The main page of one of India’s largest e-commerce websites advertises an array of products which can be bought from it. It is interesting to see the prices of a large number of products being sold. As I write this in early August there is a bag being sold for Rs 399, an LED television for Rs 12,299, an insect repellent for Rs 199, a telephone for Rs 14,899, a pair of sunglasses for Rs 1399, a watch for Rs 999 and so on. There are many books also being sold at prices of Rs 299, Rs 399 and Rs 499 respectively.
There is a clear effort to sell products at a price which ends with the digits 99. Hence, the LED television does not cost Rs 12,300 but Rs 12,299. And the watch does not cost Rs 1,000 but Rs 999. This is the e-commerce avatar of what is basically an age-old marketing trick.
The original explanation for this trick was that it was a technique used by retailers to deter theft by their cashiers, before computers had made an appearance in retail. If something was priced at $1, the cashier could simply put the money into his pocket, when the consumer paid for it. But if the same product was priced at $0.99, it was unlikely that the consumer would offer the exact amount to pay for the product. He was likely to pay $1. Hence, the cashier would have to open the till to repay one cent to the consumer and the moment he did that, the chances of him recording the sale and not pocketing one dollar, went up. But this explanation sounds too good to be true in this day and age.
As Tim Harford the author of such wonderful books like The Undercover Economist asks in a column “Cunning. That’s not really why product prices end in 99p[pence], 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,” Harford goes onto write.
The real reason behind products being sold at prices ending in 99, lies in the fact that most people read from left to right and because of that the first digit of the price registers the most on the human mind. This is referred to as the left-digit effect. As Alex Bellos writes in his new book Alex Through the Looking Glass “When we read a number, we are influenced by the leftmost digit than we are by the rightmost since that is the order we read, and process, them. The number 799 feels significantly less than 800 because we see the former as 7-something and the latter as 8-something.”
Due to this reason since the 19th century shopkeepers have chosen prices ending in 9 and hence tried to create the impression that a product is cheaper than it actually is. “Surveys show that anything between a third and two-thirds of all retail prices now end in 9,” writes Bellos. In fact, controlled experiments carried out by economists have shown that when prices end in 99, sales tend to go up.
As Bellos points out “In 2008, researchers at the University of Southern Brittany[in France] monitored a local pizza restaurant that was serving five types of pizza at €8 each. When one of the pizzas was reduced in price to €7.99, its share of sales rose from a third of the total to a half. Dropping, the price by one cent, an insignificant amount in monetary terms, was enough to influence customers decisions dramatically.”
In fact, just ensuring that the price of a product ends with the digit 9 leads to better sales. Eric Anderson and Duncan Simester explain this very well in a Harvard Business Review article titled Mind Your Pricing Cues published in September 2003. As they write “Response to this pricing cue is remarkable. You’d generally expect demand for an item to go down as the price goes up. Yet in our study involving women’s clothing catalog, we were able to increase demand by a third by raising the price of a dress from $34 to $39. By comparison, changing the price from $34 to $44 yielded no difference in demand.”
E-commerce, which is the newest kid on the block when it comes to retail business, has been using this age-old trick very well. Interestingly, researchers also point out that pricing a product ending with digits 9/99 acts in the same way as a sale sign and tells consumers that they are getting a good deal. “Some retailers do reserve prices that end in 9 for their discounted items. For instance, J. Crew and Ralph Lauren generally use 00-cent endings on regularly priced merchandise and 99-cent endings on discounted items,” write Anderson and Simester.
Even Bellos makes a similar point in his book. As he writes “An up market restaurant, for example, would never dream of pricing a main course at, say, £22.99. Nor would you trust a therapist who charged £ 59.99 a session. The prices would be £23 and £60, which feel both classier and more honest.”
An e-commerce website trying to sell everything under the sun, doesn’t need to be classy. It’s unique selling proposition is based on giving the consumer a better deal than he is likely to get if he were to buy the same product from a local shop. Hence, it makes tremendous sense for e-commerce websites to price products ending with digits 99 and give the consumer a sense that he is getting a better deal.
To conclude, there is another number trick that the e-commerce websites can use to drive up their sales. Researchers at the Cornell University tested a very interesting idea at a Cafe in Hyde Park, New York. They found that consumers tend to spend more when the currency sign was left out of the menu. Hence, consumers were quicker to spend money when the price was listed as 10 rather than $10. By doing this they were able to increase sales by 8%. By leaving out the dollar sign, the researchers ensured that the “price of paying” response wasn’t triggered while paying and hence, the consumers ended up paying more.
This is something that e-commerce websites in India can easily test by doing a controlled experiment. Prices without the rupee sign can be offered to one set of customers. And prices with the rupee sign can be offered to another set of customers. The results can then be checked out to see if there is any increase in sales.
The article originally appeared in the Sep 2014 edition of Mutual Fund insight magazine.
(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])