When the Price Is Right

Why it pays to employ "off dollar" pricing strategies

It's a commonly held belief that pricing an item at 99 centsas opposed to $1 is done for psychological rather than economicreasons. Consumer psychologists contend that there's more thana cent of difference between items priced at $4.99 and $5. In asimilar vein, economists argue that when the price of an item islowered even one cent, the potential to stimulate sales is oftenenough to recoup the loss on the lower price with highervolume.

Before the invention of the cash register, dishonest salesclerks could make a surprising amount of extra money each week bypocketing cash from sales rather than turning the cash over to theowner of the store. Here's how it worked: Let's say that asales clerk in the late 1800s helped a wealthy customer pick out anew hat at Marshall Field's in Chicago. The hat sold for awhopping $2 (a lot of money in those days). When the customerpurchased the hat, the sales clerk was responsible for handling thecash transaction.

With a sales price of $2, there was a good chance the customerwould simply hand over two $1 bills to the sales clerk and exit thestore. At this point, the clerk could easily pocket the money.However, when "off dollar" pricing strategies placed theproduct at $1.99, the clerk was forced to make change from the cashdrawer, thereby dramatically increasing the chance that transactionwould be accounted for. In those days, it was one more techniquemanagers could use to keep employees honest.

Excerpted from Ben Franklin's 12 Rules of Management

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