‘Just below’ pricing can backfire
When shopping we often encounter prices just below an even number: A latte for $2.95, a pair of jeans for $89.99 or a beer crate for $19.99. This pricing strategy intends to lower price perceptions and boost sales. A recent study questions this pricing strategy for situations where consumers think of upgrading their choice. For example, an increase from $9.99 to $15 might seem more extreme than an increase from $10 to $16, even though it is less. Researchers call this psychological bias a threshold crossing effect.
To empirically test this bias, researchers set up a coffee stand for 2 subsequent days on a campus of a US business school, manipulating the pricing respectively. One condition used a just-below pricing strategy (base coffee 0.95, large coffee 1.20), while the second condition applied an at-the-threshold pricing strategy (base coffee 1.00, large coffee 1.25). Researchers counted how many participants purchased a small cup or upgraded to a large one.
How did consumers react? 56% upgraded to the larger cup when the small cup featured the just-above price of $1.00. In comparison, only 29% upgraded their small cup of coffee for the just-below base price of 95 cents. Therefore, customers upgraded more often when the base was objectively more expensive resulting in higher revenue per unit and thus overall greater sales than the just-below-pricing condition. (See figure).
These findings might also have a bearing in the current economic context where many brands are expected to (have to) raise prices. If the current pricing features a just-below price then increases may have more pronounced negative consequences. Food for thought: If you have multiple SKUs at different price points make sure that the “base version” is not the only one below a price threshold (which will deter upgrading). If you have just one SKU and need to increase prices substantially, then a first minor move just above a price threshold followed later by a larger one might be less harmful than an immediate large increase.
Source: Kim, J., Malkoc, S. A., & Goodman, J. K. (2022). The Threshold-Crossing Effect: Just-Below Pricing Discourages Consumers to Upgrade. Journal of Consumer Research, 48(6), 1096-1112.