A Case Study in Consumer BehaviorAbout The Influence of Odd Pricing to the Buying Behavior of Consumers in

City of Binan Laguna

(Consumer Analysis Model: Affect and Cognition)

I. INTRODUCTION

Casual observation of advertised retail prices throughout Binan Laguna

highlights the prolific use of odd pricing, the practice of pricing just below the

nearest round number (for example, Php 99.99 instead Php 100, or Php 999.99

instead of Php1000). The popularity of prices ending in the digit 9 and, to a lesser

extent, the digit 5, reflects the belief that odd pricing will produce higher than

expected demand at the price level concerned. In other words, the assumed

demand curve is thought to be "kinked" upwards at odd price points.

According to Scot Morris’s Book of Strange Facts and Useless

Information, psychological pricing originated in Chicago in 1875, when Melville E.

Stone founded the Chicago Daily News with a purchase price of only one cent.

There was only one problem; there weren’t enough pennies in circulation, making

the purchase of Stone’s newspaper very inconvenient. He put the lack of pennies

down to the prevalence of pricing goods at even-dollar amounts for easy

arithmetic, and colluded with shopkeepers to lower prices by one cent (e.g to

$0.99 compared with $1.00). Those shopkeepers who agreed to aid Stone in his

efforts found that the practice increased sales, except there was an issue in

providing one-cent pieces as change. The solution was to ship barrels of pennies

in from Philadelphia to provide to customers as change. There was a cost

associated with this, but the shopkeepers believed that the benefit of having the

psychological pricing was above and beyond the cost of shipping in the pennies.

If this story is true, Stone’s plan must have worked, as the paper lasted 102

years before its eventual demise in 1978.

The tendency of retailers to price their products with a ".99" or ".98" ending

is ubiquitous in the marketplace. Instead of a jar of mayonnaise costing $3.00,

we usually see a price of $2.99. Late-night infomercials promote items that cost

$29.99, not $30.00. And even the tennis shoes we buy in the mall cost $79.99

instead of $80.00. Odd pricing, or setting prices for goods and services just

below a common or even price, has been an everyday practice for years.

Nonetheless, researchers still understand relatively little about whether this

practice is successful in increasing sales, and even less about the process

through which such odd pricing may benefit the bottom line.

What little research that exists regarding the odd-pricing effect can largely

be categorized into two groups: research that examines the effect of odd pricing

on purchases, and research that examines the potential mediators of odd pricing

effects. Researchers have demonstrated that people are more likely to buy or

think they would buy odd-priced items (e.g., Schindler & Warren, 1988; Schindler

& Kibarian, 1996). The mechanism, however, is less clear. Whereas some

evidence supports the notion that people "round down" and thus misperceive odd

prices (the "level hypothesis:" odd prices are perceptually rounded down;

Schindler & Wiman, 1989), other research suggests that the mere image of odd

prices makes products seem less expensive (the "image hypothesis:" odd prices

are used as a heuristic that the product is less expensive; Schindler, 1991).

When comparing even prices with "99" odd prices, we found a significant main

effect of price ending, indicating that participants reported that they could buy

significantly fewer even-priced products than they could 99-priced products. The

results indicated that across the four price levels, although reducing the price of a

product is actually a trivial discount of 0.3%, the difference was perceived as a

substantial discount of 14%. When comparing even prices with "88" odd prices,

the main effect of price ending was only marginally significant: the mean number

of products purchasable at the even price was only marginally less than the

number of products purchasable at the "88" price ending. The results indicated

that across the four price levels, although reducing the price of a product is an

actual discount of 3.4%, the difference was perceived as a discount of 11.7%.

Future research may utilize this implicit method of measuring price

perception to better understand the mechanism underlying odd pricing effects.

