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I've seen two competing theories on the origin of pricing products at $<desired dollar amount minus 1>.99 (i.e. charging $19.99 instead of $20, of $5.99 instead of $6):

  1. Psychological pricing scheme used by retailers to make products seem one dollar less expensive than they really are.
  2. As an anti theft measure; forcing store clerks to ring up orders and open cash drawers (to give customers their one cent change); rather than just pocketing the money.

Neither of these responses seem plausible to me.

In the first case, retailers are expecting people to ignore the 99 cents, but when most people check to see whether or not they have enough money in the bank are going to take these things into account. Even if there's a slight edge to be had by losing that penny, I can't believe it'd be more than the potential thousands that one cent is multiplied into when you're selling thousands of copies of a product. Plus, most mentally add a few cents for sales tax and other things anyway.

In the second, I fail to see what additional security forcing someone to open the cash drawer really offers. One could easily have a bunch of pennies lying around and still be able to pull off the same theft scheme. Most retailers have computerized systems and security cameras for these purposes now anyway.

Do any hard data exist which proves or disproves either of these claims, or which supports a third, heretofore unmentioned claim?

Nick Stauner
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Billy ONeal
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  • For the first case, it relies on the assumption that many people are psychologically gullible, even if they know that 1 cent less is worth nothing. For the second case, if the cashier is forced to open the drawer for a change, then the customer is forced to watch the cashier put the money into the drawer so the customer plays part in securing the store owner's interest. I think security camera argument are irrelevant, 99 cents have been used before cameras become ubiquitous. That said, I don't think those reasons are implausible, but they certainly have dubious effectiveness. – Lie Ryan Apr 19 '11 at 22:19
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    In all the European countries I have been to, and in New Zealand, sales tax is already included in the shelf price, so people don't have to add it mentally. – Lagerbaer Apr 20 '11 at 00:21
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    @Billy ONeal You may be interested in this book, [Priceless: The Myth of Fair Value and How to Take Advantage of It](http://www.amazon.com/Priceless-Myth-Fair-Value-Advantage/dp/0809078813/ref=pd_sim_b_3) by a William Poundstone. He goes over how humans don't really have an "absolute" natural system to ascertain prices, and how companies exploit the fact we can only compare to established, reference prices -- "the wine problem". I'm fairly confident he addresses this 99 cents psychology further in the book; I would answer, except that I'm only about half-way through it. Just a heads up. – Uticensis Apr 20 '11 at 03:23
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    You are severely underestimating psychology. It’s irrelevant that we consciously *know* the difference between $1.00 and $0.99 to be minute. It’s been conclusively shown that we *still* fall prey to the difference. I’ve got no sources hence this is a comment. But this is well established so somebody will come up with sources soon enough. – Konrad Rudolph Apr 20 '11 at 08:50
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    Note that it's not only about getting people to think an item is one dollar cheaper, when it's actually just one cent cheaper. This trick can be employed to push something from the mental category "things that cost triple figures" to the more appealing "things that cost double figures" category. Applicable to any order of magnitude, obviously. – David Hedlund Apr 20 '11 at 09:17
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    Regarding gullibility etc, it is important to remember that this pricing technique goes way back to a time when a penny wasn't quite so worthless as today. – horatio Apr 20 '11 at 17:52
  • In my experience, this is common in Ireland and the UK, and far less common in France. – TRiG Jul 27 '11 at 01:07
  • I am sad to say, this works so well that companies will pay good money for software the automates the process. – Ian Ringrose Aug 19 '11 at 15:57
  • It seems to be more effective when selling multiple items. I've known lots of people who, e.g., when buying an item for $9.99 and another for $7.99, will estimate the total cost as $16 rather than $18. – Bruce Alderman Dec 13 '11 at 17:03
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    One thing I detest about it is when a store offers a deal something like "Spend $20 and get a free bent spoon" and then everything is priced at $9.99, $4.99, $19.99 etc. I've always had a little sadistic enjoyment though when real estate agents price a property at $229,000 and I casually ask "The price was 230 thousand wasn't it?" knowing it bugs them... – Highly Irregular Feb 25 '12 at 08:01
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    On The Straight Dope: [Why do prices end in .99?](http://www.straightdope.com/columns/read/720/why-do-prices-end-in-99) – Martin Scharrer Mar 22 '12 at 18:03
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    Frankly, it's a good parable of why it is unwise to trust private interests with control of public assets. Once the culture has stream-lined and codified a graft, then everyone forgets to acknowledge or ignores that a practice is deceptive and immoral. Also there is the problem of how to craft fair legislation to stop it, if business interests would even allow it to be stopped. – Mark Rogers Jul 22 '12 at 21:39
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    @Mark: I don't really see what's immoral about doing this. Someone selling a product is completely moral in asking whatever they want for something. Now, if nobody takes them up on the offer, they know nobody thought the price was decent. :) – Billy ONeal Jul 23 '12 at 16:55
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    The second reason would not be valid in 47 of the states in the USA. State sales tax is added at checkout to non-food items that would push the price the consumer is paying above *.99 . But the USA uses that pricing model (although not always *.99, could be *.9? with *.95 I think being the second most popular). – Scooter Mar 18 '14 at 13:31
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    Obviously, the stores just have extra 9s lying around to make their signs with, and there is a dearth of 0s. Save the 0s! ;) – Brian S Jul 14 '14 at 15:03

