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Psychological pricing

Retail prices are often expressed as odd prices: a little less than a round number, e.g. $19.99 or £6.95. Psychological pricing is a theory in marketing that these prices have a psychological impact that drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.

The psychological pricing theory is based on one or more of the following hypotheses:

The theory of psychological pricing is controvercial. Some claim that rational people, even young children have a very sophisticated understanding of true cost and relative value. Others claim that this ignores the non-rational nature of the phenomenon. Acceptance of the theory requires belief in a subconscious level of thought processes, a belief that economic models tend to deny or ignore. Several studies have provided evidence. Kenneth Wisniewski and Robert Blattberg at the University of Chicargo's Center for Research in Marketing, for example, showed that when the price of margerine was lowered from 89 cents to 71 cents, sales volume increased a mere 65%, but when it was lowered from 89 to 69 cents, sales volume increased by 222%. In another study, the perceived value of all the numbers between 1 and 100 were studied and 77 was shown to have the lowest perceived value relative to its actual value. Results from modern scanner data is mixed.

In fact, the practice of odd pricing was developed primarily to control employee theft. With an odd price, in most cases the consumer does not hand over the exact amount and therefore has to be given change. This reduces the risk of personnel stealing from the shop owner by not recording a sale on the cash register and pocketing the money, in the case that the customer does not require a receipt.

The practice is said to have been invented in 1875 by Melville E. Stone, the publisher of the Chicago Daily News, who introduced it in cooperation with his advertisers.

see also: pricing, marketing, marketing mix, price, price points, retailing, microeconomics

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