Consumers may consider themselves savvy bargain hunters, but they often make surprising choices based on the first – or leftmost – digit of a price, according to a study by Colorado State and Washington State universities.
Ken Manning, FirstBank Research Fellow and marketing professor in Colorado State’s College of Business, collaborated with David Sprott, marketing chairman at Washington State University, to discover that a one-cent change in price can affect whether people choose a cheaper or more expensive item. The research will appear this fall in the Journal of Consumer Research.
"One penny makes a major difference according to our research," Manning said.
The study found that consumers are likely to purchase a cheaper item when the price difference between two numbers – based on the leftmost digits – is perceived to be greater. For example, consumers choosing between two pens priced at $1.99 and $4.00 are likely to choose the $1.99 item, but when the gap between those leftmost digits narrows – a $2.00 pen vs. a $3.99 pen – they’re much more likely to buy the more expensive pen.
"Much research has focused on round vs. just-below price points in retailing, but this is the first study to find that changes in price endings can affect the choices consumers make when deciding between products," Manning said. "Shoppers pay a disproportionate amount of attention to the leftmost digits in prices, and these leftmost digits impact whether a product’s price is perceived to be relatively affordable or expensive."
The researchers also examined how perceived differences between rounded prices and just-below prices influence product choice. They found that people perceive a smaller difference between two rounded prices – $30 and $40 for example – than between just-below prices – $29.99 vs. $39.99.
"We predicted that people would focus less on how much they were spending when presented with round prices, and as a result, a relatively large percentage of people would opt for the $40.00 option," Sprott said. Experiments supported that expectation.
Study participants were asked to decide between two gifts. Only 25 percent selected the higher-priced gift when asked to choose between two gifts that featured just-below pricing of $29.99 and $39.99. But with round pricing, twice as many people selected the higher-priced gift.
"When buying a gift for a very close friend or when a purchase involves only a few dollars, we found that round vs. just-below pricing has no impact on choice between products," Manning said.
The research helps consumers understand their shopping habits, but it also could assist retailers in increasing profits by encouraging the purchase of more expensive items. Conversely, retailers trying to drive consumers to low-priced, high-margin products such as store brands could use price endings that increase the perceived price difference between brands.