May 1, 2024
Do 99 prices work?
Results of an empirical price threshold study
In order to shed more light on this issue, we conducted a study on the effect of price thresholds using three tests.
We selected three very different products for the test
- One appliance: A coffee machine (from Militta)
- A consumer good: A detergent (from Persil)
- One subscription: One online tool subscription (ChatGPT Plus)
The Price Optimizer from Supra.Tools was used: A tool that uses the Implicit Intelligence methodology to determine the price-demand function through an implicit survey. The approach measures the sales impact of 7 predefined price points.
The price range used was not chosen with the aim of finding the optimum price but to better understand the price threshold effects. If the price range is too small, the respondent are “primed” strongly, which leads to overestimate the price elasticity. The selected price range is only 4% of the average price for the coffee machine, 5% for the detergent and 30% for the subscription product. In comparison, we typically recommend a value of at least 50%. Nevertheless – or precisely because of this – the setup is useful to clearly show the possible effect of price thresholds. It focuses on the price ranges of the price thresholds.
Product 1: Melitta filter coffee maker Enjoy® Top Therm
The product is currently typically sold for €79.99. We set up the test so that the following price points were tested: 77.99 € , 78.99 € , 79.00 € , 79.90 € , 80.00 € , 81.99 €, 82.00 €
In the selected prices, we test a price threshold for a price jump at the ten-digit as well as the 1-euro-digit price jump before and after the price jump of the ten-digit.
The results speak for themselves:
- The price jump at the ten-digit from 79.99 to 80.00 causes an enormous drop in demand of 30%.
- The two 1-Euro-digit price thresholds, on the other hand, show only a slight effect on demand. At 81.99 to 82.00, demand actually falls slightly (by 10%). At 78.99 to 79.00, demand even increases slightly.
- The background to this anomaly is two competing effects: On the one hand, 78 is less than 79, but the perceived difference is small. On the other hand, the price 78.99 is more difficult to process cognitively. It is difficult to understand, i.e. it requires more cognitive resources, that this price is lower than 79.00. The old adage “Confused minds dont buy” applies here
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Product 2: Open AI Chat GPT PLUS
ChatGPT was chosen as a software subscription product because it is useful for the ready population, i.e. everyone. The ChatGPT Plus package was offered at the time of the survey for $20 USD with no decimal places. We tested prices from 17 to 23 USD in increments of one.
These results also speak in favor of a price threshold.
In concrete terms, the following conclusions can be drawn:
- Customers are particularly price-sensitive when jumping from 19 to 20 dollars. Demand falls by 5% in absolute terms, whereas demand only falls by 3% on average for one dollar increments.
- USD 19 is also preferable to a price of USD 18, as it generates the same demand. This result also speaks against opinions that customers have learned to round up prices of 9 and do so unconsciously.
- If you don’t want to go back to 19 USD, an increase to 22 USD is very interesting, because 22 USD seems to feel almost like 20 USD.
Product 3: Persil Color Megaperls® 23WL
The third product we tested was the brand detergent “Persil Color Megaperls 23 wash loads” and examined the following price points:
8.79 € , 8.87 € , 8.95 € , 8.99 € , 9.00 € , 9.10 €, 9.19 €
Again, we were interested in the large price threshold around €9 as well as the smaller price thresholds at €8.79 vs €8.87 and €9.10 vs €9.19
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We can read this from the resulting relation between price and demand:
- The price threshold of 8.99 to 9.00 leads to a significant drop in demand of 25%
- 8.95€ is equivalent to 8.99€ – the consumer does not differentiate here. So the 99 price is preferable
- The €8.87 price creates a small lift in demand. A margin-volume analysis is required to decide whether this lift leads to more profit. It can be assumed that for retailers and higher-margin products, an 8.87 or even simpler – an 8.88€ price is preferable to a 99 price
- 8.87€ is at least equivalent to 8.79€ – we also attribute this to the complexity. It is more difficult to understand where the €8.79 price should be placed.
- A 9.10€ or 9.19€ price delivers a lower demand compared to 9.00 – this is only recommended for low-margin products. If this is chosen, at least a .19 price should be selected.
Results summarized
This study provides evidence for the high significance of the large price thresholds. This can be seen in particular for everyday products (detergent) and household appliances (coffee machine).
“Small price thresholds”, i.e. prices of 9 to the second decimal place, are of secondary importance.
If the margins are not too small, the evidence suggests that a .88 price is preferable to a .99 price. However, a margin-quantity analysis should be carried out, as the Supra.Tool Simulator allows.
There are indications that prices can become confusing if too many different digits have to be processed. This costs demand. Confused minds don’t buy.
Above the price threshold, the price-demand function often flattens out. If you have to decide on a price above the price threshold, this means that you should not be more courageous in this area.
Limitations and open research questions that we will answer in follow-up studies
This study focused on the price thresholds and overestimated the price elasticities due to narrow price ranges. The resulting research question is: “Which price range size for a correct price approach function”. We want to address this question in our next study.
The question also arises as to whether suppliers of premium products destroy the perception of value through a 99 price and thus induce a lower willingness to pay. This is also to be investigated in a follow-up study.
AUTHOR - SUPRA.TOOLS
Supra.tools is a platform for price and product optimization and uses the Implicit Intelligence method.
- Responsible: Dr. Frank Buckler – Frank@supra.tools
- Website: www.supra.tools
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