Charm Pricing

What is Charm Pricing?

Charm pricing is a tactic in which products or services are priced just below a round number (usually ‘.99’ or ‘.95′). It leverages consumers’ psychological tendency to perceive such prices as significantly lower than they actually are because the first digit is smaller (think: $3.99 vs. $4.00).

In the B2B space (where prices are higher), you won’t see decimals, but you will certainly see SaaS subscriptions for $99 instead of $100. Similarly, you’ll sometimes see services such as marketing or consulting priced at $9,999 instead of $10,000.

Like other psychological pricing tactics, the main reason to use charm pricing is that it makes your product look more attractive from a price standpoint. This, in turn, helps customers make purchase decisions faster and boosts your sales.

That said, you have to consider how charm pricing will impact your brand as a whole. If you’re selling something you want people to think is affordable, it works. If you have a luxury product or high-ticket offer, using a round number like $1,000 signals quality and exclusivity.

Synonyms

• Odd pricing
• Psychological pricing

Charm Pricing Strategies

Charm pricing essentially follows the same tactics as odd-even pricing, which involves ending your prices with either an odd or even number to influence price perception.

Depending on your product and how you’re trying to market it, you’ll use one (or more) of the following:

Odd pricing

When you hear the words “charm pricing,” this is what it’s referring to. Odd pricing involves setting prices ending in an odd number, because it creates a perception of affordability.

• $19.95, $19.97, and $19.99 feel cheaper than $20.
• $55, $57, and $59 feel cheaper than $60.
• $95, $97, and $99 feel cheaper than $100.

The reason for this is that people tend to see the leftmost digit first, then make an instant judgment based on that.

In the case of $59 vs. $60, for example, they won’t see:

“This item basically costs $60.”

They’ll see:

“This item costs $50-something.”

Though it’s obvious that it’s just a few dollars or cents (and they’ll figure that out fairly quickly), the human brain doesn’t instantly process logic or rationality. So, whether they’re aware of this fact seconds later, they’ve already been pushed in the direction of the purchase.

Even pricing

If you actively avoid charm pricing, that’s a strategy in and of itself. With even pricing, you’re using prices that end in round numbers. This is typically a ‘0,’ but a ‘5’ can sometimes have the same effect.

You’d use this kind of pricing because you want people to think your product is expensive. When people buy expensive items, they’re usually doing it for one of the following reasons:

• Quality
• Status
• Exclusivity

So, if you’re selling something like a high-end watch, designer clothing, or a professional service for rich clients, this will help to increase the perceived value of your product. Using charm pricing would do the opposite.

Prestige pricing

Prestige pricing is fundamentally similar to even pricing, but there’s a bit more to it. Prestige pricing is about setting your prices extremely high to (a) isolate your market, and (b) create a sense of exclusivity.

Companies selling luxury items or services may have incredibly high prices not because they need to make money directly from those sales or because it costs that much to produce their products, but because they want to reduce their sales volume and increase the perceived value of their brand.

Sometimes, they use round numbers, such as a designer bag for $10,000. But it’s quite common to see them use 5s and 9s as well — that same bag could be $9,999 and still get the point across, because the number is so obviously high.

One thing you won’t see in prestige pricing is a decimal. People tend to associate decimals with lower-cost goods in general. So, if you’re selling something to high-end customers/clients, using a decimal, regardless of what it is, will send the wrong message.

Decimal pricing

Using prices with decimals is common in industries that have low prices (relative to other industries) or that revolve around sales and promotions.

The most obvious example is the retail industry, where…

• .00 = premium quality
• .99 = regular price
• .98 = one-time buy or special promotion
• .97 = clearance price (can also signal lower quality)
• .95 = sale price or good deal
• .85 = even better deal (used by Walmart)

When you see a price that ends in .97 or .85, it’s safe to assume the retailer is trying to communicate one (or both) of these things:

• “We’re reducing the price for a very specific reason.”
• “If you don’t take advantage of this offer right now, you’ll regret it.”

