The truth about $9.95

Some recent research conducted by Janiszewski and Uy has focussed attention again on the notion of psychological pricing. Are we really fooled when storekeepers price something at $9.95 instead of a round $10?
Their experiments used hypothetical scenarios, in which participants were required to make a guesstimate the wholesale cost when told:

  • The retail price

  • The retailer had a reputation for pricing TVs competitively.

Scientific American explains it as follows:
One group of buyers was given a price of $5,000, another was given a price of $4,988, and the third was told $5,012. They found that those with the $5,000 price tag in their head guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor.
People appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.
The researchers also looked at five years of real estate sales and found that sellers who listed their homes more precisely—say $494,500 as opposed to $500,000—consistently got closer to their asking price. That is, buyers were less likely to negotiate the price down as far when they encountered a precise asking price.

All of this just goes to show that, despite the fact that customers say they ‘know’ that $9.95 is really $10.00, they are still influenced by the psychology.

It is also interesting to note that Wal-Mart employs prices like $12.84 and other odd, yet precise price points.