What does a community college drop out know about pricing strategy? Well Dave Gold apparently knew more than you’d expect. Gold inherited his father’s liquor store in the early 1960’s after he passed away. Not knowing much of the business, Gold decided to experiment and started in the most obvious way: pricing.
They had previously sold wine at various prices, ranging from 70 cents to upwards of a dollar, but they had noticed that 99 cents generally worked better. He decided to run a simple test for wine, setting a fixed price point of 99 cents. It was an instant success and he quickly recognized the power of 9.
Whenever I’d put wine or cheese on sale for $1.02 or 98 cents, it never sold out… When I put a 99 cent sign on anything, it was gone in no time. I realized it was a magic number.
Dave Gold in a 2001 interview with The Los Angeles Times
Building on this idea, he figured he could be hugely successful applying the same premise to all sorts of items, which ultimately led him to opening the first of hundreds of 99 Cents Only stores in the United States.
The Left Digit Effect
The power of 99 cents and more specifically 9, has been around for decades. From 99 cent songs to 99 cent stores, the power of this pricing strategy is still thriving today. The question is why does it work? It all begins with how we process numbers.
When people are interpreting prices, they begin by defining the order of magnitude for any given value. Generally, humans aren’t the best at thinking of things in absolutes, so we rely on comparison to do the job for us. So when we compare $4.00 to $5.00, we easily recognize the difference between the two, 4 vs 5.
This works great in the example above, but what happens when you compare $4.99 to $5.00? Again we recognize that $4.99 is less, but we perceive it to be much less, because we rapidly interpret its value based on the first digits, 4 vs 5 again. This evaluation happens instantaneously. While the rational part of the brain will eventually interpret this difference as being only 1 cent, that snap judgement plays a large role on how we perceive pricing.
The left digit effect is when consumers put more emphasis on the first number than those that follow. Again, let’s deconstruct the difference between $4.99 vs. $5.00. The snap comparison is 4 vs 5, almost 1 dollar. Eventually, we’ll recognize this to only be a difference of 1 cent and not 1 dollar, but the anchor of that first interpretation leads to a subconscious bias on our decisions going forward (especially when we’re busy or tired).
This is why the left digit effect works – it plays on how our mind interprets numbers, relying heavily on that initial comparison. The number 9 is critical for this effect because it represents that threshold before moving values up an order of magnitude.
The following are a handful of price adjustments that leverage this concept:
- Decrease price by a penny – $2.00 to $1.99
- Decrease price by a dollar – $40 to $39
- Increase price by 99 cents – $39 to $39.99
- Increase price to the nearest 9: $34 to $39
The last two examples are particularly interesting. You can actually increase prices so that they end in 9 and greatly improve your sales. Why? Because the effect can also work in reverse, as consumers don’t fully recognize the difference as the left most digits are the same. Comparing $34 vs $39 initially turns into 3 vs 3, a perceived similar value.
And don’t just take my word for it, the left digit effect has been proven to work in a number of scenarios.
In a 1996 study, Rutgers University professor Robert Schindler and then-Wharton graduate student Thomas Kibarian demonstrated the power of 99 cents. They randomly mailed customers of a women’s clothing catalog two versions – one had prices that ended in 00 cents, the other had prices that ended in 99 cents. The results? Those that received the 99 cent catalog were more likely to purchase, increasing the clothing companies revenue by 8%.
Another study conducted at the University of Chicago showed that when a grocery store dropped their price for margarine from 89 cents to 71 cents, sales improved 65%. Lower prices increased sales. But when they dropped it from 71 cents to 69 cents, sales rose 222%! That extra two cent decrease to leverage the power of 9 had an outsized impact on the business.
Moreover, the power of 9 isn’t restricted to the cents column. A 2003 experiment by Eric T. Anderson and Duncan I. Simester explored the impact of sales with incremental $5 price increases. They tested a range of dresses at $34, $39, and $44 dollars. The expectation was that demand would decrease as price increased. The reality was that demand increased by a third when raising prices from $34 to $39, yet changing the price from $34 to $44 yielded no difference.
The left digit effect is a powerful tool when it comes to pricing strategy. Let’s see what happens if one were to ignore it.
Ron Johnson had spent 12 years revolutionizing the retail experience for Apple. His next venture was to take that knowledge to a more traditional retailer when he got appointed as CEO of JCPenney. He was well aware of the pricing games that similar retailers were playing and he thought it was time for change.
Rather than tricking consumer with artificial sales tactics, he was going to simplify things dramatically. He wanted to re-invent retail. His proposal to accomplish this was a program called Fair and Square. Rather than having deep discounting and 99 cent pricing, he was going to simplify everything. Prices would be whole numbers and discounts would only happen once a month. There weren’t going to be any 99 cent pricing schemes or saving 70% on products.
It was a drastic change to bring to the table and was counter to what most consumers were used to. Fair and Square was going to revolutionize retail. Except it didn’t. The plan failed miserably.
Within one year, JC Penney sales fell 28 percent and even more during the peak Christmas period. Ron Johnson’s tenure as CEO lasted only 15 months. The removal of pricing signals, a critical one being the power of 9, was detrimental to JCPenney’s entire business.
The Left Digit Effect in E-commerce
As prevalent as this strategy is in retail, it is just as powerful online. Nearly everywhere you look, you see the power of 9 being leveraged. From products to services, prices generally end in 9 and leverage the left digit effect. Just a few examples are found below from Apple, Spotify, and the Google Play store.
The examples above are just a handful of thousands of examples of this effect at play. Knowing the power of the left digit effect, let’s think about how you can utilize it.
Here are three simple things to try.
1. Increase prices to just below the next hundred or ten mark
If you have products priced at $34 or $27 or $15, try and see what happens when you bump them up to the nearest 9. Moving to $39, $29 and $19 is an easy adjustment to make that could dramatically improve the bottom line.
2. Add 99 cents to pricing
While I love how whole number pricing looks from a visual perspective, adding that extra 99 cents can truly move the needle. Try going from $49 to $49.99. The incremental revenue in addition to the pricing signal that 99 cents connotates can improve conversion across the board.
3. Discount prices down to values with 9
Rather than pricing everything with a 9, leverage the power of 9 when it comes to discounts. Discount full priced items down to numbers ending in 9.
| Full Price | Discounted Price |
|---|---|
| $27 | $19 |
| $50 | $39.99 |
| $95 | $79 |
This reinforces the left digit effect, but also sells the best deal message you are trying to communicate.
I’ll tell you what brilliance in advertising is: 99 cents. Somebody thought of that.
John Slattery as Roger Sterling in Madmen
While the left digit effect can be extremely effective, we do need to be mindful of how we use it. Often times 9 is a signal for deals/sales to consumers, so be careful overusing it, especially with other sales messaging.
Furthermore, we should think of our pricing strategy as a system across our entire business. We should leverage the power of 9 where it makes sense, to serve our goals. Think about how consumers make decisions and how the decoy effect impacts your price points. Not everything needs to be sold at a price point ending in 9.
That being said, I encourage everyone to experiment with this idea. Line up some AB tests and see how the left digit effect can positively impact your bottom line.
Sources
99 Cent Only Store (Wikipedia)
The Left Digit Effect: Why Games End in 99 Cents (Psychology Today)
The Real Reason Most Prices End in 99 Cents (CBC Radio)
The Left Digit Bias: When and Why Are Consumers Penny Wise and Pound Foolish? (Sage Publications)
Mind Your Pricing Cues (Harvard Business Review)
Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments by Eric T. Anderson and Duncan I. Simester