Psychological pricing

Psychological pricing sets a price so that it appears lower than it really is, usually by placing it just below a round amount. A skate shop might sell a deck for £49.95 instead of £50. Your eye lands on the 49, so the deck feels like a forty-something price even though the saving is only five pence. The aim is to encourage sales by changing how the price is perceived.

Advantages

• It encourages sales because customers perceive the price as closer to the lower round amount than to the higher one, so it feels like a better deal than it is.
• It can help build a reputation for good value, which suits a business whose target customers compare prices carefully before they buy.

Disadvantages

• Customers may become aware of the tactic. If every item on a shelf ends in 95p, shoppers learn that the ending is a trick and it stops influencing them.
• It can cause rounding problems when a percentage discount is applied. Take 15% off a £6.99 water bottle: you get £5.9415, so you have to round to £5.94, which leaves an untidy price and a small gap between what you calculated and what the customer pays.

Psychological pricing is a pricing strategy, not a sales promotion. Nothing extra is thrown in and nothing is cut by a large amount: the saving is only a few pence, so it is the way the price is presented, rather than a real bargain, that persuades customers.