CEO, Beyond Philosophy – World Leading Customer Experience Consultancy
Conventional wisdom says that a product priced at $99.99 will seem less expensive than a product priced at $100. Researchers have also found that a precise price, like $99.37, is more believable and appears to offer a greater value than a round price like $100.
Based on this, you might conclude that round prices – the ones that end in zeros – are always a bad idea.
But recent research shows that round prices are perfect for certain types of purchases.
To see why this is true, pretend for a moment that you are at your local store. There’s an area near the front door with items priced at $1.00 and $3.00. It’s unlikely that any of these things was on your shopping list, yet you may find yourself unable to pass up the Star Wars socks. And then, near the checkout, there’s a rack of $5.00 DVDs. You see a favorite movie and happily toss it into the cart. Those round prices were pretty effective.
Studies have shown that people sound out syllables when they read a price tag. We perceive a price as lower if it has fewer syllables. So according to this theory, a short price like $100 seems lower than a longer one like $99.99. But that seems to contradict those other studies that say a precise price appears to offer a better value.
In a recent study, Singapore-based researchers Monica Wadhwa and Kuangjie Zhang analyzed what they call the “rounded price effect.” They found that items are priced right if the pricing matches the way a customer is thinking about a purchase. Customers are more likely to think a round price “feels right” if the purchase is based primarily on emotions. Precise prices are a better match for purchases based on cognition, or rational evaluations.
Why is this? The researchers used the example of buying a camera for a family vacation. You’re buying the camera to have fun, and your brain doesn’t want to do a lot of work to decide which camera to buy. Give the camera a round price that’s easy to understand and the purchase is effortless. What’s more, the easy camera purchase reinforces your good feelings about the trip.
But if you were buying a camera for a class project, you might do a lot of research and evaluation of features and specs. You’re already thinking hard about this purchase, and the researchers say those thought processes are reinforced by a precise price that requires more mental work to decode.
Our customer experience evaluations tell us that in general, over 50 percent of a customer’s experience is based on emotion, but that number can vary greatly depending on your business, your customers and your products. This is part of what we look at when we assess customer experience using our our CX Mirror tool. When we undertake a Customer Mirror that assesses a customer experience, we look for customers’ responses to different types of pricing.
Round vs Precise Pricing
Round pricing can extend far beyond point and shoot cameras and inexpensive impulse items at big box stores. Luxury items are prime targets for round pricing because we buy them based on our desires and the image they project.
Take luxury cars. You’ll choose a Porsche based on your feelings about the car, not because you actually need that much power for your short commute across town. A round price makes it easy to say “yes” to that sporty leather interior. A precise price might cause you to think twice.
Other emotion-driven purchases include things like vacations, luxury brand goods, personalized items and prestigious jewelry or watches. You can buy a Timex to keep time, but you want a Rolex to project an image of wealth and success.
Round pricing doesn’t work so well for items we need and don’t have strong feelings about. I don’t need a round price to inspire me to buy bread, eggs or coffee at the supermarket because these are commodity items that I buy every week. The same goes for things like utilities, cable TV and gas for the car.
If the researchers are right, then round pricing also isn’t much help if your customers tend to do a lot of research before buying from you.
Should You Use Round Pricing?
Of course, most purchases aren’t all one thing or another. Your emotions may be telling you to get the personalized golf clubs, but that doesn’t mean you aren’t also evaluating their features. Knowing whether to use round or precise pricing means understanding your customer and his or her buying experience.
For example, suppose you sell high end bicycles. A new rider with plenty of disposable income might instantly buy a good-looking racing bike with lots of expensive features. A more budget-minded shopper might pick the same bike, but only after careful research and multiple test rides. Round pricing might be perfect for the first buyer, but the second one may perceive he’s getting a better value if you set a precise price.