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Price Endings, Round Numbers and Charm Pricing: What the Research Shows
Field experiments show that a price ending in 9 can lift demand, but the effect depends on whether the left-hand digit changes and on how the customer is deciding, which is why a round price often suits a service better.
At a glance
- In a mail-order field test reported in Harvard Business Review, raising a dress from $34 to $39 increased demand by about a third, and three experiments found a $9 ending lifted demand each time, most of all for new items.
- The effect comes from the left digit: buyers give the first digit of a number extra weight, which shows up in more than 22 million used-car sales as price drops of about $150 to $200 each time the odometer crosses a 10,000-mile mark.
- A cut from $100 to $99 needs only about 1% more bookings to pay for itself, but round prices tend to fit purchases made on feeling, such as a facial, a cut and color or a gift card, better than nonround ones.
The number and where it comes from
The best-known evidence on charm pricing comes from field experiments run with a women's clothing catalog, in which researchers printed different versions of the same catalog with different prices for the same items and compared orders. A study in Quantitative Marketing and Economics reported three such experiments; a $9 ending increased demand in all three, and the lift was stronger for items the retailer had not sold before, which the authors read as a sign that 9-endings work best when customers have little else to judge the price by. The researchers' summary in Harvard Business Review gives the most striking case: moving a dress from $34 to $39 raised demand by about a third, and adding the word "sale" beside a price raised demand by more than 50% in tests with several catalogs.
Experiments published in the Journal of Consumer Research explain where the effect comes from. Across five experiments, a 9-ending price seemed noticeably smaller than a price one cent higher only when the leftmost digit changed, as in $2.99 against $3.00, so $4.99 against $5.00 behaves differently from $4.98 against $4.99. The same left-digit pattern appears outside retail; an NBER study of more than 22 million wholesale used-car transactions found prices falling by about $150 to $200 at each 10,000-mile odometer threshold, a real cost created by buyers attending mostly to the first digit.
The research also has a caution that matters for service businesses. Studies in the Journal of Consumer Research found that rounded prices such as $200 are processed easily and match purchases made on feeling, while nonrounded prices such as $198.76 push buyers toward calculation; when the price format matched the way the buyer was deciding, the purchase felt right and reactions to the product grew stronger. A spa package, a bridal trial or a gift card is mostly a feeling purchase, while a water heater replacement or a tax return is mostly a calculated one.
A worked calculation
Every price cut has to be paid for with extra bookings, and the formula is simple: extra bookings needed = old price ÷ new price − 1. The table runs it for a $100 service.
| Current price (Assumption) | $100 |
|---|---|
| Monthly bookings at $100 (Assumption) | 120 |
| Monthly revenue at $100 (Calculated (120 × $100)) | $12,000 |
| Bookings needed at $99 (Calculated ($12,000 ÷ $99)) | 121.2 (about 1.0% more) |
| Bookings needed at $95 (Calculated ($12,000 ÷ $95)) | 126.3 (about 5.3% more) |
Illustrative example; this counts revenue only, and because each extra booking also carries its own cost, the profit break-even is higher.
The calculation shows why the 9-ending is cheap to test and the deeper discount is not. A $1 change asks for about one extra booking in a hundred, while a $5 change asks for more than five, and the research gives no reason to expect a $95 price to work better than $99, since both change the left digit.
How to use this on a service menu
Use a 9-ending where the customer is comparing and the first digit would otherwise tick up, such as a $99 tune-up beside a competitor's $100 or a $49 add-on. Use a round price for work bought on feeling or trust, such as signature treatments, premium packages and gift cards, where a clean number reads as confident. Keep one style within each section of the menu so the choice looks deliberate.
How you compare
- Your menu: count how many prices sit one step above a left-digit change, such as $100, $150 or $200; those are the candidates for a test.
- Your services: sort the menu into feeling purchases and calculated purchases before choosing an ending style for each group.
- Your own baseline: compare monthly bookings for one service for two months before and two months after a change, keeping everything else the same.
Sources
- Anderson, E. T. and Simester, D. I. Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments. Quantitative Marketing and Economics 1, 2003. Three field experiments with a mail-order catalog.
- Anderson, E. T. and Simester, D. I. Mind Your Pricing Cues. Harvard Business Review, September 2003.
- Thomas, M. and Morwitz, V. Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition. Journal of Consumer Research 32(1), 2005. Five experiments.
- Lacetera, N., Pope, D. G. and Sydnor, J. R. Heuristic Thinking and Limited Attention in the Car Market. NBER Working Paper 17030, 2011 (published in American Economic Review, 2012). More than 22 million wholesale used-car transactions.
- Wadhwa, M. and Zhang, K. This Number Just Feels Right: The Impact of Roundedness of Price Numbers on Product Evaluations. Journal of Consumer Research 41(5), 2015. Five studies.
Related reading: How to Raise Prices Without Losing Customers, Based on the Research · What a Discount Really Costs You, Shown in Margin Math · How to Price a Service: Cost, Value and What the Market Will Bear · Service Packages and Bundles Customers Actually Choose
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