Once I went to buy an internet modem with a price tag of Tk 1,399. I paid the shop attendant Tk 1,400 in cash and waited for the change, but he did not give me any. I soon realized that the price kept a little below a round figure was intended to manipulate customers' psychology by showing that the price is less. In the language of marketing, this kind of pricing is called psychological pricing or odd pricing, which results in increase in sales.
Various explanations are offered for the widespread use of odd pricing. One explanation is that customers see an odd price as being much cheaper than it actually is in relation to the nearest round figure. That is, customers see a price of $4.99 as being closer to four dollars than nearly five dollars. It is believed that this illusion of much cheaper products triggers an enhanced buyer response. An explanation for this rationale is that people have only a limited capacity for storing information. They store only the more valuable message, the first digit of a number.
Many retailers believe that the more specific a statement is the more inclined people are to believe it. Other explanations for the effect of odd pricing include a belief that "circles attract the eye," thereby drawing consumers to the digit 9, and that the customers like to receive change. However, despite the apparent plausibility of some of these explanations, they are largely based on speculation rather than objective evidence.
The illusion of odd prices being much cheaper than even prices is certainly promoted in retail advertising by displaying a much smaller type size for cents digits than for dollar digits, thereby emphasizing the dollar amount of the price. This factor may contribute to the illusion that odd prices are much cheaper than they actually are.
However, there is much ground to think about the long lasting impact of odd pricing. If we are frank enough we must accept that the idea of ‘odd/psychological pricing’ is a subtle way of cheating customers that must not be expressed to keep our shirt clean. But this could be detrimental sometimes because nowadays customers are no longer blind, customers are very much aware of all the tidbits, they are cognizant about what is happening around and try to avoid things which seem odd to them. Odd pricing definitely gives a negative impression to the informed customers.
Once a customer perceives something bad about a product or a company, then, she avoids that product as well as the other products of that company. Any negative impression about a product leads to "Negative Word of Mouth" which results in losing existing and potential customers. Thus, the companies can't even understand that they are not only losing market share of the oddly priced products, but also the market share of other products. But in taking a decision of what pricing strategy to adapt the question of maximizing profit always slips in. However, to avoid our immediate temptation to maximizing profit in short run looking ahead can be a consolation. As it’s proved that having a long lasting customer relationship gives a company steady business opportunity along with higher profitability.
So, it's critical to think about establishing long lasting customer relationship instead of chopping customers up in short run.
Complement with brilliant thoughts on pricing & pricing strategy: Price Intelligently's CEO on An Essential Guide to Pricing Strategy , Ruhul Kader on The Economist’s pricing: The art of using free in your pricing; and One Practical tip on Startup pricing