Charge $297 per hour and not $300.

Here's a fascinating article in Scientific American titled Why Things Cost $19.95 that discusses the psychological impact certain prices have over others. If you've always wondered why we see odd prices so often ($19.95 vs. $20.00), the article gives the answer. Two University of Florida marketing professors studied how consumers relate a ticketed price to the perceived wholesale "cost" of a good or service:

There were three scenarios involving different retail prices: one group of buyers was given a price of $5,000, another was given a price of $4,988, and the third was told $5,012. When all the buyers were asked to estimate the wholesale price, those with the $5,000 price tag in their head guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor. What is more, those who started with the round number as their mental anchor were much more likely to guess a wholesale price that was also in round numbers. The scientists ran this experiment again and again with different scenarios and always got the same result.

Why would this happen? As Janiszewski and Uy explain in the February issue of Psychological Science, people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.

I'd really recommend you read the entire article, but the initial takeaway for me is this: If you want clients to believe your rate (or set price for a given service) is close to your actual cost, price in odd numbers.

Comments

[Ron Baker]

Matt,

I'm surprised you'd advise to still have an hourly rate?

In any event, this study is specious. Odd-numbered pricing was not originally designed because people think $19.99 is cheaper than $20.

It was put in place when cash registers were installed, so employees would have to open the drawer to make change, usually with a loud bell attached so the owner could mentally count how many times sales were rung up.

Odd-number pricing was designed to prevent employee theft. This happened around the 1880s. There is little economic evidence odd-numbered pricing influences people's buying decisions.

Why odd-numbered pricing still exists is a more complex question, given our technology advances (and sales tax). Inertia? People think other people think it's cheaper, etc.

Disney stopped odd-number pricing in its retail stores in the theme parks after their pricer heard me explain the origins at a pricing conference. Even numbered pricing (including $4.50, etc.) actually sends a quality signal to the customer.

But the most important question: Why would you want customers to think your price is close to your cost? You should be nudging them to think of your price compared to value, which has nothing to do with your costs.

Hope all is well!

Regards,
Ron Baker, Founder
VeraSage Institute
www.verasage.com

[Bob Kraft]

Matt, this is a great post. We all know that products are priced at $19.95 because that sounds cheaper than $20. But the revelation that people questioning the retail price use a narrower range is fascinating.

I'm going to consider changing some of our flat-rate fees from, say $2000, to $1990 or maybe $2020.

Bob Kraft