Ending prices with .99 can backfire for stores, study reveals

COLUMBUS, Ohio — It’s the oldest trick in the retail book. Instead of pricing an item at $10 flat, go for $9.99 instead. The idea is that the lesser value will motivate some shoppers to make the purchase, but a fascinating new study is warning this approach may backfire on sellers. Ohio State University researchers say the “just below” pricing strategy makes shoppers much less likely to upgrade to more expensive item options, such as a larger TV or higher-end trim on a car.

In other words, while it’s true that this approach can help make a product appear cheaper and thus more attractive from a value standpoint, just below pricing also makes the notion of upgrading to a higher price point seem too expensive.

“Going from $19.99 to $25 may seem like it will cost more than going from $20 to $26, even though it is actually less,” says lead study author Junha Kim, doctoral student in marketing at Ohio State’s Fisher College of Business, in a university release. “Crossing that round number threshold makes a big difference for consumers.”

Notably, these findings held up across a wide variety of products and services. From coffee, face masks, and streaming services to cars and apartments, just below pricing had the same effect.

“We found this effect works in experiential categories, as well as products. It replicated very consistently,” Kim explains.

Pinching pennies

One experiment entailed setting up a coffee stand with rotating prices on the OSU campus for two days. Half the time a small coffee featured a “just below” price of 95 cents, along with an option to upgrade to a larger size for $1.20. The other half of the time a small coffee cost a flat $1 with an upgrade running students a steep $1.25.

Now, while the just below prices were clearly cheaper all around, upgrading from 95 cents to $1.20 also means crossing the $1 boundary. A line already crossed by ordering a small coffee at the other price point of a full dollar. Researchers predicted this would lead to more people upgrading during the $1/$1.25 pricing hours.

Their prediction was correct: 56 percent of buyers upgraded to a larger size during $1/$1.25 pricing hours, while only 29 percent of shoppers did the same during the 95 cents/$1.20 time period.

“In other words, we sold more of the large coffee when it was objectively more expensive than it was earlier ($1.25 vs. $1.20),” comments study co-author Selin Malkoc, associate professor of marketing at Ohio State. “It was amazing how increasing prices – from a $1.20 to $1.25 – actually increased sales. It is a testament to how strong the effect was.”

Perception is reality for consumers

Another experiment presented participants with multiple upgrade options at various price points for both cars and apartments. Students were more likely to purchase a more expensive car or apartment if the base price was just above a round number instead of just below.

“Research has shown that going across a state boundary makes a destination seem farther away,” Kim continues. “It is crossing that threshold that makes a difference. In our studies, the round number is like the state boundary, magnifying the perception of a difference in price.”

According to study co-author Joseph Goodman, also an associate professor of marketing at Ohio State, much of these findings may be due to the fact that many consumers have little idea about the “right” price of a product or service.

“For many of the things we purchase, price is perceptual.  We have a feeling about whether the price is right or not,” he explains. “In our study, people often said an upgrade purchase seemed less expensive when the base price was above the round number, even though it was objectively more expensive.”

Researchers add that on some occasions the threshold-crossing effect doesn’t hold up. For example, small price differences on expensive items and people who are very familiar with pricing practices, such as consumers who book hotels on a regular basis.

“As consumers, we need to realize that our perceptions are often flawed.  We need to rely on actual numbers and not just our sense of what the numbers are,” Prof. Malkoc concludes.

The study is published in the Journal of Consumer Research.