www.MarkTAW.com/culture_and_media/1999vs2000.html (printable version)

Big & Round vs. Sharp & Pointy

In a nutshell, "big round" pricing like $20 feels more sophisticated, while $19.99 feels more retail.

$20 pricing feels more individual and hand crafted (things at the Farmers Market cost $7, while things at Starbucks cost $6.96). This is obviously because folks at the farmer's market don't do the same volume business, as Starbucks, and don't deal with sales tax, or have relationships with large local banks to get quarters, nickels, dimes and pennies whenever they need it. In other words: People at the Farmers Market don't want to deal with coins unless they absolutely have to. They're messy to count, heavy, and don't fit in a cigar box. (Or if they do, they weight it down, and when you slam the brakes the cigar box goes flying and you have coins and bills all over the floor of your car. Hopefully it wasn't raining that day.). And you're always running out of them when you need them.

At Starbucks you can send someone to the Barnes & Noble to change a $20, but at the Farmer's Market you're stuck there. They also add time to the transaction, and make it more difficult to do math in your head. Sure Starbucks would be concerned with shaving time off of each transaction, but they can systemitize the time away in automated cash registers, while at the farmers market, you survive by your wits and you want to make the transactions as easy on the brain as possible.

$19.49 feels more computer generated. Stores like Starbucks, which have to charge a percentage based tax anyway, will always have to deal in coins, and therefore it doesn't matter if their base price is a whole dollar amount or not. $19.49 was probably figured out as a percentage (think: profit margin) of something else. In this specific case, $19.49 is 50% more than $12.99. A 20% off sale would make it $15.59.

Clark Howard famously figured out K-Mart's pricing scheme. They used the last two digits - the penny amount - as a sort of inventory control system. Anything labelled $x.43 (or something like that) was actually below their cost and on clearance. He bought only clothing that was on clearance and below K-Mart's cost.

A consumer won't even glance at the penny amount. So what if gasoline costs $2.39⁹⁹? $0.00⁹⁹ per gallon is miniscule and it's not like you have any other choice anyway. Most car owners aren't so poor that they can't afford to pay $0.00⁹⁹ more per gallon than advertised, so we're basically trained to not even notice this apparent deception. It barely affects the price we pay for gas, but over hundreds of thousands of tranactions a day, for the gasoline companies it means big money.

For all intents and purposes $19.99 is $20. Psychologically, on the other hand, it's very different. $19.99 may say "twenty dollars," but $20 doesn't say "nineteen ninety nine."

When something is priced $20 it means something significant. It means a hand-crafted touch, being above taxes (or being considerate enough to include them in the price), and in my humble opinion, a bit more "luxury." Luxury as in "We'll take care of the details, while you go about your business." $19.99 is like using one of those little window stickies from Quick-E-Lube to remember when to change your oil. $20 is like owning a car that tells you when the oil needs to be changed, and a service agreement that says you don't ever have to pay for it.

So if you want to convince someone you're a large corporation that has profit-margin driven pricing schemes, tack on as many seemingly random numbers as you can to the price. And if you want to give someone the impression that you operate just a little bit outside the way everyone else does, keep it as simple as possible. Of course, if you want to draw absolutely no attention to your price whatsoever, simply subtract 1 penny from $5, $10, $20, $30, $50 or $100, or $1 from 250, 500, 1000, or 2000.

It's amazing how a little penny can change so much.

Computers And Cars

Things are sleightly different when it comes to computers and cars. These are relatively expensive items that are also highly configurable. Do you want it in black, with wood grain, or with a DVD-R drive? Still, Apple prices all of their items at "round number minus $1.

iBook from $1099. Powerbook from $1599. emac from $799. iMac from $1299. Power Mac from $1999, Displays from $1299. iPod from $299. iPod mini from $249. iPod Accessories from $129.95. AirPort Expres from Just $129.

Compare this to Amazon.com's pricing.

Apple iBook Notebook 12" M9426LL/A (1.0-GHz PowerPC G4, 256 MB RAM, 30 GB Hard Drive, DVD/CD-RW Drive) Buy new: $1099.88.

Half the produc specs are in the description - very utilitarian, and one has to wonder how they come up with their pricing. Sometimes it's a whole number, sometimes it's $x.99, and other times it's $x.88. You get the sense that Amazon uses their pennies for transmitting some sort of inventory control message.

Compare the price of Volkswagon's new luxury Phaeton and the ultra utilitarian Ford Taurus. Even the language is different. "Starts at" vs. "MSRP." Starts at implies there are option packages and levels of trim you can add on. MSRP is extremely utilitarian. So utilitarian that it's just an acronym and not phrase or word.

V8 Starts at $64,600. V8 4-seater Starts at $70,350. W12 Starts at $94,600.  W12 4-seater Starts at $99,300.

Ford Taurus SE MSRP: $21.145. Taurus SEL MSRP: $24,055. Taurus SE Wagon MSRP: $23,015. Taurus SEL Wagon MSRP: $24,005.

Volkswagon's numbers are at once pleasing, and round. They also have a certain symmetry to them. One has to wonder why the Taurus SEL Wagon is $5 more than $24k.

Rolls Royce doesn't have pricing on their website (they're too international for that I guess), but instead will point you to a dealer. "If you have to ask, you can't afford it."

Custom Work & Restaurants

When you eat out, there are several prices you have to deal with. Both the individual item (Steak Tartar) and the bill as a whole (15% gratuity and tax included). All of what I said before applies to pricing of individual items (have you ever seen a glass of wine for anything other than a whole dollar amount?), but the bill as a whole is expected to be itemized, with tax and possible gratuity, so it will have to be a specific number.

One exception from my personal life is a cafe I ate at that I'm convinced was owned by mafia. It had a back room, and the waitress didn't know anything, and when we asked for the check, seemed to make up a number on the spot. Perhaps in some of the most expensive restaurants, or regular restaurants with a Prix Fixe menu this is what it's like.

You can encounter this kind of thing also with construction, decorating, plumbing, and other work where someone quotes you a price up front, and then has to give you a completed bill at the end. The upfront quote is likely to be a round number, while the bill - which will include an itemized list of things they bought, hours spent, and any applicable fees (for getting a construction license, for example) and taxes, will most definately be a very specific looking number. The specific looking number is also a sign that you shouldn't haggle.

"$20,000? That's rediculous."

"$19,487.32? Well, I guess if that's what it costs."

Hotels will operate in basically the same way. Pay per view movies are probably going to be $x.99 or $x.95 (a close cousin to $x.99). The room itself will be either a whole dollar amount ($165) or a penny less per day. And a the end, the itemized bill will include taxes, fees, phone calls, minibar expenses, and more, and be a very specific amount.

Bed & Breakfasts, on the other hand, will include meals and the occasional phone call in the quoted price. They may charge tax, but may also include it in the price.

So in addition to specific pricing being a function of profit margins and inventory control, it can also be a function of itemized pricing, or be used to send the message "this price is mathematically correct, and is therefore non-negotiable."

Tonight We're Gonna Party Like It's $19.99

Pricing sends a powerful message, and I'm sure this is a well researched topic. Most people are aware that the price you set for an item - to the last penny - sends a powerful message, but most people don't know exactly what that message is, despite being on the receiving end of it on a daily basis.

I hope this article has taken away some of the mystique of pricing. It's not the most well researched article (most of what I'm talking about is opinion, obvservation, and gut reaction, not based on any studies or even reading that I've done), but I suspect the message will resonate with many people.

Good luck with whatever it is you're pricing.

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page first created on Wednesday, September 15, 2004

this site and it's contents copyright Mark Wieczorek