The Origins of .99¢ Pricing

Matt Homann over at the [non]billable hour has a post citing a study on the psychology of odd-numbered pricing. Matt then suggests you might want to set your hourly rate at $297 per hour rather than $300.As you can imagine, there are several flaws with this. Here's the comment I left on Matt's post:

Matt,I'm surprised you'd advise to still have an hourly rate?In any event, this study is specious. Odd-numbered pricing was not originally designed because people think $19.99 is cheaper than $20.It was put in place when cash registers were installed, so employees would have to open the drawer to make change, usually with a loud bell attached so the owner could mentally count how many times sales were rung up.Odd-number pricing was designed to prevent employee theft. This happened around the 1880s. There is little economic evidence odd-numbered pricing influences people's buying decisions.Why odd-numbered pricing still exists is a more complex question, given our technology advances (and sales tax). Inertia? People think other people think it's cheaper, etc.Disney stopped odd-number pricing in its retail stores in the theme parks after their pricer heard me explain the origins at a pricing conference. Even numbered pricing (including $4.50, etc.) actually sends a quality signal to the customer.But the most important question: Why would you want customers to think your price is close to your cost? You should be nudging them to think of your price compared to value, which has nothing to do with your costs.

It is surprising how much staying power this myth has, but once you trace it back to its origins you see how specious it is.My colleague Ed Kless loves to tell the story of one of his partners who will quote a price such as $100,000.17. Every one asks right away, "How'd you get the .17¢?" completely ignoring the $100,000.I'm not advocating this, but it may partly explain the staying power of odd-numbered pricing.