How to Use Charm Pricing

How can a $39 dress outsell the identical item offered for sale at $34? In this Vlog, Grant explains that it’s all down to charm pricing.

Charging £7.99 instead of £8.00! Who are they trying to kid?

Well actually that sort of pricing is used because it works.

There’s a phenomenon known as the ‘left digit effect’. In other words, as we read from left to right, £7.99 seems a lot cheaper than £8.00 because seven is significantly different from eight.

Now although, of course when we rationalise it, we realise there’s only a penny difference, there’s what’s known as the ‘anchor’. And when you see seven it anchors you and it feels a lot less. Even though rationally we know it isn’t.

Now anchor pricing is very important and what we mean by anchor is people will take the first price they receive and use that to contextualize everything else.

So let me give you an example. If you’re running a very posh restaurant, your customers don’t necessarily know what prices to expect.

If the first thing they see is a five course meal for £125, which of course is quite a lot of money, and then the second price you show them is £75 for a four course meal, suddenly that £75 seems quite reasonable against the anchor, which is £125 for a five course meal. Even though, out of context, £75 is still a lot of money to spend on dinner.

Similarly, if you run a dress shop, you may want to show the customers your £150 dresses first because then when you get your £80 dresses, they will seem like a bargain.

It is not just because of the left digit effect and anchoring, that the £7.99 pricing works. It’s also because culturally we associate the figure nine with bargains.

Duncan Simister and Eric Anderson did some research on this. They took the same dress and in catalogues priced it at $44, $39 and $34. While the $34 version out sold the $44 version – which we would expect – actually, the $39 price outsold them all, which is crazy. But $39 just felt like a bargain because of the figure nine.

So when you’re putting your prices together, even though it can seem like a cheap trick, don’t underestimate the power of the number nine, because it works.

Just one more thing. When selling a premium product, rounded prices can actually work. For example, a very expensive watch feels better at £4,000 than £3,999 because you’re not buying the watch for a bargain. You’re buying it for status.

There may be small changes to the spoken word in this transcript in order to facilitate the readability of the written English