The Psychological Difference Between $12.00 and $11.67

The Atlantic: 

Of the lunch spots near my office, the chain Le Pain Quotidien’s menu always demands more of my attention than others. The reason that the menu at Le Pain Quotidien is unusual isn’t because they serve open-faced sandwiches or that I’m not sure what kind of cheese Fourme d’Ambert is, but rather that their prices aren’t formatted like those of other shops. Organic egg frittata costs $12.00, curried chicken salad tartine is $12.25, a large cappuccino is $5.35. In a world where most prices end with “.99”, Le Pain Quotidien’s prices make my brain hurt.

The “undercover” economist Tim Harford (he has a book and writes column at the Financial Times by that title) has explained the theories for why prices in our world end in “9.” First is something called the left-digit effect, which suggests that consumers just can’t be bothered to read to the end of prices. The mind puts the most emphasis on the number on the far-left, so even though $59.99 is closer to $60, it’s the “5” that registers. The other theory is that prices ending in “.99” signal a deal to consumers. In short, consumers seem to like prices that end in “9,” and experiments say that pricing things this way increases purchases.

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Monica Wadhwa and Kuangjie Zhang, assistant professors of marketing at INSEAD and at Nanyang Business School respectively, conducted five experiments to test this. They found that the prices of different types are evaluated in different ways. For example, products that are recreational or luxurious benefit from rounded prices: Consumers were more inclined to buy a bottle of champagne when it was priced at $40.00 rather than at $39.72 or $40.28. However, for purchases that are utilitarian—a calculator, in this experiment—participants were more likely to buy at the higher non-rounded price. In another experiment, participants were told that a camera was purchased for leisure (a family vacation) or for a class project. They preferred rounded prices when it was for vacation, and non-rounded prices for class projects.

Read the whole story: The Atlantic