Imagine you are selling a brand of sparkling wine. Does it make a difference to your ability to sell if you price it at a nicely rounded $40.00 or a non-rounded $39.72? What if you were selling a calculator? Does rounding make a difference?
Researchers Monica Wadhwa and Kuangjie Zhang recently considered the issue of price rounding and its impact on buyer intent. Here are some of the key take outs.
Depends on product type
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For products that are utilitarian (like calculators), buyers tend to use cognition to assess their reaction whereas for products that are hedonic (like sparkling wine), they rely on emotion. Because buyers like their purchase to ‘feel right’ to them, they seek a match between the way they think about it (i.e. cognitively or emotionally) and the way the number is represented. For cognitive products, non-rounded numbers work ($39.72) whereas for hedonic products, rounded is best ($40.00).
Depends on reason for purchase
The researchers wanted to know whether buying the same product (e.g. a camera) for a different reason made a difference to how prices were perceived. In one scenario participants were told the camera was for a family holiday (hedonic goal), and in another, for a school project (utilitarian goal). They found that when people were buying for a hedonic reason, the camera with a rounded ‘feeling’ number was perceived to take higher quality photos, whereas a non-rounded number evoked higher anticipated satisfaction amongst those considering a camera for a school project.
Depends on their thinking capacity
As I have written previously, it’s helpful to think about your buyers having two thinking systems: System 1 and System 2. System 1 is their emotional, impulsive, habitual, reactive thinking and System 2, their rational, cognitive, reflective and critical thinking. Most of the time we operate using System 1, saving our energy-sapping System 2 for more difficult situations.
The researchers wanted to know whether buyers would react differently to prices if their System 2 was switched on or off. What they found was that when participants had to memorise seven letters (occupying their System 2 and leaving no room for cognition), rounded numbers lead to stronger purchase intent for a pair of digital camera binoculars whereas memorising only one letter, and therefore having the capacity to think, led to non-rounded numbers being better.
Where to for your pricing strategy
Where does this leave you with your pricing? Probably scratching your head because it is clearly a complex field. Overlay this research with work on price anchoring, priming and decimals and you have a lot of concepts to reconcile. The short answer is to be aware of research like this and to create an opportunity in your business to test variations. What happens when you round your prices? What about for only some product lines or for only some purchase occasions? Is it different for customers in a complex sale rather than a simple one? For the long answer, get in touch and we can discuss it further.
Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.