Setting Your Price: Why $99.99 is better than $100.

 

Some people often wonder why prices are set at at numerical values that are close to round numbers. Instead of ending in .00, which can be simplified to a simple decimal point “.” – prices are set a little lower and have lots of digits, ending in repeated 9’s – $99.99, $999., etc. The way our brains process information is such that seemingly minor price changes have huge impacts on how they are perceived. This is why when setting price points it is better not to round off to an even number, like $100, and instead use $99.99.  Read on, I’ll show why when you are setting your price why $99.99 is better than $100.

Theory

One tool in the arsenal of marketing executives to help set prices is the “van Westendorp Price Sensitivity Meter” – hereafter vW-PSM (consult Wikipedia if this is new to you)  This tool works by asking target buyers a series of questions that probe their attitudes toward the product/service and their expectations on price. The tools works by analyzing the interaction of answers. The questions are simple – they are:

  1. What price for this product/service is too low such that you would doubt its quality?
  2. What price would you expect to pay for this product/service?
  3. What price would you think is a bargain such that you would definitely buy the product/service?
  4. What price for this product/service is too expensive such that you would not buy it?

I will not bore you with a dissertation on the  the van Westendorp Price Sensitivity Meter. Its a tool that has been used and, erroneously, abused. If you want to learn more about this tool then here is a link. This is an article written by my colleague Nico Peruzzi. It is based on some projects using the van Westendorp approach we did together while I was an exec at Drobo.  Nico’s thought provoking article is “The van Westendorp Price Sensitivity Meter – Are We Using It Incorrectly.”

Practice

In order to understand why $99.99 is better than $100, look at van Westendorp question #4: What price for this product/service is too expensive that you would not buy it? The responses show how small price differences like $.01, or $1.00 cause people to react differently. Depending on your product, if you are even $.01 more expensive it can cause a large percentage of your target market to think you are too expensive to consider purchasing.

The image below shows the responses to a 2010 survey exploring response to a hypothetical consumer personal cloud storage product. The survey was completed by 1,694 people — a huge number given given research practices at many high tech companies. This chart shows the cumulative probability distribution (CDF to any math geek readers) of the price at which the product is too expensive to buy.

 

There are two important lessons in this chart that you can use:

Pricing discontinuities – don’t step on a land mine: there are price ranges that vary by a few dollars where there is a huge shift in the percentage of your target market who think the product is too expensive to buy. I have marked these with the arrows on the diagram and the price points at which the discontinuity occurs (in this study a $3-4 dollar difference separates the “steps”).  By observing the sudden “jump” in the stair step curve you can understand the perceptual impact of a minor difference in the expressed price. These explain why $99.99 is better than $100.

Price indifference – don’t leave money on the table: between the jumps, there are broad price ranges over which buyers don’t perceive a difference. In other words, you can price at the high end of the range, or you can “leave money on the table” by pricing too low. In the results shown above, each of the “steps” is about 30% wide. By this I mean that the next “jump” is at a price point higher than the one that triggered the current plateau.

Insights For You To Use

The van Westendorp Price Sensitivity Meter is not the perfect tool. It is best used when there is no ability to change the product specification and your are looking to set the best price. This is a very common situation – like if you are the marketing VP who joined a startup a company with a “ready to launch”  product that has not had proper market vetting. Is this an ideal pricing tool? The full vW-PSM approach gives noisy results. I will discuss these in future posts if there is enough reader interest. The key benefit of the van Westendorp approach is setting a price that maximizes attractiveness to your target market, yet doesn’t leave money on the table.

A Real World Example: Amazon Kindle Pricing

To show that the discussion above is not “analysis paralysis” (link to: ) or worse . Consider the 9/28/11 introduction of the new Amazon Kindle . Amazon’s CEO and Founder Jeff Bezos introduced the new Kindle product family, making effort to position it as a low cost competitor (against the unspoken Apple iPad.  Bezos’ presentation had an analysis  singing the reasons why a Kindle priced at “$99” (and, implicitly, not $100) would excite his customers to buy.  Amazon wants to hit a home run and make their new Kindles very successful. Setting a price on the correct side of a van Westendorp price discontinuity is one key to that objective.

Still Not Convinced?

If you still have questions or doubts — let Tactics remove them. Contact us. We will to do a vW-PSM for you and test how YOUR customers value your product. We are confident we can show you why when Setting Your Price: Why $99.99 is better than $100, $199 is better than $200 and $999 is better than $1,000.