Charm pricing works, so why aren't you doing it?
Richard Shotton and Alex Boyd look at the history of charm pricing - and through a fascinating experiment debunk some common myths about one of retail's longest-serving strategies
Charm pricing has a long pedigree. As far back as the 1880s retailers were purposefully setting prices to end with a nine to create an aura of good value. The Victorian retailers had stumbled upon a quirk of human nature that has since been proved by modern psychologists.
Researchers now believe that charm pricing - the name for prices that end in a nine - conveys better value for two reasons. First, time-pressured consumers don’t remember the entire price, just the first digit. Thus £69 is remembered as £60-something. This is known as the left-hand digit effect. The idea is supported by evidence from Gumroad, a site which allows the public to sell their handiwork to the public. They have published data showing that charm prices improved conversion rates by more than 50% compared to round figures.
However, a 2003 study by Eric Anderson and Duncan Simester, from the University of Chicago and MIT respectively, suggests that the left-hand digit effect is not the only factor. They partnered with a mail-order retailer to test the impact of different prices on the sales of dresses. When priced at $34 they sold 16 dresses, at $39 they sold 21 whilst at $44 they shifted 17. Since the sample sizes were small they repeated the experiment - each time they found the same result.
The left-digit effect explains why the $39 price point sold more than the $44 one but not why $39 outsold $34. The psychologists believe that through constant repetition, steep discounting and charm pricing have become intertwined. The mere sight of 99p denotes a bargain, regardless of the underlying value.
A lesson spurned
Despite the ample evidence for the effectiveness of charm pricing brands are reducing their usage. In 2003, when Anderson and Simester wrote their paper an estimated 30% - 60% of retail prices ended in nine. However, that figure has since dropped.
Each week The Grocer collects a random selection of supermarket prices. Alex Boyd and I looked at 1,152 prices from their archives and found that only 8% were charm prices, less than you’d expect from chance alone. Some retailers even shun charm prices completely - not a single Sainsbury’s price, of the 240 we studied, ended in nine.
Why are retailers ignoring a proven tactic? Some retailers fear the short-term gains in sales are offset by a deterioration in the brand’s association with quality. It seems a fair concern, but one that Alex and I could find no evidence for. We therefore designed an experiment. We stopped shoppers on a busy London street and gave them a sample of chocolate. We told the shoppers that the chocolate was launching soon and would cost 80p. Finally, we asked them to rate the taste on a scale of 1-10. The average rating was 7.1.
We then repeated the experiment - but with one change to the spiel - this time we said the chocolate cost 79p. We wanted to see if having a charm price damaged quality perceptions. In this scenario, the shoppers rated the chocolate slightly higher at 7.6 - a statistically insignificant difference. It seems that charm pricing doesn’t damage value perceptions after all.
The ‘Year Zero’ Fallacy
The research raises the question about why this tactic has fallen out of fashion when there is no evidence to suggest it is ineffective?
One reason that charm pricing is ignored might be that it is a long-standing tactic. For many in marketing that is enough to damn it. Paul Feldwick in his book The Anatomy of Humbug termed the belief that the consumer has fundamentally changed, thereby making historic tactics ineffective, The Year Zero narrative. The issue with this rarely substantiated belief is that although there have been superficial changes in technology, the fundamentals of human nature remain the same.
Marketers should only reject time-tested tactics when we have proof that they no longer work. Until then they should harness charm pricing.
Alex Boyd is his promising intern