Thursday, July 23, 2009

Round Pound

I ran across this interesting piece on the BBC web site. It seems that some retailers in Great Britain are moving away from the old strategy of pricing things at just under a pound (U.S. equivalent of just under a dollar) and they are meeting with some success.

This got me thinking about the number of "dollar" items that have sprung up in the U.S. recently. Several fast food restaurants have "dollar" menus, or "value" menus with items priced at a dollar each. Other stores have dollar bins with select items priced at a dollar each instead of the hitherto traditional 99 cents. Given that we frequently still end up paying an odd amount because of sales taxes, I hadn't really thought about it. But the article raises a question, has the traditional pricing strategy of "keeping it under the next level" (99 cents instead of a dollar, $4.99 instead of $5, etc.) begun to fall by the wayside? Have consumers in the U.S., the U.K. and presumably elsewhere "wised up" to this pricing misdirection and mentally made the shift to rounded pricing?

Is it possible that consumers are no longer seeing the price as "under", but just rounding up? And if that's the case, does convenience really enter into the transaction, as the article implies? If so, does the marginal benefit of dealing with one coin exceed the cost of paying an extra penny? Or does the fact that there are taxes on the sale just change the amount of change we receive? Given the shift toward paying electronically, does it matter?

One further issue may be whether this is an early sign of the death of the penny. That issue has been argued a long time in the U.S., but I'd like to know if the demand for the diminutive coin (and its English cousin) has fallen off.

What do you think? For those of you teaching personal finance or marketing, how does the psychology of pricing fit into your class? I look forward to your comments.

This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

1 comment:

lampkinsr said...

I think that the style of pricing things just under a dollar (or a pound, using the British example) is indeed falling by the wayside. I know that personally, whenever I see that an item is 99 cents, I round up to a dollar. This is probably becoming more of a trend with most Americans in current times.
The issue of taxes has certainly played an important part in the new direction of the consumer's mindset. It doesn't really matter if something is 99 cents or a dollar, one will still end up breaking another dollar for the tax.
But in all honesty, the point I'd like to make is one hinted at by Mr. Schilling. I believe that the world is (very gradually) moving towards becoming a cashless society. (Let it be noted that I don't think that stage will ever be truly achieved, however we are getting closer.) As more and more people are using credit cards and debit cards, this pricing method will lose its effectiveness, and people will just learn to be smart consumers. This is a sign of such a shift.