One study will involve using the method to test the level and image hypothesis. If

the image hypothesis mediates the effect, we should find that odd prices that end

with a "9" will be perceived as less expensive than odd prices that do not. This

may be evidenced by participants’ thinking that they can buy more of a $1.69

product than a $1.68 product. Conversely, if the level hypothesis is correct, we

should find a continuous trend that any odd price will be perceived approximately

equivalently. This may be demonstrated by participants’ thinking that they can

buy about the same number of products priced at $1.69 and $1.68. In a second

study, we plan to measure price perception both implicitly (using the method

discussed herein) and explicitly (by simply asking participants their subjective

perception of how expensive a product is). We expect to find that the implicit

measure of price perception mediates the effect of odd pricing on purchase

decisions better than does the explicit measure.

The completed study, as well as the proposed future research, will

therefore collectively provide evidence about the underlying reasons why odd

pricing influences purchasing decisions. The first study clearly demonstrates that

even at a level more basic than purchase decisions, people actually perceive odd

prices as being much lower than even prices. Again, although the odd price was

trivially lower than the even price, the perceived magnitude of that difference was

much greater (as much as 14%). Future research will use this method to

demonstrate why either limit or image effects (or both) account for the effect of

odd pricing on price perception. Finally, additional future research will

demonstrate that implicit perception of price mediates the effect of odd pricing on

purchase decisions.

Although the process of odd pricing is long-standing, research about odd

pricing is still in its infancy. This research will help advance our understanding of

the underlying mechanisms of odd pricing, as well as provide a measurement

technique and theoretical directions for future study.

These days it seems that practically every retail and online store has

bright red “SALE” signs and posters boasting odd discount percentages clogging

their storefront window. 70% off here, 35% off there, and a whole lot of numbers

everywhere. These discount incentives appear to be practically begging those

passing by to come in and look around. Yet, beyond the psychological pricing

and pricing strategy implications of these practices, we need to take a step back

and truly take a look at how these incentives affect the customer. You may be

thinking, “Well, they’re sales, so they should be bringing in more customers,” but

as a recent article from The Economist so blankly states in its title, “Something

Doesn’t Add Up,” because research shows that consumers don’t comprehend

the mathematics of a discount. To better understand what’s going on here, let’s

subtract out the confusion, add in some clarity, and multiply the knowledge

dropped.

Typical sales, both online and offline, follow a century’s worth of

discounting and premium pricing strategies to hook in consumers. The idea being

that with a high anchor price being smashed by an impressive discount price

would create a sense of urgency and high perceived value to push a consumer to

purchase. Yet, in a study completed by Akshay Rao of the University of

Minnesota’s Carlson School of Management, the research team found that

consumers are waning on discounts in favor of receiving something extra.

Essentially, consumers would rather “buy one month and get the next free” than

“receive 50% off their first month.”

Keen observers of pricing trends may believe this phenomenon is due to

price fatigue or the rise in consumer intelligence to pricing tricks. After all, we’ve

seen “buy now, this sale won’t last long” for years and know that it really doesn’t

go away. Yet, we actually prefer getting more to a discount, because of our

ignorance with math. Rao puts it simply, “most people are useless at fractions.”

The team exposed this incompetence through a series of studies that asked

consumers which deal they would prefer: a 50% increase in quantity or a 33%

discount in price. The secret: they’re both the same offering. Despite their

mathematical equivalence, they found consumers overwhelmingly assume the

quantity increase is a better value. What’s even more interesting is that the

results stayed true even when the discounted product was blatantly a better deal.

II. METHOD OF STUDY

The research relied on the descriptive research in order to gather and

evaluate the data in accordance to the objective of the study. Descriptive

research is concerned with the description of data and characteristic about a

population. Descriptive studies seldom involve experimentation, as they are more

concerned with naturally occurring phenomena than with the observation of

controlled situations. It is a fact finding with adequate interpretation.

The goal is the acquisition of factual, accurate and systematic data that

can be used in average, frequencies and statistical calculations. Descriptive

research answers the questions who, what, when and why and how.

The rational for the use of the study is that the survey design was

regarded as the most appropriate research design to analyze the influence of

odd-pricing to consumers .