3 Answers3

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Apparently it is a psychological marketing technique that assumes consumers ignore the least significant digit, reading from left to right. This explains why you'll often see the 99 in superscript (e.g. $1999). A study by Nicolas Guéguen and Céline Jacob(pdf) found that "nine-ending prices led to increase the amount of purchasing of women-customers". Interestingly, they also concluded that nine-ending prices do not increase the number of buyers, but does increase the number of sales from those who already buy:

The mean purchase amount of the customers was 6.53 €uros (SD = 1.95) in the nine-ending condition and of 5.08 €uros (SD = 2.22) in the zero-ending condition. The difference between the two means was highly significant (z = 3.72, p<.001).

The results of this experiment confirm Schindler and Kibarian’s results and indicate that the effect of nine-ending prices can be generalized to an other business situation.

As for preventing theft, opening the till/cash register creates a record of the sale which could potentially decrease likelihood of pocketing the money given by a customer. Can't find any studies on this, though.

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MSpeed
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    The quote "nine-ending prices led to increase the amount of purchasing of women-customers" is taken out of context. It's mentioned in the linked paper as a rationale for conducting the authors' experiment, which revealed no difference in behaviour between sexes. The study the quote is taken from targetted women only. – jd. Apr 19 '12 at 11:20
  • @ajax333221 It is a bit ambiguous, to be fair. The hyphen means that the customers are women, and we are talking about their purchasing (as a noun). If that makes sense. Compare it to this: "...the running of women-athletes." – MSpeed Aug 13 '12 at 08:27
  • Also, if 9.99$ may look to *most* as equal to 10$, *no one* would doubt a price of 10$. Therefore it comes almost for free. – clabacchio Mar 24 '14 at 12:27
  • @clabacchio: When you're selling millions of copies of a thing, that penny does not seem "free". – Billy ONeal Jul 14 '14 at 15:24
  • @BillyONeal I mean that it's free for who puts the price, not for who buys – clabacchio Jul 14 '14 at 15:40
  • @clabacchio: Erm, that's exactly what I mean. Let's say you sell a million bags of flour. If you charge one cent less for that bag of flour, the customer doesn't see much difference in the one cent. But you see a 10 thousand dollar difference. That's not "free" – Billy ONeal Jul 14 '14 at 17:49
  • @BillyONeal I get your point now :) But what I meant was more in the psychological terms: using the .99 prices won't fool everyone, but it will probably work better than rounding up. That's what I meant for "free" (as risk-free). But indeed that's the drawback. The only difference, I would focus more on the percentage over the whole price than on amount of sold units. If I sell a million cars, still 10'000 dollars are nothing. – clabacchio Jul 14 '14 at 18:04
  • @ajax333221 In standard usage, if "women" were saying what they are customers are, rather than what customers they are, then it should not be pluralized. The phrase "women owned and operated", on the other hand, does suggest that "women" is the object, rather than subject. – Acccumulation Dec 18 '17 at 04:59
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The short answer is that this practice is marketing orthodoxy, and supported by empirical evidence; companies do this because it makes them money. The exact cause is complex and perhaps unknowable, but the effect is real, and reasonably well documented.

