Dressing to the Nines: A Pricing Dilemma

Price not only communicates transactional cost it also informs about product quality. Many retailers such as Wal-Mart use prices ending with the number 7, while others use prices ending with 9. While the use of such numbers may be common practice, the implications and meaning associated with such an approach may be more problematic than once thought.

The main purposeĀ of this commentary is to provide insights about price endings and suggest that prices ending with the number 0 may have an operational advantage. Moreover, zero-ending products may be perceived as “better quality” than those with odd price endings.

Odd Pricing & The Magic Number 9

With the introduction of the cash register, storeowners found it easy to keep track of sales because each transaction was recorded. There was the possibility that the cash register clerk could pocket the money by not recording the sale. If, however, the clerk had to return some change to the customer, the cash register could not be opened without ringing up the sale.

In the decimal numerical system, numbers 7 and 9 are such that even when a customer buys 10 items of all the item prices end with 7 or 9, the clerk always must return some change when a customer presents paper currency.

The number 9 has an even more interesting feature. Suppose a customer purchases three items and all items are priced with an ending 9. The number of pennies the customer must be given back is equal to 10 minus the number of items, which in this case is three.

Although cash registers have been replaced with optical-bar-code readers or computer-based scanners, which provide information about prices, retailers have continued to use odd price endings such as 7 and 9. Moreover, sale taxes and other service charges in the current business environment may not meaningfully communicate odd or 9-ending prices. This is even more problematic in a business-to-business transaction where mark-up may create further distractions for the ultimate consumers. It also may create an operational nightmare for a store manager.

Consider an example of a typical grocery store that may carry as many as 15,000 Stock Keeping Units or SKUs. If the store puts 10 percent of its SKUs on sales promotion, the store manager must change 1,500 prices. If each SKU price has an average of the three digits, then the retailer must change 4,500 numbers. Finally, if the store manager has 99% accuracy in entering numbers, it is still possible he may miss as many as 45 SKU prices.

Consider now a situation where all prices end with zero. Holding everything else the same, the store manager is likely to make one-third fewer errors – a significant benefit in terms of customer relations and an excellent pricing strategy.

As retailers have continued over the years to use odd price endings, academic research has flourished as it attempts to explain why products are priced with 9 endings. A significant amount of academic research suggest that odd price endings, especially prices ending with 7 and/or 9 are perceived by consumers to be cheaper both in terms of transaction cost and quality than prices ending with zero.

Other academic research indicates there might be a small sales increase because the product is perceived to be cheaper. The increased sales, however, occur only when no other competitive products in the market have 7 and/or 9 endings. The effect of better product image, as well as better retailer image, however, is a longer-term benefit that is harder to achieve.

From the above discussion, it can be argued that retailers who use prices with zero endings may be perceived to carry better quality products and have a stronger image than retailers using prices ending with 7 and/or 9.