Why You Pay More When Prices Don’t End With a Zero
Young kids love to explain that they are not 4 years old but rather 4 and a half – with an emphasis on the half. But hardly anyone says they are 54 and a half. They might not even admit they are 54 but say mid-50’s instead.
This isn’t just people being coy about their true age. As numbers get larger, we get less and less comfortable with them, and we are more likely to use round numbers as placeholders. When I say that 80,000 people work at my employer, I’m not really giving a precise estimate. If we hire 100 more people, I am highly unlikely to change my response to 80,100. For similar reasons, McDonald’s campaign stopped counting at 100 billion burgers sold and now just says “billions and billions.”
Manoj Thomas, a consumer psychologist at Cornell University, has studied the “feelings of uncertainty evoked by large precise numbers.” He calls this the precision effect. In an experiment, participants in two groups evaluated the same houses with prices that were either non-round ($395,425) or round ($395,000). On average, subjects judged the non-round prices as a better value than the round ones, even though the actual price was higher. Professor Thomas concludes “when we see a big number that is precise we instinctively assume it is less than it is.”
The implications of this phenomenon for marketing are rampant. We’ve long known that people are more likely to buy if the price is set to $3.99 than to $4.00. The psychological difference of the leading digit increasing from 3 to 4 is powerful. But Thomas’ research suggests that we can see the reverse effect with large numbers. You shouldn’t list your house for $500,000; instead you should list it for $501,387.
The next time you’re buying or selling something expensive, remember that buyers will pay more when sellers use a precise asking price than when they use a round one.
This blog was originally posted on Manage by Walking Around on November 20, 2016.