Supermarkets – in for a penny or a pound?

29th August, 2009

Dear Economist,
I read that supermarkets are abandoning the 99p price point in favour of a “round pound” as this makes the products appear cheaper and reflects a more honest business practice.
I wonder if pricing psychology played any part in this decision – or is it just a cynical cash grab? After all, if they make an extra penny on every product they sell this year, it will mean tens of millions of pounds in extra profits.

Dear S.C.,

This particular pricing decision involves three very different sets of costs and benefits, none of which the article you sent me sets out clearly.

The first is to do with the physical task of giving change. This is time-consuming for staff and shopper alike. However, because it requires that the transaction be registered, it also makes it harder for staff to divert money from the till into their own pockets.

The second is psychological. Do “round pound” prices or those ending in 99p seem cheaper? The article cites the same “expert” supporting both views.

The third is simple price-sensitivity. In classic economic theory, when the price goes up, revenues per item rise but sales fall. This is a straightforward trade-off and it is up to individual companies to find the sweet spot.

But your own theory is almost as confused. You seem to think supermarkets have offered customers a penny discount because they were run by kind people. This season the kind people are no longer in charge – and prices have risen.

I would dismiss your thesis out of hand if … I had a better one myself. Our discussion suggests several reasons for retailers using 99p endings, and several reasons for them using round numbers. It is not at all clear, though, what has changed. If you want my guess: some marketing bright spark tried “round pound” pricing and was surprised to find that it worked.

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