Sources of Data

Primary Sources. The chosen respondents of this study are the buyers

from SM Sta. Rosa. The random sampling was used to choose the said

respondents. Twenty (20) respondents are chosen to conduct the study.

Secondary Sources. The researcher used various books, periodicals,

articles and other reading materials in the University of Perpetual Help System

Laguna (UPHSL) library regarding some theses and dissertations. Another

source of data used in this study is the internet. The researcher surf the internet

to find other studies regarding the related topics.

Construction of Questionnaire

Constructing a questionnaire involves many discussions about the working

and ordering of the questions, selections and wording of response categories,

formatting and mode of administration of the questionnaires, and introducing and

explaining the survey.

In this research the researchers reads methods of research books in the

library, perused various theses and desertions, books on distribution strategies

as well as research literature on the same topic.

Instrumentation and Validation

The researchers used a self-made survey form. Questionnaires from an

important methods of data collection in a number of situations and have been

used extensively in a variety of studies. In validating the researcher review the

questionnaire to determine whether the questionnaire measures what it was

designed to measure. Suggestions, corrections and recommendations were

incorporated with the adviser consent. It underwent editing for language and

grammar before they were given to the respondents of the study.

III. RESULTS

Table 1Respondents' income bracket

Answer Frequency PercentageP 10,000 or below 11 55.00P 15,000 – 20,000 6 30.00

P 30,000 and above 3 15.00Total 20 100.00

Table 1 shows respondents what was their income bracket. The 11

(55.00=11/50 x 100) out of 20 respondents answered P 10,000 or below, 6

(30.00=6/20x100) answered P 15,000 – 20,000, and the 3 (15.00=3/20x100)

respondents answered P 30,000 and above.

Table 2Respondents who go to malls or supermarket

Answer Frequency PercentageAlways 8 40.00

Once a week 6 30.00Twice or more in a week 5 25.00

Once a month 1 5.00Total 20 100.00

Table 2 shows respondents who go to malls or supermarket. The 8

(40.00=8/20x100) of the respondents answered always, 6 (30.00) answered

once a week, 5 (25.00=5/20x100) answered twice or more in a week and 1

(5.00=1/20x100) answered once a month.

Table 3Respondents who are familiar to odd pricing

Answer Frequency PercentageYes 16 80.00

No 4 20.00Total 20 100

Table 3 respondents who are familiar to odd pricing shows that 16 (80.00

= 16/20 x 100) of the respondents answered Yes and 4 (20.00=4/20 x 100)

answered No.

Table 4Respondents which attract most to buy particular product/services prices

examples

Answer Frequency PercentagePhp 250.50 2 10.00Php 249.99 9 45.00Php 249.10 5 25.00Php 249.75 4 20.00

Total 20 100.00

Table 4 shows respondents which attract most to buy particular

product/services prices examples that 2 (10.00=2/20 x 100) answered Php

250.50, 9 (45.00=9/20 x100) answered Php 249.99, 5 (25.00= 5/20 x 100)

answered Php 249.10 and 4 (20.00 = 4/20 x 100) answered Php 249.75.

Table 5Respondents who usually see product which uses odd pricing

Answer Frequency PercentageYes 16 80.00No 4 20.00

Total 20 100.00

Table 5 shows respondents who usually see product which uses odd

pricing that 16 (80.00= 16/20 x 100) answered Yes and 4 (20.00= 4/20 x 100)

answered No.

Table 6Respondents who usually see products or services using odd pricing

Answer Frequency PercentageSupermarket 9 45.00Public Market 0 0.00

Shopping Malls 11 55.00Total 20 100.00

Table 6 respondents who usually see products or services using odd

pricing shows that 9 (45.00= 9/20 x 100) answered Supermarket, 11 (55.00=

11/20 x 100) answered Shopping Malls and no one answers Public Market.

Table 7Respondents who prefer to buy products which uses odd pricing

Answer Frequency PercentageYes 13 65.00No 7 35.00

Total 20 100.00

Table 7 respondents who prefer to buy products/services which uses odd

pricing shows 13 (65.00= 13/20 x 100) answered Yes and 7 (35.00= 7/20 x 100)

answered No.

