The answer is science, at least according to April’s issue of Scientific American, specifically that the former price takes advantage of how the average consumer's mind works. University of Florida marketing professors Chris Janiszewski and Dan Uy ran a series of tests to explore just how this pricing “trick” works on shoppers. They conducted experiments in which they required participants to make “educated guesses” of the wholesale value of items was based on their retail price tag. In the study different groups participants sized up a high-definition plasma TV. The same TV was priced differently for each group of buyers; the price tags were $5,000, $4,988, and $5,012.
The tests found the $5,000 price tag estimators, guessed a much lower wholesale value, than the groups whose TV was tagged with precise retail prices. And, those who started with the round number as their “mental anchor” were much more likely to guess a wholesale price that was also in round numbers. This means that in general when people see something on sale for $20 they wonder what it is really worth in round numbers; $19 or $18. But, if the starting price is $19.95, people tend to think in smaller increments. Therefore they may estimate the actual value at $19.75 or $19.50.
Uri Gneezy, a professor of economics and strategy at the University of California at San Diego, says that there is more to this psychological price trick. “When we see something marked $19.95 we make a quick evaluation that it is under $20. We see that price and put it into a category; anything over $20 is expensive and anything under $20 is affordable. And, although we try to correct our initial evaluation, we do not correct it enough.”
The strategy is also enhanced by the ability to evaluate prices as a consumer. Dan Ariely, author of Predictably Irrational, says that when it comes to shopping, people do not add very well. “A price ending in “.99” tells people that something is on sale but it also makes them think that it is less expensive than it really is. Because of this we often don’t realize how much the things that we are purchasing add up to and end up spending more than we thought.”
Experts agree that the best way to combat this psychology behind pricing is to first be aware that it exists. Once consumers know how and why retailers come up with obscure prices, they can better understand that just because something is marked $19.95 at Wal-Mart (WMT), doesn’t necessarily make it a better buy than an item marked $20.00 elsewhere.
“If you just try to ignore the $19.95 and think of it at $20 you can override the initial perception that the item is inexpensive because it is under $20. It isn’t easy but it is best to just ignore .95,” says Gneezy.
At the same time, it is important for consumers to understand why they are purchasing the items in their cart. “In general we need to try and figure out if something gives us enough pleasure or not. It doesn’t matter what the price is,” says Ariely, a professor of behavioral economics at the Massachusetts Institute of Technology (MIT). “If something is marked $19.95 and you are tempted to buy it because it is on a “good sale,” you should ask yourself, ‘If this was the original [price], would I still buy it?’”
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