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There is an Ikea
advert on TV at the moment for a dishwasher. It starts off with a question:
“How much is a dishwasher?”, and proceeds to suggest some answers: £500? £400?
£300? Soon the punchline is delivered – that Ikea sell a dishwasher for under
£200. My advertising savvy eight-year old and I look up from our lego to see
that the Ikea dishwasher is indeed under £200. But only just. The ad proudly
proclaims that an Ikea dishwasher will set you back by just £199. Daughter and
I debate whether this is honest of Ikea or whether it is more like a trick. Ok,
the dishwasher is technically under £200. But you wouldn’t be able to do
much with the change. Around the same time a student knocks on my door looking
for a psychology dissertation supervisor in behavioural economics. It’s not one
of my research areas but I’ve read Freakonomics
and The
Undercover Economist and I’m interested. She mentions price anchoring and I
remember the Ikea dishwasher ad. “Like prices ending in 99?”, I ask. “Maybe”,
she says.
The idea of prices ending in 99 resurfaces that evening, and
from the sofa I use my smart phone to search the psychology research database “PsycInfo”. I
find two fascinating and cool psychology experiments that address the very
question of whether people are fooled by prices ending in 99. They are both
written by Robert M. Schindler of Rutgers
University, New Jersey. In fact it seems that he is THE guy for scientific
investigations of prices ending in 99.
In the first paper, published in 1996, the researchers
persuaded a real company, a mail order company specialising in women’s clothing,
to make some subtle changes to their catalogue. Three versions were produced
all of which were identical apart from the prices of the items on sale. In one
version of the catalogue all item prices ended in 88, in a second version all
item prices ended in 99, while in a third all item prices ended in 00. So, to
provide an example, a scarf was advertised at $17.88 in the first catalogue, at
$17.99 in the second catalogue and at $18.00 in the third catalogue. It was
arranged for each catalogue to be mailed out to a large number of customers
from the company’s database. Then all the researchers had to do was wait and
see how buying patterns varied according to the different catalogues that had
been circulated.
Over the next 6-months nearly 3,000 customers bought from
the catalogues. Intriguingly, customers who bought from the 99-ending catalogue
spent more money on average than those who bought from the other two
catalogues. The average spend for the 99-ending catalogue was $59.99, compared
with $50.00 for the 00-ending catalogue and $57.51 for the 88-ending catalogue.
A statistical analysis indicated that these different spending levels were not
merely chance fluctuations. In addition, more customers bought from the
99-ending catalogue than the other two versions, although the difference in
customer numbers was not that large, and could have been a chance fluctuation.
Finding that people spent more money when buying items
priced with 99 endings compared with 00 endings indicates that the pricing
strategy influenced purchasing behaviour. Advertising items at one cent below
the round dollar price lead to a greater average spend per consumer. It’s not
clear from this how the 99-ending
price effect works. Presumably the consumers somehow came to believe that the
99-ending priced items were better bargains, possibly because they seemed
cheaper. I’ll return to how the 99-ending price effect works later.
You might be thinking that, although the study shows a
99-ending price effect, it only applies to a certain kind of person. Perhaps
only less well-off or less well-educated people tended to shop from mail order
catalogues in the pre-internet era. I should also point out that as these were
women’s clothing catalogues it is likely that the majority of the purchasers
were women. In other words, perhaps only some people are fooled by
prices ending in 99 – perhaps less-well educated people, and perhaps women.
Well, you could think that. But a second more recent study carried out with
male and female university students as participants will most likely alter this
opinion.
The second study was carried out with 122 students of Eastern Illinois University and was published in
2005. This time participants sat at a computer and were presented with
on-screen instructions asking them to consider how many of a selection of items
they thought they could buy with $73.00. They considered items one by one, and
item prices ended either in 99 or 00. The items cost $3, $4, $5 or $6 in the
00-ending category, or $2.99, $3.99, $4.99 or $5.99 in the 99-ending category.
Half of the participants were asked to think quickly and guess if necessary,
while the other half were asked to think carefully before responding.
Now - if people are fooled into thinking items priced with
99-endings are significantly cheaper (more than one cent cheaper) than items
priced with 00-endings, then they should overestimate the number of items
priced with 99-endings that can be bought (and overestimate by more than the
one-cent difference). And they did.
The participants estimated that, on average, 5% more items
could be purchased when the price ended in 99 than when the price was one cent
more. Again, a statistical analysis indicated that this difference was not a
chance fluctuation. This 5% margin was much larger than the actual margin of
price difference, which was never larger than 0.3% (in the case of the $2.99/
$3.00 item). Somehow the 99-price ending was distorting participants’ cost
estimates. Remember also that some participants were asked to “think quickly”
and others to “think carefully”. This made a difference, such that the tendency
to overestimate how many items could be bought for $73 was more pronounced in
the participants that were asked to think quickly.
How can these findings be explained? Well, the second study
was carried out with a mixed gender group of university students and they were
fooled by 99-ending prices. On that basis the 99 trick does not seem to be
related to gender or lack of education. However, people were more prone to be
fooled by 99-ending prices for purchases made without a good deal of thought.
In terms of how the 99 “trick” works, there are two
psychological theories. The “underestimation” theory holds that we tend to pay
more attention to the left-most figure of a price, so £1.99 looks like one
pound, whereas £2.00 looks like, well, two pounds. There is some support from
this in an analysis of the size of error made in the second experiment. The
size of error was more often within 99 cents of the actual price when prices
ended with 99, compared with when prices ended with 00. This magnitude of error
is consistent with seeing $2.99 as $2.00.
The second psychological theory is that of “association”.
The idea here is that 99-ending prices are associated with bargains, for
example as would be found in a discount sale. Therefore, when we see a
99-ending price we think about discounts at some abstract level and this sways
us towards the belief that the item is more of a bargain than it actually is.
This idea was not scientifically tested in either study but it may contribute
to the 99-ending price effect.
These studies are a welcome addition to the cool psychology
blog. I’ve lost count of the number of times I’ve looked at items in shops
priced at something-99 and thought: People don’t fall for that, do they? I’m
sure many other people have too. Well, these psychology experiments answer that
question. Ending prices in 99 is a marketing technique designed to make us buy
more stuff. And what’s more, the studies I’ve reported here demonstrate that it
works.
What can we do with this information? The second study
showed that people are more prone to be fooled by 99-ending prices when not
thinking carefully. So, weighing up purchases and trying not to buy items on
impulse should help us avoid being fooled. But it’s probably not that easy. As
people we are prone to the trials and stresses of life and there will be times
when we have to make purchase decisions while stressed and thinking less
carefully. Be aware that under these circumstances we may be more prone to the
99 trick. There is also the idea of “retail therapy” when
people use shopping to try and boost mood. Might we be more prone to 99-ending
pricing under these circumstances? I bet.
The references and links to the full papers describing these
studies are included below. You can read the abstracts (a short summary) of the
articles online for free by clicking on the links. There is a charge for
obtaining the full papers unless you are able to access a library at a
university or hospital with a subscription to the two journals that published
the studies: Psychology and Marketing and Journal
of Retailing. Otherwise you could try e-mailing the lead author, Professor of
Marketing Robert Schindler and ask very politely for a pdf copy.
References
Bizer, G. Y., & Schindler, R. M.
(2005). Direct evidence of ending-digit drop-off in price information
processing. Psychology and Marketing, 22, 771-783. Link
Schindler, R. M., & Kibarian, P.
N. (1996). Increased consumer sales response though use of 99-ending prices. Journal
of Retailing, 72, 187-199. Link