Some common "folk" psychological explanations of the phenomena of the "9-fixation" are outlined in the paper "Why 99 Cents?" (pdf) written by Economist Oz Shy:

Rounding illusions: Consumers tend to approximate the prices they pay by a lower integer or a lower decimal number rather than a higher price. Thus, depending on the level of rounding numbers, consumers may state or report a price of $999.99 as nine-hundred-ninety-nine, as nine-hundred-ninety, or simply nine-hundred dollars. Whence, people tend to under quote a price according to the leading digits of the price. Stores, then, maximize profit by setting the last digits as large as possible, in which case they simply add the relevant sequence of 9s.

Consumers like to receive change: Therefore, if stores take into their pricing consideration the assumption that consumers' utility is enhanced by receiving change, they will maximize profit by handing out the minimum-possible change, which is 1¢. Hence, all prices end in 99¢.

Attractive digits: People find the combinations of 99, 999, 9999, and so on to be "nice." Thus, consumers are attracted to looking at prices involving many digits of nine. Hence, this "elegant" statement of the price serves as a store-advertising mechanism since after looking at the price itself consumers are more likely to pay attention to other details and features of the store.

Image of a discount retailer: Discount stores tend to utilize black & white ads in order to create an image that the store is engaged in a significant cost cutting. Similarly, a price of 99¢ may indicate that a store is concerned with all levels of cost cutting and that even a 1¢-cost reduction is being transferred to the consumers in the form of a 1¢ price reduction.

There are various proposed psychological and economic "causes" to this problem.

In "Why 99 Cents?", Shy proposes a game-theoretic solution, which has retailers reaching pricing equilibrium with 99 cents after the dollar amount.

The book The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making by Tom Nagle and Reed Holden suggests that people observe the "dollar" and "cent" parts of prices independently, and often ignore the cent portion as insignificant. Capitalizing on this phenomena, retailers should maximize profit by setting the "cent" part of the price to the highest possible value.

In his paper "Why are so many goods priced to end in nine? And why this practice hurts the producers" Kaushik Basu additionally offers that this phenomena is due to pricing equilibrium caused by consumers always assuming that the "cent" part of a price will be 99, and so when an item is "four-dollars", for instance, a consumer will assume that it's $3.99 and retailers will "lose" a penny.

Whatever the actual cause and effect of this phenomena, it is an empirical fact observed by André Gabor in his 1988 book Pricing: Concepts and Methods for Effective Marketing, who observed that the decimal portion of a price has no effect on the consumers of an item.

This same phenomena was observed by Phillip Gendall in his paper Estimating the Effect of Odd Pricing, who noted that "odd pricing generates greater-than-expected demand, at least at the individual brand level, and for the common practice of setting retail prices that end in 95 cents or 99 cents."

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Ezra
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Here are two more recent papers to support the notion that consumers do suffer from significant "left-digit bias".

Lacetera, Pope, & Snydor (2012) looks at US used car sales data. It finds a large and discontinuous drop in sales prices at each 10,000-mile mark of the odometer.

For example, cars with odometer values between 79,900 and 79,999 miles are sold on average for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899.

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MacKillop et al. (2013) surveys smokers and finds that smokers' self-reported probability of a quit attempt also jumps discontinuously each time the price of a pack of cigarettes crosses a dollar mark.

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These tend to support the notion that consumers have a left-digit bias. So do retailers tend to have 99-cent pricing because they want to exploit this bias? I do not have data regarding retailers' motives, but this seems to be a reasonable conclusion to make.

Some competing explanations--such as that retailers do this mainly (i) to circumvent employee theft or (ii) because consumers like to receive change--can perhaps be rejected based on evidence that similar 99 cent pricing is common in e-commerce, where there are usually no cash register or coins to deal with. Examples: Hackl, Kummer, & Winter-Ebmer (2014), Levy et al. (2011).