I have often wondered why just about everything has a price that is
just shy of a whole or round number.  For example, a watch with a
price of $19.99 instead of simply $20, or a vehicle with a price of
$19,999 instead of $20,000, or a gallon of gasoline at $1.899 instead
of $1.90.  Do businesses really expect consumers to be so stupid as to
round the prices down in their heads?

Hello gw-ga,

Theories of pricing are an important element in the field of business,
especially in the retail sector. All aspects of it have been studied
and researched, including the question of whether prices ending in
certain digits lead to better sales or not. The most common name for
this practice is called ?psychological pricing? and anyone who has
ever done any shopping has encountered it. The research is not
conclusive on whether profits are maximized by using psychological
pricing. I?ve collected a variety of resources that you can study so
you can draw your own conclusions.

Enjoy!

~ czh ~ 



http://www.marketingteacher.com/Lessons/lesson_pricing.htm
Pricing Strategies - Lesson

***** This web site gave me the vocabulary for exploring what terms
are used in discussing pricing and led me to the term ?psychological
pricing? for the phenomenon you described in your question.

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http://en.wikipedia.org/wiki/Psychological_pricing
Retail prices are often expressed as odd prices: a little less than a
round number, e.g. $19.99 or £6.95. Psychological pricing is a theory
in marketing that these prices have a psychological impact that drives
demand greater than would be expected if consumers were perfectly
rational. Psychological pricing is one cause of price points.

***** Follow the links that interest you for further discussion of the
psychology of pricing and whether the theories about it have been
confirmed through research. It?s interesting that the History section
of this page confirms gmartin-ga?s theory about the necessity of using
it as an anti-theft device.

Historical Origins

Historically the practice of odd pricing was developed primarily to
control employee theft. For cash transactions with an odd price, most
consumers must be given change. Creating change requires the employee
to open the cash register, recording the sale. This reduces the risk
of stealing from the shop owner by not recording the sale and
pocketing the money.

The practice is said to have been invented in 1875 by Melville E.
Stone, the publisher of the Chicago Daily News, who introduced it in
cooperation with his advertisers.

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http://marketing-bulletin.massey.ac.nz/article8/research1b.asp
The Widespread Use Of Odd Pricing In The Retail Sector

Odd prices, also referred to in the literature as magic prices, charm
prices, psychological prices, irrational prices, intuitive prices or
rule-of-thumb prices ( Dalrymple & Thompson 1969; Sturdivant 1970;
Boyd & Massy 1972; Gabor 1977; Monroe 1990; Rogers 1990), are not
based on strict mathematical calculations or long standing economic
theory (Kreul 1982). Although the true origin of odd pricing is
uncertain (Friedman 1967; Dalrymple & Thompson 1969), the use of odd
pricing can be traced back over 100 years (Schindler & Wiman 1989).
Since then the use of odd pricing in retailing has become widespread
in many countries.

***** This is a 1997 research paper that discusses at length the
issues raised in your question. It also provides and extensive
bibliography.

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http://www.cerge-ei.cz/pdf/gdn/RRCII_37_paper_02.pdf
The Dynamics of Pricing Points

***** This is a 2003 research paper on the subject of psychological
pricing points. It includes an extensive bibliography.

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http://www.marketingpower.com/mg-dictionary.php?Searched=1&SearchFor=odd-even%20pricing
Marketing Glossary Dictionary

psychological pricing
A method of setting prices intended to have special appeal to consumers. 
See also: odd-even pricing 

odd-even pricing
A form of psychological pricing that suggests buyers are more
sensitive to certain ending digits. Odd price refers to a price ending
in an odd number (e.g., 1,3,5,7,9), or to a price just under a round
number (e.g., $0.89, $3.99, $44.98). Even price refers to a price
ending in a whole number or in tenths (e.g., $0.50, $5.00, $8.10,
$75.00).

-------------------------------------------------


http://www.pricingsociety.com/default.asp
Professional Pricing Society

The Professional Pricing Society is the only association that supports
price decision makers and price management personnel from a wide
variety of industries in over 50 countries. Pricing, Marketing, and
General Management executives from Fortune 1000 and mid-sized firms
are typical members of the Pricing Society.

***** I was amazed to discover that there is a professional
organization dedicated to people who do pricing for a living.



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SEARCH STRATEGY
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pricing strategy 99
psychological pricing
price point pricing

Thanks a lot...it helps substantially by simply knowing what the
jargon is for what you're interested in.

businesses would be stupid if they would price the gasoline the way
you did............

It's a standard marketing philosophy that while consumers aren't
really tricked into believing something costs less because of this
type of pricing, there is a psychological impact that does make it
seem less expensive.  Consumers often feel the need to justify a
purchase, even if only to themselves, and this helps them build their
own case for a lower cost.

Not sure if this is true or not, but I've heard this explanation from
a few people. The practice of pricing things with 99c originated so
that the cashier had to open the til to give 1c change (because the
customer will probably pay an exact number of dollars), and can't just
pocket the money.

gmartin-ga, most places have sales tax, so even with whole-number
prices, once sales tax is added the total will be a whole number only
1% of the time.

While consumers that stop to think about it will realize there is only
a 1 cent difference between $19.99 and $20.00 and it will not affect
their purchase behaviour, the reality is most consumers don't think
about it and more units are sold at $19.99 than are at  $20.00.

One large drug store chain has even determined that $.89 is a dead
point for pricing. That is, they sell roughly the same number of units
at $.99 vs $.89 (and it holds true for $1.89, $2.99, $3.99 etc.).

Just listening to what people say is a good clue:

Let's say you ask your friend where to buy gas the cheapest and she
says "Exxon down the street is $1.90 right now."
Do you think the price is $1.899, $1.909 or $1.90?
That's right, it's is $1.909 per gallon yet we all say it is $1.90. 
If they didn't charge that extra .9 cents per gallon on the 5000
gallons they sell daily then they'd be losing $45 dollars pure profit
per day and everyone would still say their gas is the same price
($1.90).

But I'd love to see a gas chain come out with a great advertisement
about not trying to mislead their customers and give them a straight
up round price :)