Off-by-one Pricing Psychology

(Published in The Express Tribune, October 18, 2010)

A common practice among retailers is to price products at 199 or 999 instead of rounding the price up to 200 or 1,000. Cognitive psychologists often refer to this as the left-digit effect and it is the one of most prevalent pricing strategies in the world.

Round numbers

Stock market traders closely monitor psychological barriers for stock prices which are usually round numbers where the prices find support or face resistance. A particular stock might keep hitting a ceiling price of 110 and keep gravitating toward a floor of 100 in the longer term. The same is also true for most business deals – they are usually struck in multiples of hundreds, thousands or millions.

This is no coincidence. Human beings, in general, have a tendency to think in multiples of 10 because we are accustomed to the decimal number system. This numbering system, as everyone is well aware, cycles after every 10 units and the numbers are limited from zero through nine.

This too is no coincidence. The base of 10 units comes from the fact that we all have 10 fingers and as the field of arithmetic was taking shape thousands of years ago, people used their fingers to tally counts— a practice that is still alive and well today simply because of its convenience.

Given that we are so in tune with the decimal system, ’off-by-one’ pricing throws a wrench into the whole mental machinery. It is specifically designed to disrupt this model and makes it harder to tally up the numbers.

The additive effect

It is far more difficult to add the numbers 199, 299 and 399 than 100, 200 and 300 (the former adds up to 897 while the latter totals 600).

The idea is that if consumers cannot add the numbers, they are likely to evaluate each product individually rather than as a basket and remain unaware of their total spend during a shopping spree.

This pricing strategy also exploits cognitive dissonance, another great economic lever. When people are faced with two conflicting outcomes, they usually pick the one that makes them feel happier about their decision.

In the case of off-by-one pricing, the dissonance comes from the fact that the consumer does not know if the shopping spree is a good bargain or a bad binge. The result is only known when the checkout is complete which is when cognitive dissonance kicks in. At this point, even if the total bill is high consumers are likely to defend their decisions to purchase those products as being ‘good’ ones and move on with their day than deal with buyers’ remorse.

The left-digit effect

The left-digit effect exploits the left-to-right orientation of our brains when reading numbers. When the brain parses information and sees a ‘1’, it obviously considers that lower than if it sees a ‘2’. Consequently, the immediate reaction is that prices of 199 and 1,999 appear significantly lower than 200 and 2,000.

At the same time, a price tag of 9,999 is still preferred over 10,000 because even though the left digit is larger, the total number of digits is actually lower, in effect creating the illusion of a lower price. The prevalence of this pricing strategy further amplifies its effect. Even though consumers see something noticeably odd about it, they are desensitised enough that they have learnt to ignore it on a daily basis.