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.
The psychological pricing theory is based on one or more of the following hypotheses:
- 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. Some suggest that this effect may be enhanced when the cents are printed smaller - $1999.
- Fractional prices suggest to consumers that goods are marked at the lowest possible price.
- Now that consumers are used to psychological prices, other prices look odd.
In fact, the practice of odd pricing was developed primarily to control employee theft. With an odd price, in most cases the consumer does not hand over the exact amount and therefore has to be given change. This reduces the risk of personnel stealing from the shop owner by not recording a sale on the cash register and pocketing the money, in the case that the customer does not require a receipt.
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.
see also: pricing, marketing, marketing mix, price, price points, retailing, microeconomics
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