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$19.95 Pricing Explained

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There’s an interesting Scientific American article out regarding Why Things Cost $19.95 and it delves deeper into a concept most people understand and generally regard as true. I always had thought that the purpose of pricing something at $19.95 or $19.99 rather than $20.00 was because it seemed psychologically “much cheaper” despite an actual difference of a few cents. While that may still be true, the article in Scientific American seems to paint a picture in which the impact is more subtle. If the original price is in round numbers and we try to guess the wholesale cost, our guess will be far lower than if the item were originally priced a few cents off. The $20.00 price puts our “increments” in whole dollars whereas a $19.95 price puts our “increments” in cents. The mental anchor, whether it’s a round or not-round number, really set the stage for how we guess.

To be honest, I never bought the concept that $19.95 seemed psychologically cheaper than $20.00 but this explanation seems far more plausible. If your eyes see a $20.00 item and your brain unconsciously guesses it’s worth $18.00, you’re less likely to buy it (because you want a good deal). You’re more likely to buy it if your eyes first see $19.95 and then your brain is tricked into thinking it’s worth $19.45, you are paying less of a premium (despite you actually not knowing how much of a premium you’re paying). The trick is far more subtle!

To extend this further, and this is now based on my experience (or perhaps I read this somewhere a long time ago) and not the article, I find that the Wal-Mart pricing structure is intended to give shoppers a sense that they are getting a deal. Now that people are tuned into $19.99 being actually $20 (or more, given sales tax), they gone to weird pricing like $19.43 and $19.57, because I think people see odd numbers and think discount! $19.99 is regular price, but if it’s $18.76, it probably means it’s cheaper because another retailer would probably price it at $19.95. I don’t know if this is actually what happens but I bet that’s what they’re banking on.

What do you all think?

{ 8 comments, please add your thoughts now! }

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8 Responses to “$19.95 Pricing Explained”

  1. Traciatim says:

    I find it very unfortunate that this is studied that much. If products were actually good and priced properly they would sell. How do you get your toothpaste in to the mouths of millions . . . not by having good toothpastes, but by tricking them.

    I think I’m heading the way of the crazy old hermit on the hill who hates society. The more and more I read the more and more I just want the earth to stop so I can get off.

  2. JimmyDaGeek says:

    A standard retail practice is to “code” merchandise with different cents values. This is a way for clerks to verify a valid price. For example, .97 might be a clearance price while .99 might be a sale price.

    I remember seeing gas stations price their gas using a fraction like .6 instead of .9, but I don’t think anyone noticed, so they stopped it.

  3. Tom says:

    This will be slightly off topic…

    I think in a way that you’re right about Wal-Mart, however, they don’t just do that to woo shoppers at the expense of their profit margins. Other stores try the same thing, but often lose potential profit. Wal-Mart has cut costs and leaned out their supply chain so much that they are able offer lower prices than every other retailer all the time.

    I have great respect for Wal-Mart (minus all the bad press) and their ability to offer such low prices. $.25 off milk at any given time is not much, but $.25 each time over the course of a lifetime is thousands. Why do you think that Wal-Mart is posting huge profits even in this “recession”?

  4. jim says:

    JimmyDaGeek: I’ve heard the same thing, something to the effect of a price ending in 7 was the absolute lowest price Target would discount something (I probably have both the number and the store wrong, but you get the idea) so snatch it up if you see it.

    Tom: I think there’s a little of both, they can do that because they have pushed margins to the point that it’s still profitable.

  5. Jim says:

    Your theory about the Walmart pricing at unusual numbers is interesting. It probably does have a psychological impact on shoppers.

    @Tom: “they are able offer lower prices than every other retailer all the time.”, I am sure Walmart loves it when we believe this and they spend lots of marketing dollars telling us they have low prices. But they do not beat every retailer all the time. They may be cheaper on average and/or may be cheaper on most items, but they dont’ beat everyone ALL the time. Heres one report with examples where several items were cheaper at Target than Walmart:
    http://www.cockeyed.com/citizen/target/walmart_versus_target01.html

    Jim

  6. Michael Good says:

    It works because, the more detail, the less likely you are to question the item’s cost.

  7. donna jean says:

    You brought up a point I hadn’t considered – the perception of the wholesale price. Since I make items for sale, I’m constantly having to figure out a price. I really like whole numbers, but that seems to make things difficult. I wonder if it also influences the perception of the ‘cost’ value of the item as well.

  8. John says:

    Everyone looks into this improperly. The truth is that things are priced this way (at least in the beginning) in order to actually make an extra profit. Most Merchants priced the merchant fees based on dollar amount. For example, if a purchase was 20 dollars, the merchant fee for processing the card might be 7 cents when a purchase between 10 to 19.99 would be 4 cents. therefore the profit on a 20 dollar item would be actually be more if they lowered the price a cent or two. Many merchants fees vary and is why we always see 19.95, 19.98, 19.99, etcetera on particular objects. You will also notice that these are persistent based on the store you are in. For example, most of Wal-mart’s items are 19.95 but Walgreen’s would be 19.98 for most items. It usually depends on the merchant being used. This is how it started because merchants started out charging based on the purchase between a particular rounded dollar amount. They hardly do that anymore. These days the pricing is often due to one of two main reasons.

    1. Because alot of people will lay down a twenty and say keep the change (which adds up over time).

    2. And because Everyone else is doing it.


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