Pound for pound 99p is worth every penny

9th June, 2012

‘Supermarkets, and also chemist chains, have started to rely on distinctive red stickers and very clear £1 or £2 prices in a bid to attract shoppers on a budget, as well as those consumers fed up trying to work out complex deals. One-in-four of all products sold by Asda is now either £1 or £2.’

The Daily Telegraph, June 5

What’s their game, eh?

Always the right question when dealing with supermarkets. They know what they’re doing when it comes to slapping a distinctive red sticker on a pack of chicken wings.

I thought prices always ended in 99p. Is this just an excuse to fatten their margins?

I think it’s a safe bet that most self-respecting retailers will charge as much as they can get away with, but that with every price increase they will expect to lose some customers. A key skill for those who set prices is to pick the perfect compromise between losing margins and losing customers.

And yet the perfect point often seems to end in 99p.

Indeed it does. There are three main theories as to why it makes sense to end prices with a “9”. The first is an explanation favoured by economists because it works even in a perfectly rational universe. Product prices with 99p endings are difficult to pay for with exact money; the shop assistant will almost always have to make change.

Why is that a good thing?

Because it means the sale must be recorded to open the register. The shop assistant can’t just hand over the product and trouser the cash.

Cunning. That’s not really why product prices end in 99p, 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.

Not very true to the spirit of economics.

On the contrary, behavioural economics is très chic these days. And there are two theories at play here. The first, called the “left digit effect”, suggests that consumers can’t be bothered to read all the way to the end of a price. “£79.99” reads as “70-something pounds”. The alternative theory is that a price ending in 99p is simply a shorthand for good value.

Which explanation is correct?

The Telegraph’s story makes sense if the “shorthand” theory is correct. It’s easy to imagine that the shorthand for a bargain was once a 99p price, but now it’s a nice round number thanks to the pound shops.

It may be easy to imagine, but is it true?

Two business school professors, Eric T. Anderson and Duncan Simester, published the results of some field experiments in 2003 in which they had teamed up with a mail order company and manipulated the advertised prices. A $59 dress, for instance, would sometimes be priced at $54 or $64 instead. Mr Anderson and Mr Simester found that prices ending in “9” were more likely to find buyers, relative to the prices ending in “4”. This was always true but particularly if the product in question was something new. That last fact does suggest that the “9” was conveying overtones about an unfamiliar product. It’s some support for the “shorthand” theory. But there’s a catch.

Which is?

Several studies support the more intuitive idea that consumers simply ignore the pennies and round down. Whatever the reason, the fact is that 99p endings are extraordinarily common and they appear to attract consumers.

But The Telegraph says that many products are now rounded to the nearest pound.

Not quite. The Telegraph says that 16 per cent of items sold by Tesco, Sainsbury’s or Asda are priced at £1 or £2. It doesn’t reveal the pricing of the other 84 per cent. There’s no contradiction between that statistic and the typical finding in the marketing literature, which is that prices ending in a “9” make up between one-third and two-thirds of all products on sale and most of the other products have prices ending in “0” or “5”.

So has The Telegraph spotted a non-existent trend?

That’s harsh. There might be a trend, but this fundamental rule of marketing hasn’t changed. I spotted a similar story in a couple of other newspapers. The Daily Mail headline was “Asda axes the 99p price ploy”, while the Sunday Times went for “Stores abandon 99p sales ploy”. They were published in May 2000 and October 1995. We’ve been here before.

Also published at ft.com.

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