The psychology behind the price tag

"Priceless: The Myth of Fair Value (and How to Take Advantage of It)" by William Poundstone

Steve Chiotakis: We don't usually pay attention to polls, but one about consumers caught our attention this week. Gallup reported that consumer spending in May improved slightly from April.

Yet, the headline was something else. Consumer spending is way below the same time last May. Those things we are buying are more expensive, like gas and food. And stores are aware of how much things are costing these days. They have to price items to entice consumers to spend.

So, why do some prices end in nine and others in zero or five? William Poundstone is the author of "Priceless." He's here to help us understand why we pay what we pay for things. Bill, welcome to the show.

Bill Poundstone: Good to be with you.

Chiotakis: So gas, lunch at a fast food place, even a candy bar -- something just feels right about buying things with the price tag that ends with nine. Why nines?

Poundstone: There's been a lot of debate about that. I mean, there's several almost, I call them "urban legends" about how that started. One has to do with the invention of the cash register. In Dayton, Ohio, there was a saloon keeper by the name of James Rittey and he suspected that his bartenders were, first of all, drinking the liquid inventory and also pocketing some of the actual receipts. So he invented this machine where you would have to any time you had to make change you would have to open the drawer, it would make a loud bell. And the saloon keeper could listen during his lunch hour to make sure that that bell kept ringing. If not, he knew something was up. So what this did was this gave people an incentive to make sure that every price was not an even dollar, that you did have to make change. And that was late adopted by Macy's department store, and you see in the late 1800s, Macy's had these ads where every price ended in nine. And there's been a lot of debate whether it actually motivates people to buy, but certainly a lot of people who set prices believe that.

Chiotakis: But the difference between, say, getting back to maybe a burger or something like that between $4.99 and $5.00, is one penny. That isn't worth much money, it's sitting in your pocket, you probably have 30 of them in your couch cushion, right? So psychologically, what does that mean?

Poundstone: Well, that's a very good question. They did some very interesting studies. Two psychologists named Eric Anderson and Duncan Simester convinced one of the mail order catalog companies to print up different versions of their catalog, where they would sell the same item at different prices, like at $34, $39 and $45. And the funny thing, they found that the product would sell the best at the $39 price. So actually more people bought it at $39 than at the cheaper price of $34.

Chiotakis: Why is that though?

Poundstone: There must be some sort of unconscious thing where we associate prices ending in nine with better values, with competitions and with discounts. And even though everyone discounts this and says, "Oh, I'm smarter than that. I won't be fooled," when you look at what people actually do, that nine really does motivate them to buy.

Chiotakis: Alright, so prices that end in nine or 99 signal, perhaps, something is on sale, right?

Poundstone: Yeah, it probably goes back to the old days of price wars, where you'd have a gasoline station selling gasoline for 20 cents a gallon. And then one would come in across the stress at 19 cents a gallon, and then maybe 18 cents a gallon. And then you'd associate that with competition and better prices. And you kind of even see that today. Wal-Mart makes it a thing of having its prices end in eight, as if to say, "Hey! We're even a penny cheaper than nine!"

Chiotakis: So the difference between $5 and $4.99 is only one penny, but it just seems, I mean it's cheaper, obviously, $4.99 is. But it seems significantly cheaper, not just a penny cheaper. Why do I feel that way?

Poundstone: Yeah, well that's one of the long-time theories about these prices ending in nine, which is called the "left digit effect." You sort of round off, you just look at the left-most digit. So if you see $4.99, you say, "Oh, that's $4 and change." And that seems cheaper than something that's $5.

Chiotakis: So I'm looking at the four; I'm not paying attention to the rest of it, I'm just looking at the four.

Poundstone: Yeah, but as I say, I mean there are some studies showing that can't be the whole explanation, because you get people more likely to buy at $39 than $34, which in both cases should really register as $30 and something else. So it really does seem that there is something magical about that nine, even if it is on the end.

Chiotakis: What are some other psychological tricks that these retailers use to get us to buy something for a certain price?

Poundstone: Well, certainly one of them is reference prices. You see the things where they say, "This is normally $79, but we've marked it down to $59." And even if it was at $79 for like eight hours, there months ago, it still seems you can tell yourself that you're getting a great bargain. And a lot of the decisions we make, you're kind of having a little argument with yourself -- "should I buy this or not?" And if you can say to yourself, "I'm saving $20," that gives you a little more ammunition to go decide that you're going to buy it.

Chiotakis: You know, I keep getting back to the whole nine when pricing ends in something that's not a nine or not a zero. What does that signal to the consumer? You mentioned Wal-Mart with the eights, are there any other numbers that have a particular significance?

Poundstone: Yes, definitely. A lot of stores, like Nordstrom's, makes it a big point that they do not use nines on their prices. Everything is a round number, and that's really saying, "We're not Wal-Mart. We're not a discount place. We offer something that's of superior quality and that's what we're saying by having our prices in even dollars."

Chiotakis: Bill Poundstone, author of "Priceless: The Myth of Fair Value (and How to Take Advantage of It)." Bill, boy, interesting conversation. Thank you.

Poundstone: Yes, thank you.

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