The Left-Digit Effect vs. Round Number Pricing

Have you ever wondered why so many retailers price their items at prices ending in .99 or .95? Wouldn't it just be easier for everyone to go ahead and round to the next dollar? I mean, isn't $19.99 pretty much the same as $20 anyway? 

Maybe you, like many businesses, also price your items this way because it seems like "the thing to do," but do not know why or how it affects sales. So how does it work exactly?

Research shows this type of pricing, known most often as "charm pricing," takes advantage of how our brains process information and uses it to affect the perception of cost. For English speakers and others who read and write left-to-right, our brains are rapidly encoding information from left-to-right as we take it in. So rapidly, in fact, that our brains often anchor the significance of a value on the left most digit before we've even finished reading the number. Even after the logical, conscious parts of our brains kick in and we realize that $19.99 is basically the same as $20, our brains have already established a significantly lower value for the price beginning with a 1 instead of a 2. That means that customers still perceive $19.99 as a significantly better deal than $20, even understanding it's only $0.01 different in price.

However, this really only works if pricing something at $__.99 changes the left digit. What we mean is this: The difference between $17.99 and $18 really isn't going to sway a customer one way or the other. The left-digit didn't change. However, the difference between $19.99 and $20 or $99.99 and $100 is perceived as significant because the left digit changed from 1 to 2 and 9 to 10, respectively. It's not about how the price ends as much as it is about how that small price difference affects the left most digit. 

There is, however, another school of thought that suggests round numbers are the most effective way to price products, claiming customers prefer the honesty and ease of a round, flat number and associate it with a higher value. This pricing structure, while most commonly seen at gas stations and restaurants, is quickly starting to infiltrate the retail market, particularly with high dollar products and "pay what you want" options. People are often willing to go out of their way, particularly with leaving tips, to achieve a rounded number on their check. While this doesn't necessarily apply directly to an embroidery business as customers are not typically setting their own prices, it does show an interest and desire from customers for whole, rounded numbers. 

Some retailers choose to combine these pricing models, capitalizing on customers' perception of pricing and psychology. By offering full price products at round whole number prices, retailers establish a perception of high valued products. When they put things on sale, however, they emphasize the deal by utilizing charm pricing to establish the sale price and a lower perceived value. 

Now that you've seen the two pricing options compared, what do you think? How do you price your items? Have you tried both ways and had greater success with one over the other? Let us know in the comments below!