$2.99 or $3.00? Will the difference of a penny get you to the checkout counter?

Posted on under Today's research

As Tribe members will know, I love studies which go against received wisdom. This is one of them.

The traditional belief in retail marketing is that prices ending in “9” – $1.99 or $2.99, for example – will prompt more purchases than a whole number. But is that true? And is a simple one-penny price difference the best tactic to sell more products?

What the researchers say: In a new study published in the journal Marketing Letters, researchers contend that “nine-ending pricing” is not universally effective. The study, composed of four experiments with 932 consumers, reveals that marketers might experience more success in price-setting if they focus their efforts on identifying—and even modifying—the thinking styles of their target consumers.

“We looked specifically at two styles of thinking—analytic and holistic,” said the study’s lead author.

Analytic thinkers, he explained, tend to view all the digits in a price as separate and independent, with the focal object being the left-most digit. Holistic thinkers tend to view all the digits as interconnected, with each digit being an inseparable part of the price.

The study shows:

1. Analytic thinkers are more subject to nine-ending pricing than holistic thinkers.

“Analytic thinkers tend to view the nine-ending price as lower because of the difference in the left-most digit. In contrast, holistic thinkers tend to view all price digits as a whole and are less subject to the nine-ending price effect,” the researchers said. “We identified that when individuals are more inclined to holistic thinking (versus analytic thinking), the effectiveness of a nine-ending pricing tactic is pretty weak.”

2. When holistic thinkers’ cognitive resources are limited—they’re under time pressure, for example—they’re more subject to the nine-ending price effect, just as analytic thinkers are.

“Holistic thinkers are not always immune to nine-ending prices. Our research shows that holistic thinking takes more cognitive resources than analytic thinking. When their cognitive resources are limited by time pressure or distractions, holistic thinkers respond to nine-ending prices the same way analytic thinkers do.

That is, they view a nine-ending price as much lower than a round price just one cent higher,” they said.

“Our findings suggest that irrespective of consumers’ thinking style, nine-ending prices are most likely to be effective in situations that strain consumers’ resources, such as when shoppers are time-pressured at the checkout counter or distracted by background music or occupied with an interactive product demonstration.”

3. Analytic/holistic thinking style can be manipulated as well as measured.

“Marketers may manipulate thinking style via communication strategies, such as promotion imagery, message framing, website design and retailer environment so that chosen pricing tactics will be more effective,” said the lead researcher.

She added that nine-ending pricing is more effective with chronically analytic thinkers (e.g. Westerners, individualists) than with chronically holistic thinkers (e.g. East Asians, collectivists).

“Given growing cultural diversity of most major markets, identifying chronically holistic and analytic thinkers in regional and local markets will boost the effectiveness and predictive accuracy of managers’ pricing policies,” the researchers wrote.

So, what? The study is undoubtedly of great use to marketers. But Alicia had a more interesting take from this study regarding leadership. The findings confirm a long-standing idea of mine that we are largely genetically programmed to make purchases (and other decisions) in particular ways. This is certainly true of voting—as I have mentioned before—and, of course, leadership decisions.

She pointed out that as previous research (see past TRs) has shown leaders who have an analytic way of thinking tend to make short-term and more ego-centered inflexible decisions whereas those with a more holistic mindset tend to make longer-term, agiler and team or company-focused ones.

From this and other research, it seems that holistic leaders can become more short-term and analytical under pressure. The conflict between their natural inclination to a holistic approach and an analytic one could cause increased mental stress and perhaps lead to depression. It would also lead to less agility, flexibility, and collaboration in the workplace generally. Just what we’re seeing now.

In the hunter-gatherer tribe (I seem to be drawing a lot on them today) it was very useful to have people who thought analytically as well as those who took a more holistic approach to decisions so that they could bring different perspectives onto any problem that they faced. The same is true of any high-performing team—both the analytic and holistic viewpoints are vital.

Interestingly HGs—as my own observations and those of many other researchers have confirmed—prized alternative ways of looking at the world. For example, they saw what we call mental illness—especially schizophrenia and other personality “disorders” as benefits to the band. Schizophrenics were usually seen as healers and shamen for example (their cure rates are about the same as modern medicine’s).