.99 pricing can also signal special deals and sales, but it’s more often associated with everyday prices. This is especially true in the online world, where businesses have multiple pricing options or payment plans.

The Rule of 100

Once you start setting your own charm prices and looking into other psychological pricing strategies, you’ll inevitably find information about the “Rule of 100.”

The rule of 100 says that if your product is priced under $100, you should use a percentage discount (e.g., 20% off). However, if your product is priced over $100, you should use a dollar amount (e.g., $200 off).

Consider a $20 t-shirt. $5 off isn’t as appealing as 25% off.

Now consider a $2,000 laptop. $500 off sounds better than $25% off.

When you strategically use .99, .95, and other decimals in your promotional offers to create specific meanings and perceptions about your products, this is the other piece to the value perception puzzle.

Why Charm Pricing Works

There are a few psychological factors that come into play when it comes to charm pricing. To use it effectively, you have to consider them all.

Left-digit effect

We can attribute the effectiveness of charm pricing to the “left-digit bias,” where consumers focus on the first digit of the price and perceive the product as belonging to a lower price bracket.

This bias is important because it raises a critical point about charm pricing: it doesn’t have the same effect if the leftmost digit is unchanged (e.g., $3.50 vs. $3.49 or $350 vs. $349).

Anchoring bias

People tend to rely primarily on the first piece of information they see when making any type of decision. This is known as the anchoring bias, and it significantly influences their perception of value and, thus, decision to purchase.

When a consumer sees something like $9.99, their brain automatically thinks “less than ten dollars,” which makes them more inclined to purchase the item.

You can use anchor pricing in combination with charm pricing to amplify the impact of a promotional offer. By showing the higher price first, then showing the discounted or “charm” price (such as $20 $9.97), you reinforce the idea that not only does the price have a good value (hence the ‘.97’), it used to be a lot pricier, meaning it’s a great deal now.

Scarcity effect

Another factor at play when using charm pricing is the scarcity effect. Human beings tend to place higher value on items that are scarce or limited in quantity.

By creating this sense of urgency through charm pricing, consumers may feel that they need to act quickly in order to take advantage of the perceived deal before it’s gone.

Social proofing

While charm pricing can help you emphasize a limited quantity or amount of time to purchase an item at that listed price, it can also create a sense of popularity and demand. As more and more people purchase the item at that price, it can create a snowball effect, making others feel like they need to jump on the bandwagon and not miss out.

Perception of quality

Of course, charm pricing communicates a certain level and type of product value. When you strategically use odd vs. even numbers and round numbers vs. decimals, you’re communicating to your target customer what type of product it is. If it’s aligned with their needs and purchasing power, this creates demand and drives sales.

Charm Pricing Examples

Now, let’s dive into a few different examples of charm pricing’s applications in real-world business scenarios:

Retail

Practically every retail company uses charm pricing to their advantage when developing their pricing model.

• Luxury brands like Gucci and Louis Vuitton set high prices without decimals (such as $850 and $10,000) to emphasize the high quality and exclusivity of their products.
• Cheaper clothing retailers like Forever 21 and H&M often use .99 pricing to appeal to budget-conscious customers.
• As part of their marketing strategy, stores running a sale change their prices from .99 to .97 or .95 in addition to a price reduction to communicate a better deal.

Food

Fast food restaurants and grocery store chains also use charm pricing tactics to influence consumer behavior.

Take the 99¢ store, a brand whose entire marketing and branding strategy is based around the charm pricing approach. While there are clearly items that cost more than 99 cents, the point is that, by ending every price number in .99, the brand communicates their low pricing and great value to customers.

Technology

In the tech industry, there are dozens of different ways to leverage the benefits of charm pricing.

