When does the left-side-digit tactic work best?
We all know the practice of pricing products just below round amounts. It has been around for almost a century. Retailers set prices at, for instance, $2.99 instead of $3.00, expecting to benefit from consumers’ tendency to focus on prices’ left-most digits. But in what circumstances does this practice work best? Tatiana Sokolova and her colleagues Satheesh Seenivasan and Manoj Thomas searched for answers.
dr. Tatiana Sokolova
TiSEM: Tilburg School of Economics and ManagementView full profile
TiSEM: Department MarketingT.Sokolova@tilburguniversity.edu Room K 739
(Edited by Odette Bruls)
Small changes, large effects
One cent off might seem a minor price change, however the total financial consequences for companies can be huge. For example, if a multibillion-dollar FMCG company with a 9% net margin changes its product prices from $2.00 to $1.99, its margins decrease by 6%. Unless this drop in margins is offset by a sizeable increase in demand, just-below pricing can backfire and reduce company’s profits by millions of dollars. So understanding in what circumstances just-below pricing will affect consumer choice is of major importance for consumer packaged goods companies.
We used data from 11 stores of a major Northeastern U.S. supermarket chain covering transactions by 2,000 households in three categories—peanut butter, ketchup, and liquid dish detergent—in 2007. In total, we analyzed 15,236 choices made by consumers in the three categories. Additionally we executed a number of experiments to study how price evaluation works in the mind of the consumer.
Side by side evaluation seems to work best
Our results suggest that just-below pricing is more likely to work when consumers evaluate multiple prices side by side, instead of comparing a given price to a price retrieved from memory. This means, for example, that left-digit pricing will be more effective during promotions wherein people see the compared prices on the same tag and become more likely to make side-by-size price comparisons.
In one of our experiments we asked consumers to evaluate the price of Smucker’s jam. The product was priced at $2.99 for half of the participants and at $3.00 for the other half of the participants. In addition, for half the participants, we provided the regular price of $4.00 next to the offer price as a reference point. The other half did not see the regular price.
Memory versus stimulus based price evaluation
Participants perceived $2.99 price to be 15% lower than the $3.00 price. However, this was only the case when participants were evaluating the offer prices alongside regular prices of Smucker’s ($4.00). We call this stimulus based evaluation. When the $2.99 price was evaluated alone, without the $4.00 reference, it was rated the same as the $3.00 price. In this case, the price evaluation was memoy based.
These results highlight a fundamental insight about when the human mind spontaneously rounds up numbers and when it does not. When a person evaluates $2.99 by itself, her mind spontaneously rounds it up to $3.00. But when she evaluates the difference between $4.00 and $2.99, her mind starts comparing the left-most digits even before it can round up the latter number.
Attracting light consumers
We also find that just-below pricing is more likely to boost sales among light users of a category. Those consumers have less-developed price knowledge and are, thus, prone to compare the prices of products on the shelf. So they rely more on stimulus based price evaluation. Whereas heavy users have more knowledge about the product category and rather rely on their own memory.
Going back to the important question: does the just-below pricing work? The answer is: that depends. It depends on the way consumers compare the prices and on the type of consumers and products the company is working with. Companies are most likely to benefit from just-below pricing when the core of their audience are light users and/or when their products are low-purchase-frequency items. So before deciding whether or not to use just-below pricing, the company must know its consumers and products well. Moreover, the company should always show the original price next to the price-off.
Sokolova, T., Seenivasan, S., & Thomas, M. (2020). The left-digit bias: When and why are consumers penny wise and pound foolish? Journal of Marketing Research.