Why do most prices end in 95 cents? There are many urban legends that explain the origins of ending prices with 95 cents or other odd numbers. While it may be difficult to prove the historical accuracy of those legends, the reality of psychological pricing is a key part of 21st century marketing. Why do retailers use this practice? Consider the following top four effects of psychological pricing on consumers.
1. Least significant numbers are ignored. Consumers make quick judgments. The most prominent number is often what is given the most attention, as opposed to rounding to the closest whole digit. In fact, Keith Coulter, associate professor of marketing at Clark University, says this marketing technique is enhanced even more when retailers print the .95 in a smaller font than the first number.
2. Lowest price is perceived. Ending a price in .95 or .99 gives the customer the perception that the retailer is offering the lowest price possible.
3. Item in lower-priced category. Even if only five cents or five dollars is involved, keeping a price lower than the next whole number could put the item in a category that will attract more customers. For example, potential home buyers may search for homes under $100,000. Pricing your property at $99,995 will get you on their search results list. Whereas, if you priced your home at $100,000 you would be excluded.
4. Consumers read from left to right. It seems rather simple, but it's referred to as the "left-digit anchoring effect," a theory published by Manoj Thomas and Vicki Morwitz in 2005. They researched how consumers interpret the difference between $1.99 and $3.00. The results showed most people perceive the difference to be $1.01 instead of $2.01, simply because they read from left to right and focus only on the numbers on the far left.
The theory of psychological pricing has its opponents. However, banking on its effectiveness, thousands of retailers still utilize this method.