• Enterprise software companies like Oracle sometimes end their prices in zeroes to emphasize their high value and advanced technology.
• B2C subscription-based companies like Spotify, Netflix, and Apple’s iCloud storage use charm pricing by offering deals such as “Three months for $0.99,” and they price their monthly plans at $9.99 (vs. a flat $10) to emphasize affordability.
• Smartphone, appliance, and electronics companies price their products ending in “99” (e.g., $999) to make the price seem lower, and use round-numbers for discounts (e.g., $500 off) to make the discounts seem higher.

Services

Depending on the type of service, charm pricing can be used in different ways.

• For professional services like lawyers, accountants, and consultants, using round numbers (e.g., $500 per hour) emphasizes their expertise.
• In the beauty and wellness industry, you’ll see prices that end in .99 or 99¢ (e.g., $49 for a massage) to communicate affordability.

There are also countless other industries and applications where charm pricing can be used here, from real estate to travel and beyond.

Info products

High-ticket info products and consulting packages are usually priced at round numbers like $5,000 to isolate rich clients who will perceive the product as high-quality. On the other hand, if you’re offering a low-priced info product like an e-book or a software download, you might price it at $27 to appeal to a wider pool of price-sensitive customers.

Pros and Cons of Charm Pricing

The main benefit to charm pricing is that it drives consumer decision-making. Buyers take less time to think about a price they already see as a good deal. This, in turn boosts sales — prices ending in 99 outperform rounded prices by ~24%.

They also align the value you’re trying to communicate with your customers’ values and interests. Whether you’re letting a budget-conscious customer know they’re getting a good deal or a wealthy client know they’re singing up for the best service, using the right pricing approach gives them a positive impression of your brand.

When they have a positive impression of your brand and products, they’re more likely to be happy with their purchase, less likely to feel buyer’s remorse, and will generally stay around for longer. So, customer satisfaction and retenion will increase.

All these things come together to create a competitive advantage for you. You’re able to sell more, attract a wider pool of customers and keep them around longer, all because you used charm pricing.

However, there are some cons you have to consider before implementing it:

• It’s difficult to apply consistently across different products.
• It only works in certain industries (know whether you need to make your product look affordable vs. expensive).
• Overusing charm pricing leads to customers feeling manipulated, which decreases their trust and loyalty.
• The slight reduction in price might affect profit margins, which you have to offset with increased volume.

How to Effectively Use Charm Pricing

To avoid the drawbacks we’ve mentioned above, you have to determine (a) whether your customers will respond well to such a pricing approach, and (b) how to make the most of it without overusing it.

Here are a few tips:

Test in small doses.

Instead of implementing charm pricing across your entire product line, start with a few products. And make sure you isolate that variable (don’t group it with other offers, like a volume discount) to ensure it’s the thing that’s actually affecting your sales.

Know your customers’ values and interests.

As we mentioned earlier, what works for one customer may not work for another. That’s why you can’t make pricing decisions of any kind without knowing what your customers value and respond well to.

Study their demographics, behavior, and preferences to determine how best to align charm prices with what customers are looking for (e.g., a high-end product or something they can easily afford).

Look at what competitors are doing.

Chances are, your competitors have already done the hard work for you (on a much larger sample size, might we add). This is particulaly the case in retail and DTC ecom — just look at what all the big players are doing (e.g., Walmart, Target, Amazon and the similar products they’re selling) to understand what works best in your industry and niche.

Don’t overdo it.

If your offers are too in-your-face, customers will pick up on it almost right away. And this could create negative associations with your brand and products. Try to use charm pricing in ways that are already familiar to your customers, and only use it when you really need to drive decision-making and sales.

Combine charm pricing with other strategies.

The best thing about this strategy is you can use it to reinforce other kinds of pricing offers. For example, you can combine it with price breaks or product bundling to make your products look more affordable without compromising on profit.You can also use multiple unit pricing offers like BOGO (buy-one-get-one) to make deals look even more appealing. Or, you could take a value-based approach, where you price the product based on your customers’ percieved value.

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