Saturday, June 9, 2012

Why Do Prices End with .99?

By Tim Harford

Pound for pound 99p is worth every penny
‘Supermarkets, and also chemist chains, have started to rely on distinctive red stickers and very clear £1 or £2 prices in a bid to attract shoppers on a budget, as well as those consumers fed up trying to work out complex deals. One-in-four of all products sold by Asda is now either £1 or £2.’
--The Daily Telegraph, June 5

What’s their game, eh?

Always the right question when dealing with supermarkets. They know what they’re doing when it comes to slapping a distinctive red sticker on a pack of chicken wings.

I thought prices always ended in 99p. Is this just an excuse to fatten their margins?

I think it’s a safe bet that most self-respecting retailers will charge as much as they can get away with, but that with every price increase they will expect to lose some customers. A key skill for those who set prices is to pick the perfect compromise between losing margins and losing customers.

And yet the perfect point often seems to end in 99p.

Indeed it does. There are three main theories as to why it makes sense to end prices with a “9”. The first is an explanation favoured by economists because it works even in a perfectly rational universe. Product prices with 99p endings are difficult to pay for with exact money; the shop assistant will almost always have to make change.

Why is that a good thing?

Because it means the sale must be recorded to open the register. The shop assistant can’t just hand over the product and trouser the cash.

Cunning. That’s not really why product prices end in 99p, though, is it?

Probably not – perhaps it once was, but in a world of credit cards, e-commerce and self-checkout, the story does not really fit. We need to look for a psychological explanation.

Read the rest here.


  1. I strongly prefer the left-digit bias explanation. I've had to correct too many people who, when something is $1499, say "it's $1400."

    I think the bias feeds into people's ability to rationalize their purchases to themselves and to others.

  2. I worked as a walmart cashier one summer. The reason they put that prepped food in the front is to get shoppers to think they've just purchased a meal for the evening. I used to tell people at the checkout one that it was "a $50 chicken" because hey probably picked up $50 more crap that they didn't need because hey weren't rushing home to cook dinner. The $.99 is irrelevant. What goes into a cart when is key o understanding the opportunity cost that a consumer goes through when making subsequent purchasing decisions.

  3. Years ago my brother worked in a supermarket. Often times vendors would give them promotional product that they could either sell or give away. In this case a coffee vendor gave them some really nice tall ceramic coffee mugs for free. My brother put a great price on them of $1.99 and sold about 10% of his inventory in a week. He couldn't understand why people would not buy the cups at such a great price. In a passing conversation he told the store's wine rep about the mugs that wouldn't sell at such a great price. The rep told him to raise the price to 20% below similar mugs on the self and see what happens. So he raised the price of the mugs to $5.99 and they sold out in less than a week. What he learned from this was that retail pricing is a strategy based on consumer behavior. What my brother determined was that since there was no branding of the mugs, the consumer probably saw the $1.99 mugs as inferior promotional rejects, but when the price was made more relevant to other similar items, consumers viewed them as a great deal and bought them up. So in the end he learned that cutting prices too low on a product, especially one that does not have an establish brand, will not always produce increased demand.

  4. People mentally round down, that is why gas is always ###.99. Few actually round up. It is a retail mental trick. To my amusement I witness this with my wife constantly. Item is $9.99 (10 dollars to me) and she says it's 9 dollars.