It was once synonymous with India’s widest network of footwear retail stores. Back when you bought everything with cash, seems so long ago doesn’t it, it meant you went home with new shoes to the merry notes of jangling coins in your pockets. Today with booming retail and the ubiquitous hypermarket ‘odd-end’ pricing is now a common phenomenon. In India most people still call it ‘Bata Pricing’, the puzzling practice of pricing products a few decimal points below a rounded number. But globally ‘odd pricing’, ‘price ending’ or, more academically, ‘psychological pricing’, is a well established, much researched but little understood phenomenon. And a surprisingly old one.Some scholars believe odd-end pricing has its roots in post-Civil War America. This period saw fixed price retailing becoming the norm replacing the previous system when goods were unmarked and customers were expected to haggle with the retailer for each price. With growing retail businesses, emergence of formats like department stores and greater consumer demand this innovation no doubt reduced transaction times and helped retailer run their stores with less people. (Imagine a Big Bazaar if you had to inquire and haggle for every price!) Establishment of a standard currency across the States implied that imports had to be labeled with prices converted into dollars. British imports were widely considered to be of superior quality and over time the pricing associated with them, fractional because of conversion, became synonymous with premium products. Retailers, and shoppers, soon began looking favourably upon goods that had ‘odd-end’ prices.
Walk into any discount retailer like Big Bazaar or Hypercity today and it becomes clear that fractional pricing no longer conveys ‘premium’ or ‘quality’. On the other hand it has now come to mean discounts and value. Price tags proudly announce that products are available at a discount ranging from a few paise for a tube of toothpaste to several thousand rupees for LCD TVs. For the shopper this means low prices that often end in two places of decimal. (Rs. 9.87 for a bar of chocolate bar that you would pay ten bucks for outside!) Thankfully credit and debit cards ensure you also don’t have to carry a sack of change with you in tiny paise coins.
Corporate Strategy
But unrounded prices was not just all about quality and customer. Decades ago Macy’s, the eponymous department store in New York, began 99-ended pricing (pricing products one cent below rounded) as a means of keeping check on shifty cash register operators. The fractional amounts meant that employees had to return change. This meant they had to ring the register and put every sale on record. Now no one could turn entrepreneur and pocket the money themselves. (Of course this does nothing to stop them if the employees carried bags of coins to work.)
Some researchers also trace the prevalence of fractional pricing to a rather shrewd piece of strategy intended to promote newspaper sales. Melville E Stone launched the Chicago Daily News in 1875 at the then ‘lowest’ price of one cent. His competitors all sold their broadsheets at a nickel, or five cents, a copy. While this immediately drew readers it also presented a problem. How do you get people to buy your new cheap newspapers if they didn’t carry the change? The clever Mr. Stone managed to convince retailers, many of them his advertisers, to price their products at ‘.99′ price points thus ensuring customers had sufficient change to pick up a copy of the Daily News.
Be it shrewd management, clever marketing or just brand premium, fractional pricing has lingered on as one of the more enduring retailing devices. From Bata to Macy’s to Big Bazaar price tags are more often than not emblazoned with prices that look exceedingly accurate to the single paise.
But history alone is insufficient explanation. With modern developments in payment systems and transaction management there seems little benefit in keeping what seems a troublesome custom. Why take the trouble of pricing products in fractions when you have cards, vouchers, electronic cash registers and smarter customers? And the answer to that lies not in the realms of strategy or marketing management but somewhere much closer to the customer. His head.
Sweating about the small stuff
For something that sounds so insignificant, after all what is a paise here and there, ‘odd-pricing’ has an imposing body of academic work dedicated to studying the phenomenon.
The academic interest began way back in 1936 with a brief study on the effect of changing prices for products sold by a catalogue retailer. That study was not only inconclusive but also left little data that could be analyzed for statistical significance. But that study set the stage for two key trends: continued academic research in the area, at least a dozen popular studies have emerged subsequently, and the use of catalogue retailing to experiment with consumer behaviour.
Sine the 1970s the pace of academic interest grew commensurate with the greater organization and sophistication in retailing worldwide and particularly in the United States. In most cases the research focused on determining price elasticity to fractional changes, i.e. how much more or less people bought when prices were modified by fractional amounts, and effect on conversion rates or how many additional buyers were drawn because of the revised prices.
What has now commonly emerged as the benchmark study on odd pricing is a 1996 study, ‘Increased Consumer Sales Response Through Use of 99-Ending Prices’, published by a professor from Rutgers University and a student from the University of Pennsylvania. The paper appeared in the Journal of Retailing and primarily looked at the effect of ending prices at ‘.99′ points. Unlike previous studies Schindler and Kibarian also investigated the effect of another ending point, ‘.88′, as well.
The paper hypothesized that the effect of odd-ended pricing could be explained by a combination of two concepts: ‘underestimation’ and ‘association’.
Underestimation is the mechanism by which customers try to simplify their decision making process by ignoring the right most digits on a price tag. It has been scientifically observed that individuals actually process large numbers from left to right. Fractional price points increase the length of numbers that the consumer needs to process. Therefore there is a tendency to simplify the decision process by ignoring the last few digits. To illustrate a product priced at Rs. 29.99 can be perceived to mentally to be worth Rs. 20.00. The individual in this case ignores the trailing 9.99 rupees.
For the example given this is an underestimation of some 30%. With several products priced at such points the customer may be expected to buy a larger basket than usual because of the underestimation mechanism.
Consumers can also associate a certain value proposition with a style of pricing. Since most discount retailers tend to price products at fractions because of a markdown from MRP customers may associate greater value with fractions, thus being motivated to purchase the product at the perceived lower price. This is known as the ‘association’ mechanism and is not too different from the British imports story mentioned earlier.
Fraction Traction
The paper reveals a staggering fact. Pricing products at just one decimal point lower than the whole number pushed up purchases by 8%. While the conversion rates did not increase drastically, the number of buyers in each case was almost identical, there were clear trends of customer spending increasing with use of 99-ending prices. Interestingly this trend was not noticed when prices ended with 0.88 price points.
There is something about 0.99 price points that seem to bring out the consuming best in individuals. Pity that the paper ends with no clear understanding of exactly why this happens. While underestimation and association both might be at play there is still no clear indication of the extent and individual effect of both theories.
So the next time you walk into a Big B or a Spencer’s keep an eye out on the price tags. Before you grab that box of cut price chocolates pause for a moment. You might discover that your savings are a lot less than you really thought.
But what the heck! This is economics. When did that ever become more important than chocolate!
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