From The Atlantic Monthly comes a précis of a recent study [1] published by Cornell University’s Johnson School reporting that consumers tend to see a precise price, such as $355,756, as a better bargain than one that ends in zero, such as $355,000. When asked which was lower, subjects consistently responded that the precise figure was cheaper than the round number.
Not only that, but at least in real estate, a zero at the end of a listing price works to lower the sale price. If you live in South Florida and list your home at a price ending in at least one zero, your final sale price will be about .72 percent less than that of a house listed at a similar price that doesn’t end in a zero. Three zeros will make it .73 percent lower, and for each additional zero, the price will drop another .39 percent. Doesn’t seem like much, but every little .72 percent counts: for the $355,000 house, that’s $2,556.
The strange psychology of pricing is well known to all of us who shop in stores where prices end in 98 cents. Retailers have long recognized that when confronted with a $15.98 item, buyers think the object costs $15, not $16. So, for that matter, do the sales clerks. Once in a household goods store on the order of Linens & Things, I happened to remark to the sales clerk that thus-and-such a gadget was $16.
“Oh, no!” she exclaimed. “It’s $15.98.”
“That’s the same as $16,” I said.
“No,” she insisted, “it’s $15.98.”
“Well,” I insisted back, “$15.98 is only two pennies less than $16. It’s pretty much the same as $16.”
She actually had to think about it for a moment. Finally she allowed, “Yes, I guess it is.”
What does this mean for the frugalist? Round up! Round up to see the real price. And in the real estate market: pay attention if you’re a buyer. If you’re a seller, for heaven’s sake come up with a price that ends with a digit between 1 and 9.
1Manoj Thomas, Daniel H. Simon, and Vrinda Kadiyali. “Do Consumers Perceive Precise Prices to Be Lower Than Round Prices? Evidence from Laboratory and Market Data.” Johnson School at Cornell University Research Paper No. 09-07, September 2007. January 10, 2007. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1011232.