I worked a lot on pricing over the past 5 years, and a question that comes up a lot is whether prices ending in “.99” really drive more sales, and if so, why and by how much?
The academic research in this area says that “pretty prices” (those ending in .99) perform 8-29% better than non-pretty prices.
The reason pretty prices perform better is a mixture of basic psychology – $4.99 reads a lot lower to our reptilian brains than $5.00– and the fact that over time we’ve all become conditioned to see prices expressed in this format. If something doesn’t conform to the expected norm, then we question why. And as soon as a question arises in our brain, it can crowd out, delay or block the urge to purchase.
I recently consulted with a client on a pretty pricing opportunity, and the client made the decision NOT to implement a pretty price change. Since it’s the standard, I thought it would be useful to explain this particular case.
In the study, customers in Germany were randomly shown one of two prices, one pretty, the other non-pretty. The prices differed by 2.5%, and the goal was to see if the client could generate a sales uplift of greater than 5%. Meaning, for a reduction in price of 2.5%, they could show a 100% return in increased sales. However, the results were disappointing. The uplift for the pretty price was only very slight.
The client believes the reason for the counter-intuitive result was that the target customers were European. And Europe has thrown a few monkey wrenches into their taxation system, known as Value Added Tax, or VAT.
The key factors that broke the pretty pricing model were 1) In Europe, prices are required to be displayed “inc-VAT”, that is, including tax; 2) European consumer law requires prices to be consistent across countries; and 3) VAT varies by country, for example, Irish VAT is 23% and German VAT is 20%.
The above means that manufacturers of consumer goods (the rules differ for business-to-business) have generally set standard “ex-VAT” prices (not including VAT), and then display the prices customers see, with VAT. This results in non-standard inc-VAT pricing from country to country (it varies by the difference in VAT) and non-pretty pricing, since a pretty price in Germany would likely translate to a non-pretty price in Ireland.
Here’s the point: it seems that, based on this study, European consumers are now conditioned to expect non-pretty prices. They are no longer motivated by .99. In fact, my client believes that when European customers see a pretty price, their reptilian brains get confused and try to figure out if they are looking at an ex-VAT price, and then do the math to add VAT, then compare an artificially-inflated price with their expectations – what a mess!
I believe the underlying science – consumers prefer consistency and stumble on anything that sticks out – is still good.
By the way, as of January 1, the VAT rules are changing in Europe. Consumers will now be billed for VAT according to their country of residence, NOT the country of the source product or service. More on that later!