My favourite article on pricing by Nick Kolenda had me thinking about a few things around pricing. Firstly, what is it about odd and even pricing that affects our buying behaviour and secondly what is it about that 99-cent ending?!
Now lucky for both you and I I have spent a ridiculous number of years reading journal articles for research. In fact, some might think me crazy that I actually prefer to read a journal article over a book (even a non-fiction). So it won’t surprise you that I got carried away with my reading and read 11 articles in total. From those articles I actually have two and a half pages of notes on odd and even pricing and 9-ending pricing.
Before you start hyperventilating, I’m not going to go through all of the articles in one blog post. That would just be cruel and I have to be honest, too confusing. So what I’ve decided to do is to split off the topics and write them up as separate posts; one on odd & even pricing and the other on 9-ending pricing. Not being one to circumvent a story and cut to the climax, I’m going to start at the start and odd and even pricing.
The one thing that hit me in the Kolenda article was the effect of ending on emotional reaction to a price. This is exactly the point where I begin my research. I started with the 2013 paper of Lynn, Flynn, & Helion and their research into round numbers (those ending in 5 or 0 as compared to the remaining numbers). They conducted an analysis of data from three studies where clients could pay with a credit card and the ‘product’ was fuel, the tip on a restaurant bill, or software. The interesting thing was that the software purchases were made in a ‘Pay What You Want’ (PWYW) style, where the customer paid whatever they chose (an increasingly popular choice online). This research was of particular interest due to the increasing popularity of pay what you want promotions online.
So in general terms what did they find out about 0 or 5 ending prices?
The first finding that they had was that a 0 or 5 ending was more common across all of the studies they analysed. Why was this significant? Well, because all of the studies had the option to pay by credit card, where cash handling was not required.
People find it easier to remember (this one is key for the 9-ending article), process, & perform mathematical operations when the number ends in 5 or 0. The implication for this is that we tend to like things we find easier and will develop a preference for these numbers. They even found research where 66% of people asked said they actually preferred those numbers.
They also discussed the finding that 0 or 5 endings are more likely when a person is guessing or estimating an amount. I believe that this refers back to our preference for the familiar & the ease of mathematical processing.
Here’s what was found more specifically
Pay what you want pricing.
Lynn, Flynn, & Helion found that more of the PWYW payments were whole dollar amounts. They were interested by this as the transactions occurred online and paid by credit card, so the dislike of calculating or handling change was not a consideration. Additionally they found that while, of the payments over $1, 13% ended in a 0 and an amazing 42% ended in a 5; both of which occurred more often than you can expect by chance.
Ok, so not really of major importance here in Australia, but certainly of interest to those in hospitality. Remember as you are reading the following that all of the payments were made by credit card, meaning that no actual cash-handling took place.
The main finding was that 73% of people left a whole dollar tip. So not overly surprising there, especially when you consider the general finding that we prefer whole numbers. Though of interest was that 25% of people left a tip where the most right-handed digit was a 5 (be that dollars or cents).
For those of you in hospitality and wondering about the big tippers, here’s some news. Of the tips greater than, or equal to, $11 – 20% of them ended in a 0 (cents or dollars). Now that’s promising!
My personal favourite was the following finding.
Where the bill did not end in a whole dollar amount (there were cents), 23% of people used the tip to round the bill to a whole dollar amount when the tip was added in. This finding confirms that for some people, there need for a round price is greater than their dislike for mathematical operations and their ease (or difficulty) in processing.
Our love of 5 or 0 endings
So, in addition to their finding that people will undertake mathematical processes to have a round number in the total bill; Lynn, Flynn, & Helion found the following…
These numbers were also preferred by customers purchasing fuel at a service station when they:
– paid with a credit card and received a receipt
– they only considered the whole dollar amount, and
– they only purchased fuel.
This is interesting to consider if you are offering a self-service product.
Perception of quality based on price ending
Lynn, Flynn, & Helion reported that the 0 or 5 ending numbers were positively associated with a customer believing that the product was of higher quality & resulted in more sales, but this was only the case when they were interested in buying a high quality item. In fact, the opposite was the case and other numbers were associated with a discount or a ‘good deal’, leading to increased sales, when the customer was interested in a cheaper price or a ‘good deal’. So what’s the takeaway from this one? You need to know why your customer comes to purchase from you – price or quality! There’s no getting around the fact that you really need to understand what motivates your clients.
Wilkie, Manning, Sprott, & Badenhausen (2015) found similar results in their research into odd & even pricing. They discovered that items of even pricing had a higher perceived quality over odd pricing. Interestingly, these even priced items were also perceived as being more expensive.
Pricing and personal motivation
Wilkie et al had another interesting finding and that was around motivation.
They discovered that the intention to go and buy an item was higher for odd rather than even prices. However, the initial motivation to purchase (quality vs good deal) was an important influencer of the final perception of the product and intention to purchase. This last finding reinforces the finding of Lynn et al in so far that the client’s motivation to purchase (quality vs deal) effects how they react to the pricing (odd vs even or 5 vs 0). I believe the fact that 0 is perceived as even has baring on how people perceive 0-ending prices as being higher quality (and more expensive).
Bundling of products or services
Lynn et al found that when two products were bundled together, a 5 or 0 ending increased the attractiveness of the other product in the bundle. This is important to remember when you bundle goods and/or services to increase revenue. The use of these numbers will increase buyer perception of quality and increase the attractiveness of the additional product.
Further to the findings of Lynn, Flynn, & Holien, Baumgartner & Hähnchen (2016) looked further into the pricing of bundles. They found that the preference for a bundle increased when both items were priced with even amounts rather than odd. The researchers believed that this was suggestive of even numbers representing higher quality. The 2016 research found that the greatest purchasing probability occurred when both items were labelled with even prices and the total bundle amount was odd. (Their research was into odd and even prices regardless of value)
Price ending and negotiated pricing
Klumpp, Brorsen, & Anderson (2005), looked into grain pricing in Texas. They found that prices ending in a 5 or a 0 were more prevalent. Grain prices are set by the producer and then there is a handling fee added by the grain merchant, this fee can be negotiated. They found that when the fee was negotiated the effect was more prices ending in a 5 or a 0. This suggests that if your pricing is open to negotiation, consider the risk or cost of being negotiated to either of these points, or force the negotiation to one of them for a more amicable arrangement.
Isaac, Schindler, Wang (2014) investigated 5 or 0 endings in relation to debt recovery. (I have to say that this was one of the more interesting articles personally) They found that debts ending in 5 or 0 were more likely to be repaid in full. Personally, I will now consider rounding my debts to these points when chasing overdue payments.
So what were my major takeaways from reading these pricing papers that I haven’t gotten elsewhere?
Even priced products and services are perceived as being of higher quality than odd and that intention to purchase based on quality is set by what motivates the buyer.
If you value and promote the quality of your offer, you are better off using an even price.
The pricing of a bundle of items requires that the items be even priced but the total bundle price be odd.
If setting suggested prices for a Pay What You Want promotion, you should only use whole dollar amounts and preferably prices that end in 5 or 0.
Debts are more likely to be paid in full if they end in a 5 or a 0 and to consider this when looking to recover debts.
The next instalment summarises the papers I read about 9-ending prices. I have come across some interesting history, beliefs, and theories.