Predictably Rational

Bouree Lam in The Atlantic rounds up some recent thinking on the difference between round number pricing and the more common $X.99 style of pricing.

Of the lunch spots near my office, the chain Le Pain Quotidien's menu always demands more of my attention than others. The reason that the menu at Le Pain Quotidien is unusual isn't because they serve open-faced sandwiches or that I'm not sure what kind of cheese Fourme d’Ambert is, but rather that their prices aren't formatted like those of other shops. Organic egg frittata costs $12.00, curried chicken salad tartine is $12.25, a large cappuccino is $5.35. In a world where most prices end with ".99", Le Pain Quotidien's prices make my brain hurt.

The "undercover" economist Tim Harford (he has a book and writes column at the Financial Times by that title) has explained the theories for why prices in our world end in "9." First is something called the left-digit effect, which suggests that consumers just can't be bothered to read to the end of prices. The mind puts the most emphasis on the number on the far-left, so even though $59.99 is closer to $60, it's the "5" that registers. The other theory is that prices ending in ".99" signal a deal to consumers. In short, consumers seem to like prices that end in "9," and experiments say that pricing things this way increases purchases.

This topic is a favorite for those who like to geek out on the subtleties of heuristics and biases (a foundation of behavioral economics) but the idea that consumers are "lazy" when considering prices, that they simply don't notice that $9.99 is a lot like $10.00, seems facile. 

Despite the ubiquitous "9" pricing practice, most numbers used in everyday life are whole numbers. It's not common to say, "just give me 5.27 minutes." But why do Le Pain Quotidien's prices still make my mind reel? A new study in the Journal of Consumer Research might have the answer. Researchers found that shoppers deal with pricing information differently when prices feature round numbers ("5"), as opposed to non-round ones ("4.99"). When something costs $100, consumers tend to rely on their feelings, whereas when something has an irregular price—such as $98.67—consumers have to use reason to compute whether it's a good price.

Perhaps the exact opposite effect is at work, and irregular pricing actually makes consumers "slow down" and pay more attention to the price, leading to a higher liklihood of a sale.