of 10 cents to $15.95 made no difference to consumers. But it would increase the brewery’s revenues by $4.1 million.

    Their research also revealed similar results when it came to larger amounts. Within $10 increments, price doesn’t matter. For example, people’s buying behavior is not affected by differences like $54 versus $59. So why charge $54 when you could charge $59 without any sales drop-off?

  3. Prices that end in zeros – On the flipside, there's also what's known as prestige pricing. This is pricing that is meant to seem high as it suggests high quality. Jewelry stores and other marketers of high-end merchandise (such as Nordstrom) use prestige pricing. $1,000.00 suggests higher quality than $995.95, right?

    In his book CASHvertising, Drew Eric Whitman talks about a study Rutgers University did in 2000. They had people read two different ads for the exact same dress. One ad priced the dress at $49.99, the other at $50.00. Readers perceived that the $49.99 dress was of lower quality.

So what do you do with these psychological and consumer studies? If you're not promoting something that merits "prestige pricing," ending a price with a "9" or a ".99" is a "can't lose" situation.

Also, you can vary pricing within a ten dollar range without affecting buying behavior. Meaning you can charge more for a product as long as the first digit stays the same ($54 versus $59 above). It brings in more revenue without causing any real change in how your prospect perceives your price. But before I let you go, I have to bring up an important point …

While there have been plenty of studies done about the psychology of pricing, you should consider them guidelines, not set-in-stone laws. The best way to determine which price works best for you or your client is to run tests. The research done on consumer behavior should give you a good starting point.

It’s worth trying. Because if by just changing the price of your product slightly, you can boost sales even a tiny fraction, it's essentially "free money." That’s extra revenue coming in without any additional effort.

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Published: October 3, 2011

3 Responses to “Is Your Client Charging the Right Price for Their Product or Service?”

  1. Really a great article John. Filled with useful and largely unknown facts and strategies.


    Guest (Delbert Ashby)

  2. Good article, John. You've explained clearly the psychology behind pricing and when to use what price range. I've also heard a rumor that Costco uses the ending .97 in prices when they are trying to get rid of stock.

    Marianne Foscarini

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