THE EFFECT OF ODD PRICING IN CHINA
Judith Holdershaw, Philip Gendall and Yanhua Gou
Massey University
Track: Marketing in International and Cross-Cultural Environments
Abstract
Odd pricing, the practice of using price endings just below even dollar figures, is common in
many Western countries. However, relatively little is known about the effect of odd price
endings in general, or odd pricing in particular, in non-Western countries such as China,
where the symbolic significance of certain numbers is strong.
This paper reports a study that examined the effect of odd pricing on demand in China. Three
products were examined at three different price levels (3 Yuan, 20 Yuan and 50 Yuan). Each
product was represented by three comparable brands and five prices (high and low anchor
prices, and three test prices: 00, 95 and 99 price endings). Choice models were used to
estimate demand curves for each product, and odd pricing effects were detected for five of the
six odd price endings tested.
Introduction
Odd pricing, also known as magic pricing, psychological pricing or rule-of-thumb pricing
(Boyd and Massy, 1972; Kreul, 1982; Lambert, 1975), refers to the practice of setting prices
just below even dollar figures, for example, $5.99 or $12.95. Odd pricing is widely used in
many Western countries, where studies reveal that the digits 9 and 5 are overrepresented as
the rightmost digit (Schindler and Kirby, 1997).
The rationale for odd pricing is the assumption that odd prices lead to greater than expected
demand (Coulter, 2001). That is, while economic theory predicts increased demand in
response to a lower price, prices set at odd values produce higher-than-expected demand at
the price level concerned. In other words, odd pricing is assumed to produce a “kink” in the
expected demand curve for the product concerned. The common explanation offered for this
inconsistency is that by setting a price at, say, $9.99 rather than $10.00, an illusion is created,
making the product seem much cheaper, and an enhanced buyer response is triggered (Boyd
and Massy, 1972; Schindler and Kibarian, 1996; Coulter, 2002). This underestimation effect
is thought to relate to the limited capacity of human memory (Brenner and Brenner, 1982).
They suggest that consumers process multi-digit numbers from left to right, and process only
the leftmost digits. For example, when a price is $299, the consumer will recall that the price
is $200, then maybe that it is $290, but rarely that it is exactly $299.
Some support exists for the odd pricing assumption with studies finding greater than expected
demand for 0.95 and 0.99 price endings. For example, a New Zealand study which estimated
demand curves for six products found that a “kink” in the traditional downward sloping
demand curve did occur at odd price points (Gendall, Holdershaw and Garland, 1997). In a
similar New Zealand study to estimate the effect of odd pricing, three brands in each of three
product categories were tested. The results of this study provided further empirical support
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for the assumption that odd pricing generates greater than expected demand, and for setting
retail prices with odd price endings (Gendall, Fox and Wilton, 1998).
Schindler and Kibarian (1996) also report the experimental testing of the sales effect of using
retail prices in a direct-mail catalogue of women’s clothing that end in the digits 99 rather
than 00 (e.g., $29.99 rather than $30.00). The use of 99 endings led to increased consumer
purchasing. Similarly, Stiving and Winer (1997) report greater than expected demand for 9
ending prices, based on analysis of scanner data for two products, tuna and yoghurt.
All of these reported studies have been conducted in Western countries; relatively little is
known about the incidence or effect of price endings in non-Western countries. However, a
recent observation of price endings collected for this study during May and June, 2002, found
an overrepresentation of the digits 9 and 5 in prices displayed in supermarket advertising
materials from Hualian Market in Beijing. The majority of 944 price endings observed were
“9” (34%) or “5” (20%). This indicates that odd pricing is being practised in China, and
supports an investigation into whether a similar odd pricing effect occurs in China as is
reported in Western countries.
With a population exceeding one billion, China is four times as populous as the United States,
and is the largest consumer market in the world (King, 1989). Thus, greater understanding of
the way in which Chinese consumers react to marketing stimuli is interesting in itself.
This paper presents the findings of a study designed to investigate one aspect of marketing in
China, namely, the effect in China of the common Western practice of odd pricing.
Methodology
The data for this study were obtained from face-to-face interviews with 300 respondents who
were mainly responsible for their household’s shopping. The respondents were randomly
selected by mall intercept in Shijiazhuang, Hebei, China during August 2002. The response
rate was 54%.
Three products were selected: detergent, a thermos bottle and peanut oil. The usual prices of
these products were at three different price levels: 3 Yuan, 20 Yuan and 50 Yuan. Three
comparable brands were selected for each product category, to help minimise the brand effect
on respondents’ purchase choice, and to maximise the price effect. For each brand, five price
points were used, including two anchor prices and three test prices. The anchor prices
portrayed the highest and lowest price points tested for each product category, which helped
derive demand curves for each product according to the economic law of demand. Three
“test” prices, 00, 95 and 99 were used to investigate the effect of price endings on demand.
For each product, choice sets were developed from different combinations of the three brands
and five price points (see Table 1).
