Persuasive Advertising - J. Scott Armstrong [32]
Supermarkets have addressed this problem of providing meaningful prices by posting “unit prices.” A field experiment found that customers saved about 1 percent when unit-price information was readily available. This rose to 3 percent when the unit prices were put on a list that organized them from low to high (Russo 1977).
Widrick (1979) found that only 22 percent of the brands were packaged in sizes that were easy to compare because the ratio of the sizes was an integer (e.g., one box weighed twice as much as another). Otherwise things are difficult for customers— “Let’s see, if this box is 1.62 times larger than the other, which has the lower unit price?” Widrick concluded that the use of non-integer size differentials was consistent with a pattern of confusing customers; the brands that used easy-to-remember integer ratios also used quantity surcharges only 5 percent of the time, versus 17 percent for those using the non-integer sizes.
Imagine that you are a retailer. You learn of a new pricing principle X that you could implement at little cost. Customers say they would prefer this change, and they believe it to be a more honest way to do business. It would save time both for your customers and your retail clerks. It would reduce confusion. It would improve your image as a retailer and likely increase profits in the long run. Would you adopt this new pricing policy?
1.4.2. Use round prices
Round prices (sometimes called even prices) refer primarily to rounding up so as to avoid “just below” prices. This is the principle X that I referred to above.
Round prices apply when advertisers are interested in building long-term relationships with customers, and when they would like to be viewed as providing high-quality products and services. However, achieving long-term profitability might entail short-term losses.
The alternative “just below pricing” is also referred to as “odd” or “psychological pricing.” Odd pricing is of particular interest when it reduces the left-most digit (e.g., $29.99 rather than $30.00).
Odd prices are associated with lower quality. Advertising experts figured this out long ago. In the late 1800s, John E. Powers avoided odd pricing for quality products when he advertised John Wanamaker’s expensive men’s suits.
One argument for odd pricing is that “everyone else is doing it,” as was explained when I asked Bob Ramsey, my favorite gas-station owner, to try round prices.
Although round prices are the norm and they seem to be gaining over time, odd prices are still widely used. An examination of 1,415 selling prices from U.S. newspaper advertisements found that 31 percent used odd pricing (Schindler and Kirby 1997). Interestingly, odd pricing varies substantially by country. Prices ending in 9 ranged from 3 percent to 5 percent in Japan, India, and Hong Kong, to 35 percent or more in Australia, Norway, and the United States (Nguyen, Heeler, and Taran 2007).
In summary, odd prices confuse customers, especially those with less education, and they waste customers’ time. They harm the brand’s quality image. Finally, they might harm long-term relationships with customers.
Evidence on the effects of round prices
There is mixed evidence on the short-term effect of odd pricing on sales. Some experiments found that odd pricing increases sales in the short term. For example, in a field experiment using a catalogue of women’s clothing which contained 169 items, odd and round-price versions of the catalogue were sent out, each with 30,000 copies. The odd prices produced approximately 8 percent more sales. The major explanation seemed to be that odd prices communicated “sale!” (Schindler and Kibarian 1996). Three similar field experiments