Consumers trust precise prices mean a fairer deal

The fashionable belief that ’round pound’ pricing makes things simpler for consumers is contradicted by all the behavioural evidence, which shows consumers see precise prices as closer to the true value.

In 1896, Henry J Heinz was travelling across New York by train when an ad caught his eye. It was for a shoe shop which proudly boasted that it had 21 styles of shoe. He was so taken with the idea that he began emblazoning his packaging with the claim that his company had 57 varieties. In fact, his company had far more, but he was untroubled by this fact – it was the precision that he loved.

But what if Heinz was starting his company today? Would he still plump for the iconic 57? Or would he settle for a sensible 60? After all, there’s a fashion among retailers for round numbers.

READ MORE: What to think about when pricing a product

That fad is most apparent in pricing. Round prices have come to dominate supermarkets. In an attempt to quantify this, my colleague Alex Boyd and I looked at a random selection of 1,152 supermarket prices collected by The Grocer magazine. The majority – 54% – were prices that ended in a zero. ‘Charm prices’, that is prices ending in a nine, accounted for a measly 8% – less than you’d expect from chance alone. Sainsbury’s didn’t have a single price ending in nine, of the 240 we studied.

What is the impact of round prices?

While round prices have become popular, the proof that they work is surprisingly sparse. In fact, most psychological evidence suggests the opposite – that they have a detrimental effect.

The work of two University of Florida psychologists, Chris Janiszewski and Dan Uy, is typical. In 2008 they published a simple experiment into pricing in the academic journal Psychological Science.

The psychologists told participants the asking price for a series of goods, including cheese, a beach house, a figurine, a pet rock and a plasma TV. The participants then had to estimate the wholesale cost of the items. The twist in the experiment was that while some participants were given a round asking price, others had a precise one.

The participants invariably thought that rounded prices were marked-up to a higher degree. For example, a third of the participants were told that the cheese cost $5, the next third that it cost $4.85 and the final third that it cost $5.15. Their estimate of the actual value was respectively $3.75, $4.17 and $4.41. This pattern occurred for each of the items tested.

READ MORE: John Lewis says it won’t be drawn into a price war this Christmas

Janiszewski and Uy checked their finding in the real world by analysing 25,564 house sales from Alachua County, Florida. They discovered that sellers who set a precise asking price – say $799,500 rather than $800,000 – sold their home for closer to the asking price than those who opted for a rounded figure.

The psychologists hypothesised that buyers know they should pay less than the asking price. The difference between round and precise pricing is by how much buyers adjust their offer. When they’re thinking about a round price, say £10 for a watch, they tend to adjust down in large increments – for example, from £10 to £9. In contrast, when they are considering precise figures their units shrink so they adjust down in smaller amounts, so for a £10.25 toaster they might perceive its worth at £10.15 or £10.05.

“Conventional wisdom is certainly conventional, but it isn’t wisdom.” – Oscar Wilde

So, why so popular? First, an over-reliance on claimed data. If you ask people about prices they’ll scoff at the idea that the presentational side of pricing has an effect. If they have any preference it might well be for the simplicity and clarity of round prices.

However, claims are misleading. People tend to claim they behave in a more reasonable and rational manner than they in fact do. As David Ogilvy famously said: “Consumers don’t think how they feel, say what they think or do what they say.” Better to look at how people behave rather than how they say they might. When you look at their behaviour, as Janiszewski and Uy did, the power of precise prices is revealed.

Second, there’s defensive decision making. If marketers break from the herd, they risk looking foolish. As John Maynard Keynes said: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” However, what is good for a career might not be best for the brand.

What of Henry Heinz? Would he succumb to the fad for round numbers? It’s hard to say. Perhaps it’d be best to ring the Heinz company helpline. The number?

0800 528 57 57.

Richard Shotton is deputy head of evidence at Manning Gottlieb OMD and author of The Choice Factory. He tweets at @rshotton