How Do Brands Benefit From Charm Pricing?

22/09/2016 11:50

In a memorable scene from Mad Men the creative team gather in Don's office to crack an awkward brief. After an unsuccessful start to the meeting Pete suggests mimicking the 'brilliance' of VW's 'Lemon' ad. Roger Sterling, unimpressed by Bernbach's new-fangled approach, fires back a different definition of advertising excellence:

"I'll tell you what brilliance is in advertising: 99c. Somebody thought of that."

Yet many retailers ignore his advice. Analysis by ZenithOptimedia of 650 supermarket prices tracked by Brand View has found that prices are three times more likely to end in zero than a nine.

In fact, some supermarkets actively avoid prices ending in nine, known as charm pricing. We looked at 528 additional Sainsbury's prices and found that only 1.5% ended in nine - far less than the 10% that chance alone would suggest.

So who is right: Sainsbury's or Sterling?

Zenith surveyed 650 consumers about their value perception of six different products. Half saw prices ending in 99p, whilst for the rest the items cost a penny or two more. Charm prices were 9% more likely to be seen as good value. Not a bad return on a 1% price cut.

In fact, our findings underestimate the power of 99p. In real-life shopping situations the bias is exacerbated by customers being in a rush. A French study, reported by the BBC, found that when pizza prices dropped, by one cent to €7.99, sales increased by 15%. Another study, this time by Gumroad, a platform which lets creators sell directly to consumers, found in 2013 that items with charm prices outsold those with rounded prices.

One explanation is the 'left digit effect'. Since we read from left to right, we give undue prominence to the first digits in a price. So, for example, when you're out shopping you might simply remember a price, like £2.99 as £2.

However, a study by Anderson and Simester, from the University of Chicago and MIT respectively, suggests it's not the only factor. They partnered with a 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. The left digit effect explains why the $39 price point sold more than the $44 one but not why $39 outsold $34. The most likely explanation is that repeated exposure to sales and prices ending in a nine has led to a strong association between that price and a bargain.

But if there's so much evidence about pricing why are Sainsbury's avoiding charm pricing?

It might be that they have been listening to consumers. Our research consistently shows that consumers claim that charm pricing has no influence. However, anything customers say should be treated with caution. As David Ogilvy said: "Consumers don't think what they feel, don't say what they think and don't do what they say."

In this case consumers want to believe they're too rational to be swayed by a measly penny. However, their behaviour tells a different story. Advertisers should heed customers' behaviour and make sure that they take advantage of charm pricing.