How Much Is A Penny Worth In Business?

A reader writes:

You seem to be soliciting opinions, so I’d get rid of the .99 if I were you and just make it $20. I think the .99 makes the whole thing seem sorta cheap. Your audience is much better than that (although I did appreciate humor in the $9,999.99 donation).

Another is more blunt:

The .99 cents business has always struck me as plain and simple bullshit that I always round it out to the dollar amount.  Anyone who is taken in by $19.99 rather than $20.00 is a fool.


Myself, I dislike the .99 pricing (and the 9/10 cent on gasoline is the most stupid variant) and I suspect you would not see a significant variation.  The place where .99 pricing comes into play is when you have direct competition to whom you haver to price match.  That's not the case with The Dish … yet. 


99-cent pricing for smaller ticket items can work, because people look at the left numbers of the price more than the right. But this effect can backfire by making items seem cheap.  Nice things are usually priced in whole dollars. In other words, it's gimmicky, may increase sales among value shoppers, but may make your product seem cheap to non-value shoppers. (I looked to see if I could find something backing up my memory, and found this article in Science Daily.) So I'd change your asking price to $20 if I were you. Your product is not cheap and you're not marketing to people who need to you to use a psychological trick to get them to pony up!  (I subscribed yesterday!)

More reader feedback and empirical evidence on pricing below:

I'm a new reader of The Dish (which I found out about from stories about your new subscription model), and I don't see how to comment on a Dish post directly on the website, or I would have done that. But in response to your post about "that .99 stuff", Wikipedia calls it "psychological pricing" and references some research on it. It's hard to get a sense for the research from the Wikpedia article, but it sounds like one of the studies found that psychological pricing is effective. 

But personally I adhor it; and if I subscribe to your new site, which I am strongly considering, I will donate an extra penny just to be able to pay $20!

Another with first-hand experience elaborates on "psychological pricing":

I have been in the marketing and advertising field since 1996 and before that studied microeconomics which leads me to this perspective. Most consumers will ignore the .99 part of the price and round down to $19 subconsciously. This means for the cost of charging $0.01 less than $20, you are gaining $0.99 – a 99:1 return on investment one penny at a time! This is why you typically see pricing always end with 95 or 99 – especially in tight margin businesses.

This type of approach plays on the psychology of the consumer and works best when you know the exact price at when a consumer is no longer willing to purchase. In this scenario, your $19.99 price assumes that $20 is too high for your consumer and therefore you need to send the signal to the consumer that the price is not $20. 

If $20 is the efficient threshold at which consumers will not pay for a subscription, charging $19 vs. $19.99 will probably lead to statistically insignificant differences in signup levels; whereas the $0.01 difference between $20 vs. $19.99 would. If this was academic, and not your livelihood, we could run an experiment where consumers who go to the signup page see either $20, $19.99 or $19 as the price and then measure if there is a statistically significant difference in signup rate. Many ecommerce sites are now using this type of testing to ensure that they are charging the most efficient pricing at any given point. 


Anecdotally, I consulted for one wine retailer in particular whose owner swore by the .99, so much so that when he overheard me tell a prospective buyer "It's $25 per bottle," he blew a gasket and upbraided me right then & there. Thankfully, a regular was nearby, walked over and said to the owner, "Come on, man. Nobody actually believes they're getting a deal because of a penny." And that's why I gave you $25 even!

Another points to this piece in Business Insider:

The illusion, Schindler says, isn't the last number on the price tag. It's the first number. "People focus more on the left-most digit," says Schindler, who reviewed about 100 different studies in performing his meta-analysis. "Just-below pricing certainly makes it seem like the price is less than it actually is. It gives an image of being a bargain or a discount."

Another cites a countertuitive finding we've noted before:

At least one study published in 2003 by two economists from MIT and University of Chicago showing that not only does an item priced at $39 sell much more than the same item priced at $40 (and by much more than needed to offset the extra dollar not made), but that the same item priced at $39 actually sells more than if priced at $34, because we're psychologically disposed to think the one ending in 9 is a better deal.


Of course .99 works.  We all know that.  Even companies such as Saturn ("A different kind of car company") with its one-price-for-everyone model, and Apple ("Think different") could not bring themselves to drop the .99 from their pricing. 

The next trend, I fear:  My local "99 cents" store (I'm in Berkeley, CA) prices everything at "99.99 cents".  Yes, you read that correctly.  They know their name gives them an edge over the abundance of "dollar stores" out there, but they still charge you a dollar (rounded up)!  You would need to buy 100 items ($99.99) in order to get a penny back in change.   Does the Dish really want to join this crass, deceptive culture?  Make the Dish an even 20.

Another suggests:

Personally, I prefer the straightforward $20 to the sneaky $19.99, but perhaps you could set up your own experiment: randomly display either a $19.99 price or a $20 price when visitors load this page and record what percentage of visitors actually donate.

By the way, your map of purchases by location brought to mind a recent comment (which I would attribute to its author if I could remember where I read it) that most heat maps (the technical term for this type of graphical display) are really just population density maps. In other words,it's no wonder that NY and CA are the most darkly shaded states. Perhaps shading according to donations per capita might reveal more salient information.

To close, let me thank you for going to a metered model rather than throwing up a paywall. I resent paywalls enough that I would not have subscribed under that model. But given that your model feels more like a donation or a tip jar, I'll be sending in $20.00 the next time I have a positive PayPal balance.

If you are interested in joining that reader in subscribing to the independent, ad-free Dish, go here. And thanks to everyone for the great feedback, please keep it coming.