Mathematics for Business and Personal Finance

Chapter 15: Sales

Business Math in Action

The Power of 9 and Other Pricing Formulas

Remember the first time you realized that $19.99 was essentially the same amount as $20? The people who set prices do this not to fool you, but because they know what works in attracting customers. After cost, profit margin, value to customer, and other elements are factored in, retailers must decide on a final price that shoppers will see. That is where psychological pricing comes in. And when it comes to how consumers perceive price, the number 9 is magic.

Odd-number pricing—for example, $9.99 instead of $10—originated in the late 1800s. Although a penny bought a lot more in those days, merchants must have been astonished at the results. In the years that followed, researchers have studied which prices result in the strongest sales, and why. Among their discoveries:

• When merchants changed the price of an item from $10 to $9.99, sales went up by 5 to 15 percent. But if they changed the price from $9.99 to $9.98, there was no increase in sales.

• Consumers are more likely to ignore the cents rather than round them up, especially if the cents are printed in smaller type.

• One test found that sales of margarine increased 65 percent when the price was lowered from 89 cents to 71 cents. But when the price went down to 69 cents, sales increased 222 percent.

• Another study tested three identical mail-order catalogs. The only difference among them was that their prices ended in 00, 88, or 99. The catalog with a price ending in 99 produced 8 percent more sales than the one ending in 00. The catalog ending in 88 had about the same response as that ending in 00.

• Certain prices, such as 59 cents, 99 cents, and $1.29, generate higher sales than other prices in between those points.

The power of 9 and other odd-number pricing has proved so effective over the past century that today round-number pricing is rare. You are most likely to find it in high-end stores or restaurants, where the merchants want to stress the high quality of their goods. For everything else, from chewing gum to houses, odd-number pricing rules.

English Language Arts/Writing

Pricing Strategies

Write a sentence explaining why a retailer will likely make more money pricing an item at 49 cents instead of 53 cents.