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The Lemonade Experiment

May 28, 2009
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I want you to answer the following question with your gut response.

You’re walking through your neighborhood on a hot, sunny day when you come across a kid with two pitchers of lemonade sitting on crates on the sidewalk. There’s a little sign between the crates that says, “Lemonade, $0.99 and $1.00.” If you have a only a dollar bill in your pocket, and you don’t know if the kid will give you change, which lemonade do you buy?

I ask this because I’m fascinated by our $0.99 culture. Why is it that we are more inclined to purchase something at that price than $1.00? They’re virtually the same price. And $0.99 simply looks bigger. You’ve got the number 99 in there! That’s huge! That’s much bigger than 1!

Is it simply because we’ve come to accept $0.99 as the standard for things–particularly digital things–like iTunes songs? Or is it something built into our brains, some residual DNA left over from the days of cavemen when you’d much rather encounter .99 sabertooth tigers than 1?

With all due respect to $0.99, I’d like to think that some people would consider the extra cent required to get to $1.00 an increase in value. Why pay $0.99 for a new shoelace when you could pay $1.00 and get one that’s going to last 1% longer?

Let me know what you think about this. I’m working on pricing for the startup, and I’m trying to figure out if I should price things at the slightly unweildy, uneven $0.99 level or the clean, simple, but pschologically daunting $1.00 level.

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19 Comments leave one →
  1. John Aughey permalink
    May 29, 2009 8:45 am

    I was watching the neighborhood kid sell lemonade on the sidewalk. After a while he got up, ran behind a tree, peed, then went back to his stand. There wasn’t an option for this on your survey, but I would likely decline to buy.

  2. Neeraja permalink
    May 29, 2009 9:13 am

    They (the ubiquitous they) have done consumer behavior studies and show that when companies price things at $X.99, a customer actually mentally rounds down instead of up. Thus, if a product is $8.99, the customer’s initial sizing is that the product is $8, not $9.

    That rounding down, over the course of aisles of a store, adds up to more purchases than if you use a round number.

  3. Beas permalink
    May 29, 2009 11:24 am

    You should charge the extra fraction of a penny like gasoline. We’re talking fractions of a penny here that over time will add up to a nice sum of money.

  4. Red permalink
    May 29, 2009 1:42 pm

    At the moment, your results are 12 voters for $1.00, and 0 votes for $0.99. But according to the schollarly materials linked from Wikipedia and the post-gazette, this survey does not seem to agree with the data collected in other studies. I believe that the scenario designed will not produce the answers you seek, but rather support the position you hold… grasshopper.

    1) You are thinking about it. I believe that the research shows this association as a basic reflex. You register the dollars, and assign it to a certain range, which determines whether you will make the purchase. Reflex rather than logic rules this transaction.

    2) The kid is actually going to give me a penny back if I buy the $0.99 lemonade, which is really more trouble than it’s worth. I have no need for his pity penny, and for him it may be the difference between a Choco-Taco and a Bomb Pop.

    I can’t currently think of a good scenario to test what you want to know, but it can be done.

    • John Aughey permalink
      May 29, 2009 1:51 pm

      The scenario is tainted. If the seller was McDonald’s or Walmart, the emotional factor of taking a penny away from a kid is gone. In this case if the lemonade was 75 cents and I had a dollar, I might just give the kid the dollar because I’m a nice guy. But Walmart, give me my frickin’ 25 cents in change!

      • May 29, 2009 1:57 pm

        You have to admit it’s interesting that $1.00 has 100% of the votes, though. Why is that? A perceived jump in quality?

    • May 29, 2009 1:52 pm

      These are fair points. However, all the studies I read before writing this were comparing $0.99 to non-$1 amounts. For example, one study had a store price items at 71 cents and 86 cents and 99 cents and $1.29, and the 99 cent item sold out. But they didn’t compare it to $1. Hence this study. Maybe this poll does involve logic, but I would think some reflex would be involved–it comes down to a quick click of the mouse.

      And it’s key that you don’t know if you’re going to get change–maybe you will, and you save a penny (but inconvenience your pocket), or maybe you won’t, and the price ends up being the same as $1.

  5. May 29, 2009 1:55 pm

    If someone can figure out a better way to figure out if someone would be more inclined to pay $0.99 than $1.00, let me know. The trick is that even though it’s only a penny, $0.99 is technically cheaper than a dollar. So given the two choices, especially if you’re charging it to your credit card and don’t care about change, you’d take the cheaper option.

    But if iTunes suddenly changed all of its $0.99 songs to $1.00, would you be less inclined to buy them? Perhaps that’s the question I should be asking. I just don’t know how someone could possibly answer that honestly without actually experiencing it.

  6. Nancy permalink
    May 30, 2009 5:16 pm

    I think part of this phenomenon has to do with units. Cents are smaller than dollars. So even though 99 is larger than 1, cents is smaller, and I’d rather spend cents than dollars. I dont think this is only the case for money. For instance, Jamey, you really like that the show Fringe tells you that the show will return in 60 seconds. How would you feel if they said 1 minute? 60 seconds just sounds so much shorter than 1 minute and I think the viewer is less likely to change the channel with only 60 seconds of commercials. Again, seconds are a smaller unit. Just my thought behind it. But what do I know. I’m foreign.

    • May 30, 2009 5:18 pm

      This is a great point. And it looks like we’ve garnered our first vote for 99 cents. Perhaps I should have stated it like that in the poll: 99 cents or 1 dollar

      • Nancy permalink
        May 30, 2009 9:22 pm

        I think you’d get the same results for this poll even if you rephrased it b/c it’s little kids selling lemonade. However, in large retail stores where we don’t feel so generous to help Walmart take over the world, I think you’d get the complete opposite result. I think we really start thinking cents vs. dollars in that type of setting.

  7. Neeraja permalink
    June 1, 2009 10:18 am

    iTunes is going to change their prices from $0.99 to $1.29. It’ll be interesting to note the drop off in sales.

    • Red permalink
      June 1, 2009 11:12 am

      If I used to buy 100 songs @ $0.99/song, Apple gets $99.00. Now, if I bought 100 songs @ $1.29, Apple gets $129.00. I would have to REDUCE the number of songs I bought by 23 songs (77 units x $1.29 = $99.33 ~ $99.00) to see an impact in SALES, and that’s assuming that there is no cost SAVED by Apple by the fact that they only sold 77 songs rather than 100.

      I do not see this price incrase dropping Apple’s units sold by ~25% for more than one fiscal quarter. People still will want music, and if they are on ITunes, they are willing to pay for it rather than steal/download for free. No one on ITunes thinks that a $0.99 song is free.

  8. Susie permalink
    June 1, 2009 3:22 pm

    i think the reason many places use $x.99 is that they can then advertise selling something for under x+1 dollars ($4.99 means they can say it’s under 5 bucks). i also think you make the assumption in your post that the extra cent actually translates into better quality. There’s no proof or reason to believe that a $1 shoelace is actually any better than a 99 cent one, and I don’t think most consumers believe that one cent more implies a higher quality product.

    • June 1, 2009 3:37 pm

      That’s a fair point. “Under a dollar” is a powerful marketing phrase. I think that goes hand in hand with Nancy’s comment about thinking of things as “cents” vs. “dollars”…even though you’re talking about a large number of cents, they still seem to add up to much less than a dollar.

      Nonetheless, the poll seems to indicate otherwise… 🙂

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