When we think about psychological pricing, we might think about price-ending numbers in prices that cast a magic spell on someone, and this someone buys something they would not buy otherwise.
Usually, we think this magic of price endings only works for consumers in a B2C context. But maybe price endings have a magic effect also for B2B customers.
We will find out today.
When we think about price endings, we can differentiate two effects.
The first effect is a level effect. Level effects are a phenomenon in which the consumer reads the price and engages in purchasing behavior as if the price is significantly lower than it actually is.
Customers perceive the objective value of a price as much lower so that the subjective value of a price becomes smaller.
The second effect is an image effect. Image effects are psychological processes in which prices and price endings cause consumers to infer certain things about a product they may purchase.
They can be categorized as price, image effects, and quality image effects. So consumers see a price, and this price carries a specific meaning and connotation.
Researchers ran a study and looked into high-involvement services for small businesses.
Hence, they looked specifically into a B2B context, and these high-involvement services were a wired telephone service, broadband internet service, and seller telephone service. In this study, the researchers bundled all these three services into a package and tested three different common number formats: zero-ending prices (like $110), nine-ending prices (like $109), or precise prices (like $111).
What did they do?
The researchers ran a sophisticated conjoint analysis and checked the take rate at different price points and endings.
How does the take rate change if the precise price changes either to a nine-ending price or a zero-ending price
The take rate would drop if a precise price had a positive effect over the nine-ending and zero-ending prices. If a nine-ending or zero-ending price had a positive impact compared to the precise price, the take rate would increase.
What did they find out?
The researchers found out that when the precise price of $121 dropped by less than 2% to a nine-ending price of $119, the take rate increased by 23%.
It seems there is a price-ending effect here. We can spot it in the chart on the left-hand side – see the peak in the take rate chart.
Now the researchers dropped the precise price from $121 to the zero-ending price of $120. Remember, the $120 is still $1 higher than $119, the nine-ending price.
Still, the take rate increased by 44% compared to precise prices and compared to the increase of 23% for nine-ending prices.
Very interesting. It seems we have a price-ending effect here.
What is of equal importance is that we do not have a threshold effect here. Usually, a threshold effect is presumed to exist in full tens (e.g., $110, $120, $130). Crossing a threshold should lead to a higher perceived price that drops the take rate. But this is not the case here. Reaching $120 does not have a negative effect. It does not have a neutral effect. It has a demand-increasing effect.
This study was purely empirical. It shows that a phenomenon exists but not why.
However, we learned two things.
First, price-ending effects also exist in B2B contexts. So zero-endings and nine-endings in prices also affect B2B customers.
And second, do not take price thresholds for granted. Check whether they exist and whether they negatively affect demand (i.e., dramatically increasing the price elasticity). Sometimes they have no effect. And in our case, the zero-ending price has a positive impact—test for price thresholds.
References
Larson, A. C., Reicher, R. L., & Johnsen, D. W. (2014), Threshold effects in pricing of high-involvement services. Journal of Product & Brand Management, 23(2), 121-130.