Table 8Respondents who said that odd pricing affects their buying habits

Answer Frequency PercentageYes 5 25.00No 15 75.00

Total 20 100.00

Table 8 respondents who said that odd pricing affects their buying habits

shows 5 (25.00= 5/20 x 100) answered Yes and 15 (75.00= 15/20 x 100)

answered No.

Table 9Respondents who think odd pricing help them to easily decide on buying a

product

Answer Frequency PercentageYes 10 50.00No 10 50.00

Total 20 100.00

Table 9 respondents who think odd pricing help them to easily decide on

buying a product shows 10 (50.00= 10/20 x 100) answered Yes and 10 (50.00=

10/20 x 100) answered No.

Table 10Respondents who think that they can save money when they buy

products/service with odd pricing

Answer Frequency PercentageYes 11 55.00No 9 45.00

Total 20 100.00

Table 10 respondents who think that they can save money when they buy

products with odd pricing shows 11 (55.00= 11/20 x 100) answered Yes and 9

(45.00 = 9/20 x 100) answered No.

IV. DISCUSSION

Odd prices also referred to as magic prices, charm prices, psychological

prices, irrational prices, intuitive prices or rule-of-thumb prices are not based on

strict mathematical calculations. Price tags ending in nine and five account for a

majority of the retail prices. Odd pricing is believed to have a considerable impact

on a customer’s mind. The illusion of much cheaper products compels a buying

response. Also it is believed that because consumers are exposed to a

continuous flow of prices; they store only the more valuable first digits of a

number. This is so because the memory processing time is slower in humans.

Odd pricing is also believed to put across the impression that goods are marked

at the lowest possible price because it is a belief that even prices is an outcome

of the retailer rounding up the price to a whole number. Odd prices for the same

reason even give an impression of honesty of a retailer.

Psychological pricing is one cause of price points. For a long time,

marketing people have attempted to explain why odd prices are used. It seemed

to make little difference whether one paid Php29.95 or Php30.00 for an item.

Perhaps one of the most often heard explanations concerns the psychological

impact of odd prices on customers. Odd prices, on the other hand, appear to

represent bargains or savings and therefore encourage buying. There seems to

be some movement toward even pricing; however, odd pricing is still very

common.

The psychological pricing theory is based on one or more of the following

hypotheses:

• Judgments of numerical differences are anchored on left-most digits, a

behavioral phenomenon referred to as the left-digit anchoring effect. This

hypothesis suggests that people perceive the difference between 1.99 and 3.00

to be closer to 2.01 than to 1.01 because their judgments are anchored on the

left-most digit.

• Consumers ignore the least significant digits rather than do the proper

rounding. Even though the cents are seen and not totally ignored, they may

subconsciously be partially ignored.

• Fractional prices suggest to consumers that goods are marked at the

lowest possible price.

• When items are listed in a way that is segregated into price bands, price

ending is used to keep an item in a lower band, to be seen by more potential

purchasers.

The theory of psychological pricing is controversial. Some studies show

that buyers, even young children, have a very sophisticated understanding of

true cost and relative value and that, to the limits of the accuracy of the test, they

behave rationally. Other researchers claim that this ignores the non-rational

nature of the phenomenon and that acceptance of the theory requires belief in a

subconscious level of thought processes, a belief that economic models tend to

deny or ignore.

Odd pricing is also believed to suggest to consumers that goods are

marked at the lowest possible price. Many retailers believe that the more specific

a statement is, the more inclined people are to believe it. By using odd prices a

retailer may thus convey an image of honesty which would not be achieved by

charging a slightly higher round figure. Other explanations for the effect of odd

pricing include a belief that "circles attract the eye", thereby drawing consumers

to the digit 9, and that customers like to receive change.

The firm belief amongst retailers that odd pricing increases demand for

products is reflected in the widespread practice of odd pricing. There is some

support from three recent studies for the odd pricing assumption that greater than

expected demand occurs at odd price points.

