## How Much Is A Penny Worth In Business? Ctd

Readers expand the discussion on whether the Dish should just bump up its \$19.99 subscription price to 20 bucks:

Apparently it's is also effective to drop the \$ sign on prices.

According to at least one study on the penny (pdf), the true purpose of having prices end in .99 is not to "trick" consumers into believing that an item costs less than it really does.  Rather, stores use these prices to deter theft by employees.  If something is priced with an even amount, say \$20, the consumer is likely to pay with exact change.  It's fairly easy for a cashier to just pocket the \$20 bill without ever ringing up the purchase.  If an item is priced at \$19.99, the cashier will probably have to make change.  It'll be pretty obvious if she takes a penny out of her pocket, so she will have to enter the purchase into the register.

Thought this theory might be of interest to you.  And, if true, it implies that it is pretty pointless to price something at \$19.99 over the Internet.

Another:

Steven Landsburg offered this explanation of 99-cent pricing in his 1993 book, The Armchair Economist: Economics and Everyday Life:

The phenomenon of "99-cent pricing" seems to have first become common in the nineteenth century, shortly after the invention of the cash register. The cash register was a remarkable innovation; not only did it do simple arithmetic, it also kept a record of every sale. That’s important if you think your employees might be stealing from you. You can examine the tape at the end of the day and know how much money should be in the drawer.

There is one small problem with cash registers: They don’t actually record every sale; they record only those sales that are rung up. If a customer buys an item for \$1 and hands the clerk a dollar bill, the clerk can neglect to record the sale, slip the bill in his pocket, and leave no one the wiser.

On the other hand, when a customer buys an item for 99 cents and hands the clerk a dollar bill, the clerk has to make change. This requires him to open the cash drawer, which he cannot do without ringing up the sale. Ninety-ninecent pricing forces clerks to ring up sales and keeps them honest." (http://books.google.com/books?id=qTBgMMxeJ5IC&pg=PA19)

It's a cute theory, but even Landsburg notes some holes. What about states with sales tax, where an item priced in whole dollars would still require change? And why has it persisted, even after the advent of scanners and electronic registers that record sales even when no change is required?

The question seems particularly troubling to economists, because a strong consumer preference for \$19.99 over \$20 would seem to wreak havoc with the notion of consumers as rational actors. Nevertheless, over the last twenty years, a growing number of empirical studies and experiments have confirmed that 99-cent pricing actually works.

One explanation is for that success is that 99-cent pricing signals to consumers that the item is a bargain, because it's most often used on bargain goods. Consumers aren't buying these items because they mistakenly think that missing penny makes them meaningfully cheaper, the theory suggests, but because they've been flagged as discounts.

A second is that consumers – or at least, some significant subset of consumers – process prices in two discrete units, before and after the decimal. Some people, perhaps don't find it worthwhile to invest the time and effort necessary to pay close attention to prices, and merchants calibrate their pricing to take advantage of their inattention.

You've actually been running your own experiment, with interesting results. There is, practically speaking, no real difference between those sums. At the moment, all contributions are voluntary – even the leaky paywall hasn't yet been put in place – and it's hard to believe that readers who will voluntarily hand over \$19.99 would begrudge you the additional penny. And although subscribers are prompted with the \$19.99 minimum, they have to manually enter the amount, and it's easier to just put down \$20.

Indeed, that's exactly what nearly two thousand of them did. The only catch? Twice as many took the trouble to type out \$19.99. I'd say that's fairly solid data in support of the theory that \$20 just feels like more money – and that many readers are more likely to take the plunge and invest in the site if that threshold isn't crossed.

Previous parts of this thread here and here.

## How Much Is A Penny Worth In Business? Ctd

A handful of readers differ from the previous ones who protested the .99 pricing:

I'll tell you right now, it works for me.  And I like it. Even at the dollar level: I feel better paying \$199 for something than I do \$200. I'm not tricked into thinking I'm somehow paying less than I am, but at some emotional level I mind parting with the money less when it's presented to me in that way. So perhaps I *am* being tricked, but I like it.

Another:

I, for one, think the \$19.99 pricing was sheer genius. I mean, look at all of the folks who have paid more for a Dish subscription. That kind of pricing just begs someone to throw in a bit more. I paid \$25. (I think that's what I gave Obama – multiple times.)

