Ending prices with “.99” discourages upgrades
We’ve all seen products at €99.99. Companies like to set prices just-below a round number to make us believe that the product is cheaper than it really is.
The use of this strategy is so widespread that some people have never seen an integer price tag. Spoiler alert, they exist.
But does this just-below pricing strategy always work? Well, Kim et al. (2021) question this conventional wisdom in the context of upgrade decisions.
They find that when a base product is priced at or just-above a threshold, consumers are more likely to upgrade because they perceive the upgrade option as less expensive, and they place less weight on price. We call this the threshold-crossing effect.
Just-below pricing discourages consumers to upgrade.
Wisdom of “.99”
Just-below pricing is so widespread because it works.
The left-digit effect is well-known. Consumers unconsciously gain price information from left to right. More attention is spent on the first digit which makes it more impactful.
As a result, just-below prices, especially those ending with “.99”, are associated with lower price perception of targeted products.
Is just-below pricing always optimal?
According to Kim et al. (2021), the answer is no.
Just-below pricing is not optimal in every context. In fact, it can discourage upgrades and decrease overall consumer spending.
To test this, the authors set up a stand and sold two sizes of coffee, manipulating whether a small coffee was priced just-below ($.95) or at ($1.00) the threshold and counting how many people purchased a small or upgraded to a large size.
Hence, a small increase in price of the small coffee (base product) decreased the price perception of the large coffee (upgrade option), leading to higher likelihood to upgrade and ultimately more revenue.
Implications for companies
Companies can use this insight to boost upgrades and grow revenue by simply changing the price of the base product.
For example, Adobe makes good use of the threshold-crossing effect for its app pricing. As you can see below, buying individual apps like Photoshop costs $20.99 (just above the $20 threshold) while the Creative Cloud bundle costs $29.99. The two price options are on the same side of the threshold, making the upgrade option seem less expensive.
Fooled by our own minds
This effect can be explained by how we perceive prices in these different strategies.
Round prices are perceived as a psychological threshold by consumers. When just-below pricing is used, the prices for the base and upgrade options fall on different sides and consequently the upgrade option feels more expensive.
Conversely, when just-above pricing is used, both are on the same side of a threshold so the price difference becomes smaller in customers’ perspective. The upgrade price seems less expensive because it doesn’t cross the threshold.
We are fooled by our own minds: consumer psychology in a nutshell.