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The Impacts of Pricing Theory on What We Pay

Have you ever noticed that when you purchase things they tend to end in an odd number? There is very good reason for this. Various studies have shown that the human brain perceives an odd number lower than an even number. The most common price points out there have been shown by studies to end in 9 or 5. This is what’s known as the psychological pricing theory.

Pricing Theories

There are a few theories on why this is the case:

  1. Due to the same phenomenon we talked about on loss aversion  previously, people view losses as more significant than gains. If they see they are saving a few pennies off a prior price they still perceive it to be significant.
  2. People tend to judge  the left digit of a number most significantly. Say you have a price of $4.99 or 5.00. Because your brain pattern matches checking the first digit, it tends to perceive the $4.99 as more significantly different than the 5.
  3. People perceive that pricing that is down to the cents has been reduced as low as it can go.
  4. Finally, people tend to set limits on spending based on certain whole dollar amounts. The number $500.01 may be filtered out when you go to say Amazon because your searching for less then $500 dollars, while $499 will not be. You’re more likely to see the value as a result of its positioning.

A study by MIT and the University of Chicago showed that pricing the same object, women’s clothing, at $34.39, $44.00, and $39.00, resulted in the largest sales at the$ 34.39 price point. So yes, it does work.

Overusage?

However, this is only part of the story. Your prior perception of money and the price of a type of item also play a big part. If you normally buy a type of product and it always shows ending with a 9, you might not discount it as much as you would an item ending in 9 of something that normally ends in a whole number. So, if you always buy shoes at $20 dollars a pair, $19.99 might have a bigger impact than the price of cereal which always shows as $2.99.  This is why not all items are priced using this strategy.

Higher Cost = Higher Quality?

In fact, to take it one step further there are some items that sell simply based on you perceiving them to be higher quality based on a higher cost. This is often the case with the branded versus non branded cereals. Often the same manufacturer is making the store brand, but it will be priced cheaper. The branded cereal will be priced higher and your brain will perceive it as higher quality than the same non branded item. This along with the brand itself leads to your willingness to pay more for the same thing. For example, if a Mercedes was priced the same as a Nissan Versa, you might question the quality of the car rather than buy the Mercedes, regardless of whether the Mercedes was the better car. Your perception of the brand Mercedes is tied to the quality and part of that perception of quality is the inflated price.

Discount Inflation

One final step retailers take with pricing is to use inflated prices and then reduce them by a higher percent off. Take a laptop on an online retailer. The price of the item on sale on several big retailers will list as 20% off. The problem is, none of the retailers have ever sold it for more than the price you would pay at this sale. They’ve used the MSRP price or some other stock price that someone never actually sells the item for as a basis to give you a percent off. Since everyone loves to save we are naturally drawn to a bigger savings amount and ignore that the price hasn’t really changed from week to week, or worse has increased.  Pay especially close attention to this on Black Friday or Cyber Monday.

Why have I taken you on a saunter through the world of pricing theory? The more you realize these triggers, the better off you’ll be in your every day purchasing life. If you realize the price is manipulating you, perhaps you’ll check what the true difference in price is from week to week and versus competitors to determine if you really are getting a deal. At very least the next time you go by a gas station and see the price in 9/10ths of a cent you’ll understand why.

9 Comments

  1. Go Finance Yourself!
    Go Finance Yourself! November 21, 2016

    I think the inflated pricing technique is a huge one, especially online. Sellers advertise 30-40% off of some blown up price. It works though. We all like to feel we’re getting a good deal for our money. Even if a part of us know the original price has been inflated…. it’s 40% off! You can’t pass that up, right!?

    • fulltimefinance@fulltimefinance.com
      [email protected] November 21, 2016

      It sure is difficult to resist, which is why they do it in the first place. Black Friday especially is notorious for this. That and providing subpar versions of a popular item as a door buster.

  2. Mustard Seed Money
    Mustard Seed Money November 21, 2016

    I hate to admit it but those $4.99 vs. $5.00 prices definitely get me and the worst part is I’m aware of it. It’s amazing how the mind works and why I’m sure retailers like Wal-Mart have been so successful. Thanks for sharing such an interesting post!!!

  3. They have so many calculated things that they do to get us to buy things don’t they! You’re right, it does look more appealing/cheaper even just by reducing it by 1 cent.

    I don’t tend to buy anything anymore, so it doesn’t really affect me now which is lucky 🙂

  4. Andrew
    Andrew November 23, 2016

    I always love pricing theory because it’s so interesting.

    I think discount inflation is the most powerful out of all of them. It’s probably fooled me a few times over the last year! It just feels so good to get that ‘discount’! All is not lost though, I’ve actually used it too before in some side hustles haha.

  5. ChooseBetterLife
    ChooseBetterLife November 25, 2016

    This even works on a larger scale when looking for a home to purchase!

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