Canadians aren’t known for bold moves when it comes to monetary policy, but back in May those Canucks sure made a splash when the Royal Canadian Mint decided to put an end to their one-cent piece by the end of 2012. Their move to a penniless Canada stemmed from the exorbitant costs associated with manufacturing the coin, costs that exceeded the currencies actual value. Of course, the economic after effects of losing the penny will save Canada money ($11 million annually according to Finance Minister Jim Flaherty). Yet, we at Price Intelligently argue that the economic benefits will diminish (although not completely), because of the loss of the impact gleaned from a psychological pricing strategy.
photo credit: DennisSylvesterHurd
The importance of psychological pricing: discount and premium pricing
Psychological pricing involves a marketing strategy based on utilizing particular pricing techniques to form a psychological impact on consumers. For instance, let’s say we’re pricing a candy bar. Utilizing a value based pricing strategy we’ve determined using price optimization software the chocolate should be priced between $1.85 and $2.15. You may not realize that picking the exact price point within that range can either have phenomenal or less than ideal results.
Initially, we could use the discount pricing (or “odd pricing”) method, applying a pricing strategy that puts the price directly below a whole number, such as $1.97, $1.98, or $1.99, as opposed to $2. The purpose of discount pricing is to persuade the customer into purchasing a product based on the fact that people read from left to right, which makes customers subconsciously believe they are receiving a discount (it’s also the world's most popular psychological pricing technique). To put it another way, Robert Schindler, a professor of marketing at Rutgers Business School, who has published several papers on what he calls the “99 effect” explains, “It’s like when a 39-year-old turns 40, the birthday feels like a big deal. Or when 1999 ends and 2000 starts...there’s an emotional difference.”
On the flip side, we could use the premium pricing (or “prestige pricing”) method, which aims to display the quality and experience associated with a product. With this strategy our candy bar would be $2. Our little sugar cartel would be focusing on brand and luxury focused consumers who would scoff at a $1.99 piece of chocolate. The increase in conversion rate for either of these strategies varies by industry and product, but if you ever want a great live example of these strategies check out Gilt.com. Most Gilt Groupe sales have a struck-out, before price ending in “5” or “0”, and an after price ending in “7”, “8”, or “9.”
The impact on a business: raw dollars and conversion rate
Without the ability to strategically implement psychological pricing, Canada is forcing their businesses into round price points (“0”s and “5”s) that are perceived as premium. The implications exist on two levels: a loss of raw dollars and a decrease in conversion.
The amount may seem small, but for some volume retailers, and even high volume sales in the tech space, pennies add up. A traditional price at $1.99 will traditionally move to $1.95 (as they did in Australia 20 years ago). That four cents over 100,000 purchases accounts for $4,000. Not big money, but not small change either when every penny counts.
The biggest impact will be felt by conversion rate. A famous pricing study completed by McKinsey discovered that a 1% improvement in price leads to a 8.7% improvement in corporate profitability. Taking away the discount pricing mechanism really eats into that 1%, especially since the average increase in sales is around 8% - just by ending the price in a “9.”
At the end of the day, Canada is not doomed, but their businesses will need to adjust their practices to fill the potential void left by the loss of strategic pricing. In your own business, you should work to determine your fit in the discount vs. premium offering spectrum to utilize psychological pricing effectively. After all, you don’t want to leave valuable dollars and pennies on the table - at least that’s my two cents.