The Big Difference a Penny Makes

Should you price a consumer product at a price that ends in 99 cents — or price it at a round dollar amount?

Image courtesy of Flickr user r-z.

What’s the difference between $9.99 and $10.00? Not much, objectively. There’s little you can buy with a penny these days. But a study by three researchers finds that many restaurant managers believe that price endings such as 99 cents or a round dollar number communicate a significant message to consumers. Robert M. Schindler, a professor of marketing at the School of Business at Rutgers University-Camden; H.G. Parsa, a professor at the Rosen College of Hospitality Management at the University of Central Florida; and Sandra Naipaul, an assistant professor at the Rosen College of Hospitality Management, surveyed 112 U.S. restaurant managers. The researchers found that a large majority of restaurant managers believe that consumers pay less attention to the right-hand digits in a price and instead pay more attention to the digits to the left of the decimal point. What’s more, the majority of the restaurant managers surveyed believed that consumers associate prices ending in 99 cents with good value. (And, in fact, some previous research has found that using price endings that are just below a round number — such as 99 cents — can lead to increased sales.) Nonetheless, the professors found that almost one-third of the restaurant managers surveyed use “round” price endings (such as $10.00 or $7.50) more often than prices that have “just-below” endings such as 99 cents or 95 cents. Why is that? Well, 42.9% of all the restaurant managers surveyed — and 82.9% of those who more often used “round” price endings — believe that customers associate prices that end in .00 with high quality. Also, some of the managers who more often use “round” price endings indicated that they saw such rounded prices as more honest or as more conducive to a classy image — or that they simply make price communications, calculations and making change easier. Slightly more than half of the managers in more upscale restaurants responding to the survey (which also included managers of inexpensive, quick-service restaurants) said they used round price endings more often. Schindler, Parsa and Naipaul’s paper on their research, “Hospitality Managers’ Price-Ending Beliefs: A Survey and Applications,” will be forthcoming in the journal Cornell Hospitality Quarterly, Schindler noted.

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6 Comments On: The Big Difference a Penny Makes

  • Indy Datta | June 25, 2011

    I agree that having rounded price points would convey quality & honesty, whether it is menu prices or industrial product pricing. However, I would add that “99 cents” or “95 cents” would work well in these instances: non-essentials, impulse purchases (desserts/ice creams), second tier or value-branded products, and could be tied in well with product branding & differentiation between multiple tiers of a brand.

  • Robert Voltaire | August 17, 2011

    A penny makes a huge difference. If you look at the price 999.99 or 1,000.00 you see more decimal places and it just looks more expensive. It is great that this study is applied to restaurants and hospitality but I believe all business owners could highly benefit from a .01 price adjustment.

  • Martin Dressler | August 19, 2011

    Simplifying the digits tells me the owner is a sensible person who is not trying to confuse me. I expect their other decisions will be sensible, too.

    Similarly, telling me that a gallon of milk contains 3785.41178 milliliters cannot possibly be accurate (surely they overfill the jug a bit), and the last 5 digits are purely annoying, confusing and useless unless I’m in a laboratory. It’s sort of akin to measuring the distance to the moon, accurate to one inch. It’s unnecessarily complex.

    “We estimate our expenditures for next year will be $31,263,185,218.29″ exemplifies the difference between data and information. Accurate? Yes, to the penny. Useful? Somewhat. Likely to turn out to be correct? No way.

  • Stewart Shriver | August 21, 2011

    From practical experince on the “Rooms” side of hospitaltity, the $1 difference in price does make a difference.

  • The magic numbers | abp2fa | December 6, 2013

    […] Mangelsdorf, M.E., 2011 The big difference a penny make. MIT Sloan management review.:http://sloanreview.mit.edu/article/the-big-difference-a-penny-makes/ […]

  • Pia Elworthy | December 12, 2013

    As a frugal consumer as is a growing portion of the U.S. populace, I pay attention to every figure presented in a price. To me a price ending in .99, is a flimflam and is perceived mentally as a connoted derision not a value.

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