How Odd-Even Pricing Works in Retail
A form of psychological retail pricing suggests customers are more sensitive to certain ending digits. Tons of research has been done to try and discern the perfect price point for a product. What is the price that is most enticing to customers?
Odd pricing refers to a price ending in 1,3,5,7,9 just under a round number (e.g., $0.79, $2.97, $34.95). Even pricing refers to a price ending in a whole number or in tenths (e.g., $0.50, $6.10, $55.00). The idea is that a price ending in .99 sounds cheaper in the mind of the customer than those ending in .00.
WalMart has made a very strong statement in this arena. They use an 0.88 ending on their pricing. Again they are trying to convey a lower price. In fact, they know that the other retailers are using $19.95, so they use $19.88. It sounds cheaper. It looks cheaper. It is cheaper. But can such a small difference in money make such a big difference? The simple answer is yes.
According to a 1997 study published in the Marketing Bulletin, over 90% of prices in advertising material ended in an odd digit (9,7,5). That was almost 20 years ago! It's even more with the case today. Psychologists argue that when a customer sees a price of $1.99 they associate it with $1 versus $2. While this is still a valid argument, most customers in this economy have begun to round up versus down. So, when they see $19.95, they do not think $19. Rather, they think $20.
What's changed? Well, for one the economy. We have gone through a recession in the last 20 years. The middle class has all but vanished, the cost of living has continued to increase, and people simply have less money than they used too. Add to that the advent of online shopping where prices can be changed instantly at any time during the day.
Add to that, apps for your mobile device that can track pricing and alert you to savings from one place to another. Add to that, scanners on mobile devices that can tell if the price you are looking at in this store is low or if you can go down the street and get it cheaper. The concept of showrooming has also impacted price.
So, does all this mean that odd-even pricing is no longer valid? Not at all. When asked, customers still think odd prices are cheaper than ever. Even though the price is $19.99, people still think it is cheaper than $20.00. A bit of a conundrum I know, but the facts still say pricing in odd numbers is the best strategy.
One of the latest technologies to come into the retail market is digital price tags. This allows the retailer to adjust the price of a product in real time by sending a signal to the RFID tag on the shelf next to the product. In other words, no physical price tags on the product, just the digital "sign" in front of it.
This new technology is being used to test ideas such as time of day pricing. This is the concept that customers will pay more in the evening than during the day - that the true bargain hunters come out in the early times. If this is true, prices can be adjusted during day patterns maximizing gross margin for the retailer.