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Price Endings and Consumer Perception

Faculty Contributor: Avinash G. Mulky, Professor
Student Contributors: Prahalad M., Venkateswaran K. N.

With consumerism becoming the order of the day in India, the ever important issue of pricing takes the front seat in managerial decision making. Price can have an effect on the consumer’s perception of value, quality and recall. This article aims to analyze the effect of price endings on the psyche of the Indian consumer.

Effects of Price Ending

Price ending is a marketing practice based on the theory that certain prices have a psychological impact . A number of theories have been proposed about how price endings act as a signal for non-price attributes. These may be divided into “Level effects” and “Image effects”.

Level effects, also referred to as underestimation effects; refer to the skewed perception of price levels due to price endings. Some specific manifestations of the effects are:

• A 9 ending price may be seen as a “just below” price. This means a price of Rs. 4999 may be perceived as “just below 5000” bringing it into the 4000 bracket for the consumer
• The 1 unit removed from the price may be seen as an indication of the lowest price around, or as a price that has not been changed too much
• The 1 unit removed from the price may be perceived as a mark down from a higher number and hence as a discount offered to the consumer. This is related to the “Perceived Gain” theory that Schindler and Kirby tested.
• As a result of the high frequency of 9 endings, 0 endings may be perceived as 1 unit surcharge over the 9 endings, thereby indicating a premium
Level effects are the skewed perception of price levels due to price endings. Image effects are consumer perceptions of firm behavior as a result of the price signal

Image effects refer to consumer perceptions of firm behavior as a result of the price signal. Some manifestations of this effect are:

• Since a 9 ending is frequently associated with a sale, the outlet displaying 9 ending prices may be perceived as a low quality store or a “discount store”
• Since a 0 ending is frequently associated with a premium, the outlet displaying 0 ending prices may be associated with premium

The question of how the Indian consumer perceives these price endings has not been addressed. If a relationship can be established between price endings and consumer perception, it can have a significant managerial implication in terms of signaling.

Framing of Hypotheses

Based on the literature survey and survey of price data, the following hypotheses were formulated for testing as shown below. The recurring theme in the hypothesis below is to check if these pricing perceptions amongst western consumers are mirrored in the Indian context and if not, how exactly Indian consumers respond to price.

• 9 ending is an indicator of high value
• 9 ending is an indicator that the product is on a sale
• 0 ending is an indicator of high quality
• Customers process prices from left to right
• Customers remember ‘0’ ending prices as well as ‘9’ ending prices

Experimental Approach

Two experiments were conducted to test the above hypothesis.

Experiment 1

The experiment was conducted on a sample of 50 respondents wherein 25 respondents were shown questionnaire I and 25 respondents were shown questionnaire II. The questionnaire contained a product with a corresponding price tag (shown in Exhibit 1). Each respondent was asked to rate the products on the parameters of Value, Quality and Fairness.

Respondents were also asked if the product appeared to be on a discount or was on a sale. This was a Yes/No response.

Experiment 2

In this experiment, a catalogue of 18 products with price endings distributed between 0 endings, 9 endings and random endings were given and the respondents were asked to recollect the prices of the products. A total of 40 respondents were surveyed. The aim of the experiment was to determine the way consumers process price endings. The responses can be classified as follows:

Case A

Consumer remembers the left digits better and hence processes from left to right

Case B

Consumer approximates the price to the next whole number

Case C

Consumer is able to recollect the exact price with the 9 ending

Another experiment performed with the same catalogue was to check whether the tendency to remember ‘0’ ending prices is the same as the ability to remember ‘9’ ending prices exactly.

Analysis of Experiment Results

The following conclusions pertaining to the hypothesis (discussed earlier) can be drawn from an analysis of the experimental results.

Hypothesis 1: 9 ending is an indicator of high value

The experiment 1 performed across five products with ‘9’ endings in the experimental group suggests that there is a perception of high value for 9 ending prices. Almost all the probability values have been statistically significant to prove the result. The experiment also proves that this case is unique to 9 ending. The 8 ending product for example failed to show higher value for money.

This hypothesis holds in the Indian context

Hypothesis 2: 9 ending is an indicator that the product is on a sale

The experiment 1 across product categories showed that the 9 ending prices were invariably considered as products on a sale. The p values obtained have been statistically significant.

