Be wary of ‘just below’ pricing

I’ve been toying with the idea of getting a MacBook Air (my old Samsung netbook has just about had the life pounded out of it after churning out half a million words or so), and I noticed that the 11-inch MacBook Air is listed on Apple’s Canadian site as starting at $999. Well, at least it’s not $1,000!

I’ve been toying with the idea of getting a MacBook Air (my old Samsung netbook has just about had the life pounded out of it after churning out half a million words or so), and I noticed that the 11-inch MacBook Air is listed on Apple’s Canadian site as starting at $999.

Well, at least it’s not $1,000!

We’re used to seeing these kinds of pricing games. You almost never see a product priced at an even, say, $23; no, it will be $22.99 or $22.98.

There’s just one problem. According to Robert Schindler, a professor of marketing at the Rutgers School of Business-Camden, who has been studying this marketing strategy for years, it doesn’t always work.

In fact, sometimes it can backfire: “When consumers care more about product quality than price,” he says, “just-below pricing” (as this technique is called) “has been found to actually hurt retail sales.”

Schindler conducted a meta-analysis of more than 100 different studies of just-below pricing and says that, yes, it does work: people really do perceive, subconsciously, a big difference in price between $19.99 and $20, and think they’re getting a bargain. The effect is actually greater than the perceived difference between something priced at $25 and $20, even though $5 is rationally a much greater savings than one cent.

The reason seems to be that people pay a disproportionate amount of attention to the leftmost digit in prices: that’s the one that determines whether an object is seen as affordable.

A study published in the Journal of Consumer Research in 2009 bore this out. Kenneth C. Manning of Colorado State University and David E. Sprott of Washington State University conducted a number of experiments to see how people determined affordability.

In one, they asked participants to consider two pens, one priced at $2 and the other at $4. Decreasing either price by a single cent lowered the leftmost digit by one.

They found that when the pens were priced at $2 and $3.99, respectively, 44 percent of the participants chose the higher-priced pen. But when the pens were priced at $1.99 and $4, only 18 percent chose the higher-priced pen.

“The larger perceived price difference between the pens when they were priced at $1.99 and $4.00 led people to focus on how much they were spending and ultimately resulted in a strong tendency to select the cheaper alternative,” the researchers wrote.

In another experiment, the researchers compared two round prices (such as $30.00 and $40.00) to two just-below prices ($29.99 and $39.99). They predicted that people would perceive the two round prices as more similar to each other than the two just-below prices, and that as a result, people would focus less on how much they were spending with the round prices.

Which proved to be the case: with round prices, a relatively large percentage of people chose the high-priced option, a percentage that dropped dramatically when they were presented with the just-below prices.

But Schindler, who has just completed a textbook on pricing strategies, says his meta-analysis of studies in the field shows that just-below pricing can have an unexpected downside: it can give the impression that an item is of poor or questionable quality, and thus should be avoided on luxury items and services or purchases that might be seen as risky.

The example he gives is of a contractor trying to get hired to work on someone’s house: the last thing you want is for your price to suggest that you might do a poor job, so it’s best to stay away from just-below pricing: keep your bid at, say, an even $10,000—don’t knock it down to $9,999.99.

Most of us spend more time shopping than pricing our own goods and services, though, and for shoppers, it’s definitely a case of caveat emptor.

As Manning and Sprott put it, “Consumers should be aware of the subconscious tendency to focus on the leftmost digits of prices and how this tendency might bias their decision making.”

In short, a pig in a poke is still a pig in a poke — whether it’s priced at $100 or $99.99.

Edward Willett is a Regina freelance writer. E-mail comments or questions to ewillett@sasktel.net. Visit Ed on the web at www.edwardwillett.com.