Identifying the conditions that facilitate the left-digit bias can help managers decide when to use left-digit pricing
Consumers often judge just-below prices, or prices that end in 99 cents, to be much lower than the closest round number—a tendency often referred to as “left-digit bias.” The practice of pricing items a few cents less than a round figure 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 whether this practice is successful depends on the condition. Research conducted by Tatiana Sokolova, an assistant professor of marketing at Tilburg University; Satheesh Seenivasan, a senior lecturer at Monash University; and Manoj Thomas, an associate professor at Cornell University, examines when the left-digit bias is more likely to affect consumer judgments and evaluations.
Sokolova and Thomas provided details on some of the most eye-catching data from their study.
$2.00 >> $1.99
“Understanding whether and when just-below pricing will affect consumer choice has nontrivial financial consequences for consumer packaged goods companies,” Sokolova and Thomas explain. “For example, if a multibillion-dollar FMCG (fast-moving consumer goods) 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 a company’s profits by millions of dollars.”
This is more likely to work when consumers compare multiple prices side by side, rather than comparing a given price to one the customer remembered seeing. “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-side price comparisons,” the authors say.
$2.99 vs. $3.00
In one experiment, the researchers asked consumers to evaluate the price of Smucker’s jam, which was priced at $2.99 for half of the participants and at $3.00 for the other half. In addition, half the participants also saw the regular price of $4.00 next to the offer price as a reference point. The other half did not see the regular price.
Participants perceived the $2.99 price to be 15% lower than the $3.00 price—but only in the test where participants were evaluating the offer prices alongside the $4.00 price. When the $2.99 price was evaluated alone, without the $4.00 reference, it was rated the same as the $3.00 price.
$2.99 Rounded Up to $3.00
$4.00 vs. $2.99
“These results highlight a fundamental insight about when the human mind spontaneously rounds up numbers and when it does not,” Sokolova and Thomas say. “When a person evaluates $2.99 by itself, their mind spontaneously rounds it up to $3.00. But when they evaluate the difference between $4.00 and $2.99, their mind starts comparing the left-most digits even before it can round up the latter number.”
Research found that just-below pricing is more likely to boost sales among light users of a category who have less-developed price knowledge and are therefore prone to compare the prices of products on the shelf.
In 2007, data was gathered from 11 stores of a major Northeastern U.S. supermarket chain and included transactions by 2,000 households in three categories—peanut butter, ketchup and liquid dish detergent. After reviewing 15,236 choices made by consumers in the three categories, researchers found that consumer choice is more affected by prices’ left digits for heavy category users—defined as shoppers who buy frequently and spend a lot in a given category.