However, there is still very little known about how the process occurs and

whether the effect is the same for different products and at different price levels.

Due to the customer perception of value, numbers do not always

represent its true value in the brains of human beings – a price may appear

expensive, but in another way it can be perceived as really cheap. How is this

possible? It is the psychology behind our everyday mental processes. In fact,

how we react to numbers and how we think about any particular number is

determined by the perceptions generated by our minds. We make different

perceptions each time and each time they can potentially make us believe

something is less different (or more) to something’s true value.

This concept of perception of value can be utilized in extensive areas.

Pricing doesn’t just work alone by itself, to apply this price perception strategy, it

must (in most cases) be initiated with support from other factors. There are

several pricing strategies that go with price perception, notably the odd pricing

strategy and its reversed version – prestige pricing; both are regarded as the

most frequently used psychological pricing techniques in the world.

The reason why odd pricing and prestige pricing work is because they

focus on the principle of price perception, in a way that customers think it is

beneficial to them. As brief as possible, odd pricing is when odd numbers (hence

it’s name) are used like Php249.99 rather than a full Php250. What’s the

difference? Sure, 1 cent, but because human beings tend to read numbers from

left to right, this instant mental process that reviews both digits cause us to think

the difference.

This is a simple strategy to encourage customers place orders, raise the

chances of people purchase. This has worked for thousands of years. There are

a couple of explanations to why it works; the first factor is the “left-digit effect”, as

we tend to look at prices from left to right, in most occasions. It is also mainly

because of the psychology behind it, the number 9 will always, and I mean

literally, always appear lower than 10 by a tremendous amount, even though the

real difference is only down by one dollar or one penny if in the case of Php99.99

to Php100.00. Ideally, it is because of the whole number point, 9 has only one

unit place, and when moved up by 1, it becomes 10, which means there are two

digits. We tend to look at numbers from left to right, just like how we read (also in

countries where text is read from right to left because the numbers would also be

reversed). Hence, we call it the “left-digit effect” since the majority of the society

reads left to right.

We, human beings, are extremely sensitive with the units of a price. For

example, if a price is Php99.99 whereas another is Php100.00, although the real

difference is only by one penny, but the fact that the number 10 has two digits,

we perceive its value as a lot higher than it really is. Therefore, the consumer

thinks they are receiving great savings by going for the Php99.99. Rounding

upward involves an additional decision compared with storing the first digits.

Furthermore, due to the vast quantity of information available for consumers to

process, the information on price must be stored in a very short interval. The

cheapest way to do so, in memory and attention terms, is by storing the first

digits.

Marketers around the world have profitably used odd pricing to increase

their sales, to be honest it’s impossible if you’ve never seen this classic trick. The

illusion of odd prices being much cheaper than even prices is certainly promoted

in retail advertising by displaying a much smaller type size for cents digits than

for dollar digits, thereby emphasizing the dollar amount of the price. This factor

may contribute to the illusion that odd prices are much cheaper than they actually

are.

Alternatively, the odd pricing effect could be the result of marketplace

conditioning of consumers to expect odd price endings. In other words, the sheer

predominance of odd pricing in the marketplace may influence consumers' price

expectations, which in turn makes a positive odd pricing effect on demand a self-

fulfilling outcome.

Factors that may influence the overall effect of odd pricing on demand

include product quality, product type and price level. In relation to price level,

there is some evidence that greater sensitivity to pricing occurred with lower

priced products and that sensitivity to particular price endings varied with price

level.

However, wise customers like you are rare and may not fall for the trick,

although it is seen and not totally ignored, the “discount” is partially still in effect,

more than half of the victims fall for it without realizing. The fact is that there are

people out there who make mentally influenced decisions rather than completely

rational decisions, because thoughts are partially made in an emotional sense.

After all, Odd Pricing has been proven to work, it has been tested on millions of

customers and millions every day, most important of all, this pricing strategy is

supported by psychology and natural human thinking

V. REFERENCE LIST

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