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Table1. Brands and prices for detergent, thermos bottle and peanut oil
Brand and price combinations
Detergent
Brands
Prices (Yuan)
Thermos Bottle
Brands
Prices (Yuan)
Peanut Oil
Brands
Prices (Yuan)
3.10
Baimao
3.00
Libai
2.99
Diaopai
2.95
2.90
22
Lupai
20
Jindadi
19.9
Beijia
19.5
52
Hujihua
50
Fulinmen
Luhua
49.9
49.5
48
18
A fractional factorial design was used to produce 18 choice set combinations of brands and
prices for each product tested. Each choice set, represented by three alternative brands at
selected prices, was displayed on a showcard. The showcard pages were A4 in size, and
presented to respondents in a flip-chart format.
To help reduce respondent fatigue, three versions of the showcards were designed. The 300
respondents were randomly divided into three groups of 100. Each group viewed one version
of the showcards. Thus, each respondent viewed only six of the eighteen choice sets
produced for each of the three products; a total of 18 showcards.
Respondents were asked to assume that they had entered a store to buy detergent, a thermos
bottle and peanut oil, and the only options available were the three brands displayed on the
showcards, at the prices offered. After viewing each showcard, respondents were asked to
select one item from the three alternative brands and prices displayed.
Results and discussion
The multinomial logit model was used to derive demand curves for the three products tested.
As the probability of purchase is directly related to utility, thus utility was used to represent
demand for each alternative at each price point.
Figure 1 presents the estimated demand curve for detergent. There was no conclusive odd
pricing effect for this product. The 99-ending point lies marginally to the right of the curve
indicating greater than expected demand, however, the result is not statistically significant.
Conversely, the 95-ending point, lies to the left of the demand curve, indicating less than
expected demand at this price point.
Figure 1: Estimated demand curve for detergent
1.2
1.0
2.90
0.8
0.6
Utility
0.4
0.2
2.95
0.0
2.99
3.00
-0.2
-0.4
-0.6
-0.8
-1.0
2.85
3.10
2.90
2.95
3.00
3.05
3.10
3.15
Price
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More conclusive results were found for the second product, a thermos bottle. Demand for the
thermos bottle is clearly greater than expected for both the 19.5 Yuan and 19.9 Yuan price
endings (see figure 2). This effect was statistically significant for the 95 cent test price but not
for the 99 cent test price.
Figure 2: Estimated demand curve for thermos bottle
1.5
18.0
1.0
19.5
Utility
0.5
19.9
20.0
0.0
-0.5
-1.0
22.0
-1.5
17
18
19
20
21
22
23
Price
The result for the third product, peanut oil, presents statistically significant odd price effects
for both the 95 and the 99 price endings (see Figure 3).
Figure 3: Estimated demand curve for peanut oil
1.5
48.0
1.0
Utlity
0.5
49.5
49.9
0.0
50.0
-0.5
52.0
-1.0
-1.5
47
48
49
50
51
52
53
Price
Within the price range tested (under 50 Yuan), the 99 price-endings generated greater than
expected demand for all three products tested, and the 95 price ending generated greater than
expected demand for two of the three products tested. In other words, the results of this study
support previous findings for odd price studies conducted in Western countries where a
“kink” in the traditional demand curve occurred at odd price points. Overall, the effect was
more noticeable for 99 price endings indicating that retailers should use the higher price to
benefit from the extra revenue generated.
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The higher the price level of the product, the greater the odd pricing effect observed. This
finding is consistent with the notion that consumers could be expected to pay more attention
to higher prices than lower prices, however, it differs from those of two previous New
Zealand studies in which greater odd pricing effects occurred for lower priced items (Gendall
et al, 1997; Gendall et al, 1998). A possible explanation for this difference is that different
product categories and brands were tested in the three studies, so the observed pattern could
be related to product category rather than price level.
The fact only three product categories and three price levels were tested for an odd price
effect is one limitation of the study. Therefore the findings may not be generalisable to other
product categories or other price levels. A second limitation is that the results are based on
choice behaviour in an experimental setting rather than actual purchase behaviour.
Furthermore, the sample was small, involving only 300 household shoppers in Shijiazhuang,
and their choices may not represent those of the whole population of China.
Conclusions
The purpose of this study was to investigate what, if any, odd pricing effect could be detected
in China, testing the price ending digits, “9” and “5”, common in Western countries. The
results suggest that odd pricing in China leads to greater than expected demand for odd priced
goods, a finding consistent with odd pricing effects detected in studies undertaken in New
Zealand and other Western countries. Therefore, this study provides tentative support for the
use of an odd pricing strategy by retailers in China.
As this study only tested the price ending digits, “9” and “5”, future research could address
the question of whether demand would be even greater in China for prices ending in the digit
“8”. In China, the number 8 is regarded as “lucky”, and the numbers “9” and “5” have no
particular cultural significance, yet odd pricing appears to “work”. This supports the existing
assumption that odd pricing occurs due to an underestimation effect rather than due to cultural
effects or consumers’ expectations. However, further research in China designed to compare
the price ending effects of various digits, including 8, may potentially challenge the existing
odd pricing assumption.
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