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Beware of the Left Digit
Posted By Ron On May 20, 2009 @ 12:58 AM In Budgets,Frugality,Money,Personal Finance | Comments Disabled
When I find myself comparison shopping, price is usually the first item I compare. It makes sense since this is usually the first “comparable” item I can quickly examine anyway. But I need to be careful. I’m human and I tend to make a decision between lower and higher cost items based on the first digit I see – the leftmost digit, according to a new study in the Journal of Consumer Research .
Retailers and restaurant owners have known this for years. That’s why things seem to be priced at $4.99 rather $5.00 or $2,999 rather than $3,000. Retailers and restaurateurs know you might think of it as a $5 purchase, but the effect it really has is when you’re making a comparison. Shoppers all claim to “round it up” in their heads but research seems to indicate that few actually use the self discipline  to do so when comparison shopping. Yet most people think they’re the exception!
According to the study’s authors, Kenneth C. Manning (Colorado State University) and David E. Sprott (Washington State University):
"Shoppers pay a disproportionate amount of attention to the leftmost digits in prices and these leftmost digits impact whether a product’s price is perceived to be relatively affordable or expensive."
In one experiment, Manning and Sprott asked participants to consider the purchase of two similar pens, one priced at $2.00 and the other at $4.00. Prices were then altered by that single penny and the researchers found that when the pens were priced at $2.00 and $3.99, 44 percent of the participants selected the higher priced pen. But when the pens were priced at $1.99 and $4.00, only 18 percent of the participants chose the higher priced pen.
"The larger perceived price difference between the pens when they are priced at $1.99 and $4.00 led people to focus on how much they were spending and ultimately resulted in a strong tendency to select the cheaper alternative."
In another experiment they studied the effects of “round prices.” Study participants were asked about two items priced at $30 and $40, then about items priced at $29.99 and $39.99. The responses were revealing. The “round prices” were perceived by the participants to be similar and that one penny caused participants to decide that the “just below” prices had a greater gap. Just one penny.
What’s interesting is that when purchasing a gift for a loved one or a close friend, these differences due to rounding disappeared in the consumer’s mind!
I’d strongly recommend this exercise for any major purchase so you can avoid busting your budget. When considering the relative prices of your purchase options, take a few moments and write down the items and their rounded up price. List their major features and benefits (features are characteristics and benefits are how those characteristics meet your individual needs). Ask yourself if the difference between the two prices are worth those added benefits.
Once you make this simple analysis, you’re in much better shape to make your purchase decision. Make it, and sleep well.
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