Playing the numbers game

Did you know that the world’s favourite number is seven? That the digits three and eight also rank highly in the global popularity stakes, but four is widely reviled - particularly by people from East and South-east Asia, as the word for four sounds quite similar to the word for death in many Chinese dialects?

Human beings’ complex relationship with numbers and the emotional and physical responses that certain digits elicit has been the subject of a great many research studies, papers and dissertations.

As retail overheads continue to mount, employing a few key learnings from the complex world of number psychology when setting your price points could pay off. And with shoppers arguably more value conscious than ever, there’s never been a better time to try some number crunching.

Some five years ago rounded pound pricing was the big thing. The rounded price point functioned as a beacon for communicating value in the recession and stores across the country jumped on the bandwagon, creating dedicated rounded price zones and forests of supporting POS material.

However, every dog has its day and now that the UK has emerged from the economic fog, round pricing’s number seems to be up.

According to HIM’s 2013 pricemarked packs survey, 64% of shoppers said that a rounded price point would “make no difference” to their purchasing decision.

There is, however, one exception, as Today’s retail director John Kinney explains. “The exception is the £1 price point, which is a critical price point to hit. We don’t receive much demand from wholesalers for £2 or £3 rounded price points anymore, just £1.”

Londis retailer Mike Dorey of Eastcombe Stores in Gloucestershire has also noted the shift. “The recession is over and the feel-good factor is returning. However, I believe that shopper confidence is still a little low and that retailers need to remain careful about how they price goods,” he says.

For Mike, £2 and £3 price points have lost their impact and he uses the £1 price for special offers or promotions only - particularly in the confectionery, household and health and beauty categories, where it seems most effective.

Dan Cock of Whitstone Stores (Premier) in Holsworthy, Devon, agrees. In fact, he says that the £1 price point is far more effective than 99p and so he routinely rounds prices up to £1 - an act which he says achieves a “better rate of sale”.

Aware of the pulling power of the £1 price point, many manufacturers have been busy reducing pack sizes to enable them to maintain the magic number despite rising costs.

Kinney continues: “A lot of suppliers have responded well and through pack engineering are delivering great products at the £1 price point. There are a lot of £1 priced products in the market now driven from the discount channel, and the convenience channel has responded well to meet the consumers’ expectations, but the challenge is hitting this price point, but still providing a sustainable shared margin,” he says.

However, the rules change the higher up the pricing spectrum you go, with rounded pound prices become increasingly less potent the higher the price of an item.

“When it comes to pricier products, prices that fall just under round pounds seem to drive a much better rate of sale, particularly when it comes to fresh and chilled goods,” Mike adds. “The left-hand digit is definitely the trigger. It’s only 1p difference, but a bottle of wine is far more likely to sell at £5.99 than £6 for example.”

What Mike is referring to is what is known in scientific terms as the “left-digit effect in price cognition”. Reducing the left-most pound digit by implementing a small change in the right-hand pennies affects shoppers’ “magnitude perception” and leads them to believe that they are getting a good deal.

The power of 9

A 2005 study by George Bizer and Robert Schindler also referred to this “left-hand digit effect”. The pair argue that shoppers ignore, or give very little attention to, the ending digits of a price, often treating the 99p ending as a zero, seeing £2.99 as simply £2.

The pair believe that this “drop-off mechanism” could have a high potency, and only has to work a small percentage of the time to make a big difference to a retailer’s bottom line.

They also say that there are many situations when it “would be especially appropriate” for retailers who want to create the impression of low prices to consider using 9-ending prices. Categories where shoppers typically have low purchase involvement, such as canned vegetables, toothpaste, or paper towels, might be particularly good candidates, they say.

Dan Cock tries to round most of his price endings up to 99p, and will even drop prices down a few pence to achieve it, such as charging £1.99 instead of £2.

“I have made a conscious decision to lower margins on certain key lines such as milk, for example, in a bid to drive volume. However, I’m making it back on areas such as general grocery where I aim to go above the rrp and achieve about a 30% margin,” he adds.

“I’ll input the data into the epos and if something comes out with anything more than a 95p ending I’ll round it up to 99p. I find that price points that end in 96p, 97p or 98p don’t work as well. If you go for 97p shoppers seem to think that you’ve pushed the price up and will resist the temptation to buy, whereas when they see a 99p ending they seem to think it’s been discounted so will snap it up, even if in truth it hasn’t been!

“As a result I often opt for 99p endings, unless a product is actually 99p. When this is the case, the £1 price point drives a better rate of sale. Bizarrely, I find that you can sell more by upping the price by 1p to £1!”

It seems that the power of the number 9 isn’t limited to 99p endings, either. The number 9 appears to have become so synonymous with value that just seeing it somewhere on the price tag appears to be enough to lead them to think they are getting a deal.

Little surprise then, that the vast majority of pricemarked packs contain a 9 somewhere in them, whether it’s £2.99 or £2.29. Big brand manufacturers are certainly aware of the impact that number psychology can have on sales.

Half the battle

The numbers 5 or 50 are also credited by retailers with achieving a positive rate of sale - and particularly, it seems, in the wine category. “Wine buyers seem to have a different psyche to, say, lager buyers,” says Andy Short from the Selsey Off-licence in West Sussex. “They like value for money, but that’s not to say they want to buy on a promotion.” Rounding prices up or down to hit the 5p mark works well for him, and much of his wine is priced at £6.95, £7.95 or £8.95.

“We tend to price 5p below the pound rather than have a 99p ending as shoppers perceive this to be a good deal. It’s also easier to handle the change! Products with 99p endings can sometimes annoy customers who pay in cash and we find that quite a few don’t like being given the 1p back,” he says. Shoppers are always quick to snap up bottles in the £5.50 ‘bin end’ section, he adds.

Mike is also enjoying “huge success” with a £5.50 price point on wine. “I have a wine tower at the rear where all the wines cost £5.50 and they fly off the shelf. It’s a good solid number. It’s clearly offering shoppers value for money, but as there’s not the 99p in there it doesn’t feel like a promotion.

“It’s not always easy to maintain the price point as I have to fight hard to find good- quality wines that I can sell for £5.50 and still make a decent margin on, but it’s worth it. Shoppers like the fact they can come in week after week and see the same prices. It gives them greater confidence that my prices are fair.

“The wines on the £5.50 tower make me a minimum of 10% margin; it’s not huge, but it drives volume. People don’t generally come in and buy just one bottle - far more typical is two or three.”

There are other pricing strategies that can be used to prompt shoppers to buy the goods you want them to - those with better margins, for example. A popular one is called “anchoring”.

It’s a simple enough concept. Give shoppers the choice of two similar products, say instant coffee. Give one a high price point and the other a slightly lower one. The coffee with the high price point will give shoppers a frame of reference and suddenly the coffee with the ‘lower’ price seems like a bargain.

It may not in fact be a ‘low price’, but compared with the high-priced option - the anchor - for many shoppers it’s instantly more desirable.

So next time you are considering what to charge, remember to factor in shoppers’ thought processes, too.