Price Thresholds

Definition:

Buyers perceive prices below price thresholds significantly lower than they actually are. Studies find that the use of price thresholds is widespread: 30-65% of prices in the US end in the digit 9.

Explanation

Price thresholds make use of the left-digit effect. As consumers read the left digit of a price first, they tend to round it to the next lowest monetary unit.

Research shows that consumers’ magnitude perceptions are affected by lowering a price by one cent to a “.99” ending, changing the left digit (e.g., $3.00 to $2.99). Conversely, when a price is lowered by one cent but the left digit does not change, consumers’ magnitude perceptions are much less affected (e.g., $3.20 to $3.19). Quantifying price threshold effects is difficult and context-specific. The range of results is highlighted by two studies. In 1996 researchers conducted an A/B/C test which sent out three different catalogues to 90,000 people and measured the purchase uptake of a certain dress. They found that .99 resulted in 8% higher sales volume compared to prices ending in .88 or .00.

In a similar experiment on women’s clothing, researchers tested how prices ending in 9 perform against those $5 cheaper or more expensive. Overall, the ending in 9 had 40% higher sales than the other options – even the $5 cheaper ones!

What to watch out for

It cuts both ways: Having established a price threshold makes it difficult to raise prices above the threshold (e.g. 99 cent store).

It does not fit for all companies: Depending on the industry, one must determine whether price thresholds negatively impact the perceived value of the offer. This can be the case for luxury goods.

Buyers might be more suspicious towards thresholds: Price thresholds can be perceived as manipulative, while more random prices like €4.57 look fairer as the vendor simply applied cost-plus pricing.

Further reading

"Nudge: Improving Decisions about Health, Wealth, and Happiness" Richard H. Thaler & Cass R. Sunstein