This hypothesis holds in the Indian context

Hypothesis 3: 0 ending is an indicator of high quality

Even though in one or two products, a 0 ending was perceived as a signal for higher quality, the results have not been statistically significant. Other products did not show this trend.

This hypothesis does not hold in the Indian context

Hypothesis 4: Customers process prices from left to right

Only around 30% of the respondents who recollected the price processed it from left to right. Almost an equally significant number approximated the product price to the next whole number. Hence, on the evidence that we have got from the experimental survey, this hypothesis cannot be proved right.

This hypothesis does not hold in the Indian context

Hypothesis 5: Customers remember ‘0’ ending prices as well as ‘9’ ending prices

The probability of remembrance of 0 ending prices and 9 ending prices are not statistically very different. However, the trends from the survey indicate that 9 endings seem to be easier to recollect than 0 endings. The probability that both prices are remembered equally is around 39% only.

This hypothesis holds in the Indian context

Managerial Implications

There seems to be a definite relationship in the Indian context of 9 endings being associated with value

• In interviews, we found that 9 endings were mostly “learnt” from Bata displays in the Indian context. Considering Bata's value for money positioning, the learning of 9 ending with value seems to be strongly implanted even across product categories in India.
• 9 ending prices are again related to sales / promotions. Most advertisements involving a sale or a promotion do have 9 ending prices

The signaling of quality by 0 ending prices is not very strong in the Indian context

• As opposed to the American context, no learning of 0 endings appears to have taken place
• It is also important to note that the Indian consumer does not make a judgment on quality unless he/she “touches and feels” the product. Since the experiment was carried out based on visual cues, this relationship is hard to come by

Non-zero even endings are not perceived to be different from 0 endings

Implications for internet pricing

• In the internet shopping experience, the major input of touch and feel is missing. The buyer has to take cues from other inputs like product description, display picture and reviews. In that context, we believe that price endings could be used as a cue to convey information to the consumer

Conclusion

From the above analysis, it is clear that for the Indian consumer, prices ending with 9 are indicators of high value, price ending with 9 is an indicator that the product is on a sale, and customers remember prices ending with 0 as well as those ending with 9. These conclusions can be used in managerial decision making on how to price products in order to attract the Indian consumer. The dilemma of setting price ending as 0 and 9 has been clarified by the fact that the Indian consumer strongly associates high value to a 9 price ending but the association of quality is not as strong for 0 price ending. Another take away is the fact that the there is no difference in the Indian consumer’s perception of non-zero endings and 0 endings, and therefore more value can be extracted by pricing with a 0 or 9 ending depending on what one wants to signal. Finally, these principles do not apply to internet shopping as touch and feel are the most important entities in communication of quality and value.

Contributors

Prof. Avinash Mulky , Professor in Marketing area at Indian Institute of Management Bangalore. He holds a Ph.D. from I.I.T. Bombay and a Post Graduate Diploma from IIM Ahmedabad. He can be reached at avinashgm@iimb.ernet.in

Prahalad M (PGP 2007 - 09 at IIM Bangalore) holds a B. E. in Electronics and Communication Engineering from Anna University, Chennai and can be reached at prahaladm07@iimb.ernet.in

Venkateswaran K N (PGP 2007 - 09 at IIM Bangalore) holds a B. Tech. in Chemical Engineering from IIT Madras and can be reached at venkateswarankn07@iimb.ernet.in

Keywords

Marketing, Consumer Perception, Indian Consumer, Price Ending

References

1. http://en.wikipedia.org/wiki/Psychological_pricing. Last accessed on June 27, 2009.
2. Mark Stiving, Russell S Winer, Journal of Consumer Research, Gainesville , Jun 1997, Vol. 24, Issue 1.
3. Schindler, Robert M., 'Symbolic Meanings of a Price Ending', Advances in Consumer Research , 1991, Vol. 18 Issue 1.
4. Robert M Schindler, Patrick N Kirby, 'Patterns of rightmost digits used in Advertised Prices: Implications for nine-ending effects', Journal of Consumer Research. Gainesville , Sep 1997. Vol. 24, Issue 2.