4 Ways to Stop Paying Too Much for Anything

The insidious appeal of 'charm prices.'

Posted Aug 12, 2015

 l i g h t p o e t/Shutterstock
Source: l i g h t p o e t/Shutterstock

When shopping in a store or on online, we routinely come across prices that end with the digit 9. A box of cereal may be priced at $3.49 or a six-pack of beer, $5.99. Marketers call these prices “charm prices” because they believe they charm money out of shoppers. As any regular shopper knows, charm prices are abundant. Many retailers price all their merchandise with charm prices. The only time shoppers are unlikely to find any charm prices whatsoever is in high-end stores or posh restaurants. (I will explain why.)

Do charm prices increase buying?

Marketers have studied this question for about 80 years. The first known study on the impact of charm prices appeared in 1936—and was inconclusive. Dozens of studies have looked at the question since then. While the results are not always consistent (which is probably why researchers return to the question), there is sufficient evidence to conclude that in many cases, charm prices do produce greater incremental purchases. Many charm-price studies are experimentally controlled using different versions of print catalogs or different store locations of a retail chains, with some selling items using charm prices while others use slightly different prices ending with other digits.

Across the studies that find positive effects, the increase in buying behavior generally tends to be quite high—the lowest increase is around 5% and the highest increase is over 75%.  

Still unanswered is the question of what is responsible for increased sales from charm prices: Are the same shoppers buying more quantity or are some non-buyers being tricked into buying because of the charm price? We simply don’t know. Regardless, the takeaway from the consumer research is clear: When they are out shopping, people need to be aware of charm prices and have a strategy in place to deal with them.

How do charm prices work?

Charm prices work in two ways. First, they create a sense that the price for the item is lower than it actually is. Many shoppers underestimate charm prices because when looking at a price, they use what psychologists call a “truncation strategy.” They only pay attention to the leftmost digits of a price instead of all its digits. So for example, something priced at $7.99 (7-something) appears to be a lot cheaper (and a lot more appealing) than if the same item is priced at $8.00 (8-something). Thanks to this difference, the charm price helps the item’s sales.

The second reason is that when a retailer uses charm prices throughout a store, catalog or website, it creates a holistic low-price image for the brand. Once such an image is created, shoppers pay little attention to actual prices, or to the cost compared to competitors. They become convinced that items the retailer sells will be cheaper than elsewhere, and they buy accordingly. Interestingly, this effect of charm prices is also the reason that stores wanting to maintain an exclusive or prestige image among customers go out of their way to avoid charm prices. They instead price all their merchandise with “rounded prices” that are whole numbers.

What should shoppers do to minimize effects of charm prices on buying?

The effects of charm prices are based on the fact that shoppers pay less attention to prices than they should. Here are four ways you can reduce the influence of charm prices.

  1. Follow the 3-second rule.
    In any shopping situation, it takes about three seconds to pay proper attention to an item’s price and to process it (and more time if the shopper also attends to its other features). It’s not that much time, but for most people it is well worth spending it. Shoppers should take the three seconds, read each price carefully and fully from left to right, and then decide if it is appealing or not. This means attending to all digits, not just the left-most one.
     
  2. Round the item’s price up instead of rounding it down.
    When shoppers see a charm price, a simple way to compensate for truncation is to round a product’s price up instead of down. Just like the 3-second rule, rounding up forces you to pay attention and do the calculation in your head. For shoppers, both the 3-second rule and rounding up also have an added side-benefit: They slow shoppers down, forcing them to confront whether an item is really necessary or just an impulse buy. In some cases, at least, the item is simply not needed, regardless of price. 
     
  3. Pay more attention to prices of new or unfamiliar items.
    When shoppers see items they don’t know very well, or when they are unfamiliar with the regular prices of a product, charm prices have more impact on their buying behavior. Retailers know this, which is one reason they introduce new products with charm prices. (Look out for this the next time you are in a grocery store). Shoppers, in turn, should be more cautious about the prices of new and unfamiliar products. In such cases, the 3-second rule could be extended to 5 seconds so that the novel product can be evaluated properly.
     
  4. Be wary of retailers that promise the lowest prices on everything.
    When a retailer uses charm prices ubiquitously and succeeds in creating a brand with a low-price image, it becomes immune to consumers’ scrutiny. Reassured by its low-price image, shoppers let their guard down and just assume that everything will be cheap. Often, this is not the case. Be extra vigilant in such stores.
Now that's Cheap Eats by Alexa Clark Licensed Under CC BY 2.0
Source: Now that's Cheap Eats by Alexa Clark Licensed Under CC BY 2.0

You should not let charm prices fool you into making a purchase you do not really want or buying something at a price that is higher than your comfort level. Selling products at prices that end with 9 is a common pricing strategy. Paying attention and thinking through each purchase decision will minimize any negative influences of these prices on your budget.

I teach core marketing and pricing to MBA students at Rice University and my academic vita is here. You can find and download a lot of my academic and some of my practitioner-oriented writing at SSRN. If you can’t find something old I have written, shoot me an email and I will send it to you. Some of my writing for managers and business people can be found at HBR.org and I also write a relatively new blog called “The Science behind Behavior” on Psychology Today.

You can connect with me on LinkedIn or Facebook, or you can send me an email. All questions, comments, thoughts, and ideas for future blog pieces or academic research projects are welcome.

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