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 9.¹

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).² 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 .00.³

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!⁴

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.

Sources & further reading

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

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"Key Behavioral Pricing Effects"