Why do prices end in 99? It would seem logical to just round them up to the next dollar. Yet so many businesses forego rounding and price their products to end in 99. So why is this done? The answer is not what you think - at least, not only what you think.
The Psychology Theory
The reason why prices end in 99 is often attributed to psychology. This pricing strategy, known as the “left-digit effect,” it is believed that a lower first number has a greater psychological impact than the amount of money saved. Basically, since we read from the left to the right, we instinctively form an opinion before our rationale can catch up with our first impression. And by then, we have formed a bias.
For example, if you are purchasing a new MacBook and the price is listed at $999, this amount feels less burdensome than if you were purchasing it for $1,000. While there is only a dollar difference, the “left-digit effect” theorizes that since we naturally read from the left to the right, the first number we see is going to be the most important number in pricing - the one that forms our initial bias in our decision making process.
But what if psychology didn’t have anything to do with why prices end in 99? What if there was an entirely different reason altogether?
There is - a pricing hack that goes back hundreds of year.
The Accountability Theory
According to Andrew Gregson, the author of Pricing Strategies for Small Business, the reason why prices end in 99 doesn’t have anything to do with psychology. Gregson states that pricing at 99 was an innovation that solved a problem.
-The Cash Register
In the late 1880’s, the cash register was first invented. This machine was highly innovative as it performed basic arithmetic, secured cash, and kept a log of all transactions. Before the cash register, adding up items, securing cash, and monitoring inventory were all separate processes. This meant that the machine provided several controls for business owners that they didn’t previously have. For example, they now had a transaction tape that provided a record of how much money should be in the cash drawer.
This control made it more difficult for dishonest employees to skim cash from the store as there was now a paper trail for the owner to follow. But the control wasn’t flawless. For example, if an item cost $1, the clerk would have no need to open the cash register. If the transaction wasn’t run through the cash register, there wouldn’t be a paper trail showing that the dollar was missing. Therefore, the clerk could just pocket the dollar and the theft would only show up months later as missing inventory.
-Making Change (Literally)
To hack this problem and ensure that every transaction was run through the cash register, Gregson states that store owners started to implement prices that ended in 99 so that change was required from the transaction. When change was required, this essentially forced the clerk to utilize the cash register so that change could be provided.
Today, prices still often end in 99 rather than being rounded up. Even companies who value simplicity, such as Apple, have prices that end in 99. With the vast amount of research and data available today, there must be some statistical proof that prices ending in 99 are more effective than those that do not.
Why do you think that the majority of prices today still end in 99?