WEBVTT - Why Do So Many Price Tags End in .99?

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<v Speaker 1>Welcome to brain Stuff from How Stuff Works. Hey, brain Stuff,

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<v Speaker 1>I'm Christian Sager. So the other day I was shopping

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<v Speaker 1>at Bavmorda's Trebuche and Millinary Emporium, and I started wondering,

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<v Speaker 1>why do so many prices end in the number nine?

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<v Speaker 1>Don't the stores want that extra penny? You might have

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<v Speaker 1>wondered the same thing too, and if you have, it's

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<v Speaker 1>not just your imagination. Studies have shown that many retailers

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<v Speaker 1>disproportionately used prices within five cents of the nearest dollar,

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<v Speaker 1>within one cent of the nearest ten cents, within five

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<v Speaker 1>dollars of the nearest one hundred dollar or one thousand dollars,

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<v Speaker 1>and within one dollar of the nearest ten dollar amount.

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<v Speaker 1>Prices like this are often known as charm prices, odd prices,

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<v Speaker 1>magic prices, or psychological pricing. Price tags ending in the

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<v Speaker 1>number nine are especially common. But why these days? Two

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<v Speaker 1>main psychological theories of charm pricing have emerged For the

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<v Speaker 1>purpose of this episode. Will call them the rounding off

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<v Speaker 1>theory and the bargain signaling theory. The rounding off theory

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<v Speaker 1>states that shoppers tend to pay a lot more attention

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<v Speaker 1>to the first digits in a list of a price.

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<v Speaker 1>So when you see a product labeled twenty nine nine,

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<v Speaker 1>even though it's one penny off from thirty bucks, the

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<v Speaker 1>theory goes that you mentally round down to think of

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<v Speaker 1>it as a twenty dollar price point based on that

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<v Speaker 1>first digit. Now, the bargain signaling theory suggests that odd

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<v Speaker 1>prices work the same way sales signs do, meaning they

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<v Speaker 1>imply to shoppers that the price listed is especially good.

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<v Speaker 1>Maybe the weird specificity of something priced at five night

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<v Speaker 1>or two thirty nine makes us think that the store

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<v Speaker 1>is selling this bag of gummy bears at the lowest

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<v Speaker 1>price point they can possibly afford. Or maybe we've all

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<v Speaker 1>been conditioned by marketing to associate odd prices, especially the

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<v Speaker 1>ones ending in nines, with sales and discounts. There seems

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<v Speaker 1>to be some evidence for both the rounding off theory

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<v Speaker 1>and the bargain signaling theory. In two thousand three, researchers

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<v Speaker 1>showed that in some cases, you could actually increase demand

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<v Speaker 1>for an item by raising the price so that it

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<v Speaker 1>ended in a nine, which would seem to contradict rational economics.

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<v Speaker 1>One example, they studied a thirty four dollar dress in

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<v Speaker 1>a Clothing Catalog by raising the price from thirty four

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<v Speaker 1>dollars to thirty nine dollars. Demand for the dress actually

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<v Speaker 1>went up when they raised the price to forty four dollars. However,

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<v Speaker 1>the trend didn't hold, so it wasn't just that buyers

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<v Speaker 1>liked paying more for their clothes. Since thirty four and

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<v Speaker 1>thirty nine both start with the same digit, this would

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<v Speaker 1>seem to favor the bargain signaling theory rather than the

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<v Speaker 1>rounding off theory. Something about the nine just seemed to

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<v Speaker 1>make people think they were getting a good deal. But

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<v Speaker 1>there's evidence for the rounding off effect as well. For example,

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<v Speaker 1>a two thousand five study found that prices ending in

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<v Speaker 1>nine cents caused shoppers to make math errors that even

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<v Speaker 1>dollar prices did not. It worked like this test. Shoppers

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<v Speaker 1>were given an allowance of exactly seventy three bucks, and

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<v Speaker 1>they were then asked to estimate how many products they

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<v Speaker 1>could buy with this allowance. It turned out that when

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<v Speaker 1>endings were in the picture, shoppers overestimated their spending power.

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<v Speaker 1>In other words, they thought they could buy significantly more

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<v Speaker 1>products at prices like to ninety nine and five ninety

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<v Speaker 1>nine than they could at three dollars or six dollars.

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<v Speaker 1>This seems to suggest that we do tend to round

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<v Speaker 1>down and ignore the final digits and prices, even though

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<v Speaker 1>it makes no economic sense to do so. So, it

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<v Speaker 1>looks like our penchant for buying at the nines might

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<v Speaker 1>be explained by a mixture of our tendency to round

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<v Speaker 1>down to the leftmost digit and our beliefs at nines

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<v Speaker 1>inherently indicate bargains. Check out the brainstuff channel on YouTube,

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<v Speaker 1>and for more on this and thousands of other topics,

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<v Speaker 1>visit hastuff works dot com.