The 99 Cent Delusion

It’s on sale! Just $39.99!

People tend to classify prices into “price points.”  For example, when planning to buy a new gadget, you will probably  decide to spend “about $100” or “about $500.”  You will definitely not decide to spend exactly $453.45, to the penny.  You’ll have a rough idea of how much you want to spend, a rule of thumb, a heuristic.

Here’s where the marketers get you. They price things to take advantage of your heuristic, whereby you generalize that you plan to spend “about $500.” To take advantage of this heuristic, they will price the item as high as possible, while remaining within your price range, that is, they’ll inevitably price it at $599.99.  ($600.00 would be too expensive.)

Fall for this, and you’ve spent $100 more than you planned. But wait. Then there’s tax! And add in other “extras” that seem necessary but aren’t included in the base $599.99 price, like fees, shipping, a five-year warranty, a carrying case,  and all sorts of accessories. By the time you’re all done, you’ve gone far over your budget.

To avoid the 99 Cent Delusion, set a price maximum, and decide up front that, no matter what, you will not spend more than this maximum on the item. Do not finalize the sale until you know, absolutely, for sure, that you aren’t spending more than your maximum.

From a sales perspective, you can take advantage of the 99 cent delusion by carefully setting price points below consumers’ expectations (i.e. ending in 99), and offering all sorts of extra once you have already clinched the deal.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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