Another:

To all those who want to pay \$20 rather than \$19.99:

Shortly before my mother died in 2006 at the age of 83, I witnessed her arguing with a checkout person about two pennies' difference in the price of a single item. I remember becoming somewhat embarrassed for holding up the rather long line. In the end, my mother prevailed. On reflection now, isn’t that how the Depression-era kids built a strong country? And we boomers are squandering the whole thing, penny by penny. I think you should stick with the 99 cents meme.

Another:

You'll notice that most really high end restaurants are priced with round dollars (in fact, if they want to look even more premium and their menu designer is worth his salt, they'll drop the .00 ending altogether), while value restaurants like diners are more likely to use the .99. This concept applies across most industries. So I guess you gotta choose how you want people to perceive your product. Is your product a bang for your buck? Or are you a premium brand?

One more:

For me, the psychological difference between \$19.99 and \$20 is all about the relationship between the buyer and seller. If I'm giving money to a real person that I know, I'm going to give \$20. \$19.99 is more like some sort of "easy payment" I send to some faceless company. As a reader of your blog, I feel like I know you, so it'd be awkward to do \$19.99. Louis CK is also someone I feel that I know through his work, so paying \$5 instead of \$4.99 for his latest album makes sense, and in some way makes the transaction feel a bit more personal.

The link to pay \$19.99, 20 bucks, or more for an independent, ad-free Dish is here. The whole staff is working overtime to roll out the new site by February 1st.

(Chart from TinyPass. Statistics current as of 5 pm Sunday.)

## How Much Is A Penny Worth In Business?

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.

Another:

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.

Another:

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.

Another:

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.

Another:

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.

## Dissent Of The Day

Among a growing chorus in the in-tray:

Amen to the reader whose comment you posted saying you should make it 20 bucks, not \$19.99. I had already sent in my \$20 contribution when I read the comment. Being a quantitatively literate person, I hate that .99 stuff.  It's a way to try to fool people, and that is exactly the opposite of the honesty that has attracted me to your site over the years (I’ve been reading you since almost the very beginning).  And it is inefficient: it takes much longer to say and write 19.99 than 20.  I would be happy to see us abolish the penny and even happier if every merchant and gas station in the country would stop with their ridiculous .99s and just round up to the next dollar.  Truth in advertising.

That's a good point. I wonder if there's strong evidence that using the whole .99 thing works. And by "work", I simply mean brings in more money than all those extra pennies put together. Is it a myth? Or is it real? We're happy to adjust, but figure Dishheads will know the answer to this empirical issue beforehand. Anyone?

## The End Of The 99¢ Effect?

Leigh Caldwell's new research finds that "prices such as £1.99, £5.99 or £9.99" no longer boost sales. Update: Caldwell's post was an economic April Fools' joke. The money quote from his wry post:

1. Prices ending in .99 no longer have any advantage in consumer value perception, and do not lead to higher sales.

2. The optimal penny value varies by country. In the United States, it is .01. So, instead of \$3.99, companies should charge \$4.01. In European countries, the optimal price point is different for different product categories, but there is a peak at .04 for many products. So, British or European retailers currently charging, say, £0.99 should increase the price to £1.04.

3. By switching in this way to a “dollar-plus” price instead of “dollar-minus”, retailers can increase sales volume by an average of 8% and increase profit margins by 1-3% (depending on the exact price point).

4. Consumers, when presented with the new price point, report an increased level of trust and affinity with the brands of the retailer and manufacturer. We believe this arises from the “honesty signal” that comes from abandoning a discredited and manipulative sales practice.

(Hat tip: Niklas Blanchard)

## When A Penny Matters

by Patrick Appel

Ryan Sager offers some Christmas shopping tips. Among other inherent biases:

A recent study in the Journal of Consumer Research found that when pens were priced at \$1.99 and \$4.00, only 18% of the participants chose the higher-priced pen; but when the pens were priced at \$2.00 and \$3.99, 44% of the participants selected the higher-priced pen. That one-cent price drop makes the \$4 pen seem a lot cheaper.

For whatever reason, we can’t take our eye off that leftmost digit. But we can at least try.