Nineteen seventy-four was a rough year for the economy. There was an energy crisis, rampant inflation and the world's financial system seemed on the brink of collapse. A new mindset of frugality was taking hold among consumers. In October of that year, Lee Iacocca, then the president of Ford, described the situation this way: "People want economy, and they will pay any price to get it."
Ford's response to all of this was to introduce the Fiesta, one of the first true North American "economy cars." The energy crisis eased in the 1980s, and the Fiesta was eventually replaced by the Escort in North America, but it enjoyed continued success in Europe. Earlier this year, Ford announced that it would be bringing the Fiesta back to North America for 2011. The budget-conscious consumer is suddenly on every retailer's mind once again.
No company is as adept at taking the pulse of the frugal consumer as Walmart and, in April, the Canadian arm of the world's biggest retailer responded to the pinch of today's economic climate in a fascinating way: It announced it was eliminating fractional prices on most of its popular products. Instead of pricing items just a few pennies below a dollar, like $19.97 or $49.99, the discount retailer would begin rounding them to even dollars-a strategem that is challenging more than a century of accumulated retail wisdom about how people make purchasing decisions.
Economists, especially the followers of F.A. Hayek, like to idealize the practice of pricing. In Hayek's view, a price was the "miraculous" end result of the vastly complex system of inputs and motivations that drive the world. Everything you need to know about a product should be immediately visible in its sticker price. Stella Artois actually captured this idea nicely in its famous U.K. ad campaign- "Reassuringly expensive" -that lasted 25 years. Marketers have a much different view than economists, of course. In the marketer's world, price is just another way of defining your product and bringing the buyer to a moment of decision. Roger Sterling, the fictional ad exec on the television show Mad Men, put it nicely when he said, "I'll tell you what brilliance in advertising is: 99 cents."
Ninety-nine-cent pricing first emerged in the 1880s, and it became common practice by the 1920s as print advertising began to mature. Today, the number 9 is the trailing digit in as many as 65% of the price tags we see-only a very small percentage of prices end with a zero. While several theories have been advanced to support fractional pricing, the most often quoted is the idea that since we are used to reading from left to right, we tend to hold the dollar amount of a price in our minds and ignore the trailing digits. By that thinking, retailers can add up to 99 cents to a price without causing a consumer to reverse a purchasing decision. Another theory posits that "9" is simply an attractive digit that looks good on displays. Still another claims that people are motivated by the idea of getting change back from a purchase. The whole thing has been a bit of a mystery, though, and the evidence for whether fractional pricing actually works has been mostly anecdotal. Retailers commonly believe that items sell better when they are priced to avoid round numbers, but there has been little research to support that claim.
