How we change what others think, feel, believe and do
The 99 Effect
When a product is priced at $4.99, it is perceived as being significantly cheaper than $5.00. The same effect happens with $499, $9999, etc.
The effect can also be seen with just a 9 ending, for example when pricing items at $29, etc.
A fast-food retailer sells lots of small, cheap burgers at $0.99.
A white goods retailer prices items at $299, $499, etc.
This is an example of the boundary effect, where pricing below a perceived boundary is perceived as much lower than at or above the boundary.
$4.99 is the best price for the seller, as $4.98 would probably sell the same amount but at lower profit. Having said this, when customers become too accustomed to the 99 effect and mentally round up, a different number (eg. 95) can break this thinking and return the perception to being of better value.
An additional effect of 99 pricing is that if the customer pays in cash, they get change. Even if this is a small amount, it still gives them a sense of giving and receiving, and hence they may feel at some level that the deal is more equitable.
Curiously, people can become so used to the '99' ending as symbolizing 'cheaper', they can learn to look for it and be suspicious of prices without this. You can hence add it to a higher price to make it seem cheaper.
Adding .99 to a large number, such as '$1450.99' can, due to the sound duration effect, make the price seem higher, which suggests that low value 99 additions may best be not used in such cases.
Anderson and Simester (2003) found that a 9 ending was less effective when items were offered in a 'Sale'. This is perhaps because the 'Sale' cue led customers to pay more attention to the price and look for a significant reduction.
Using nines like this is also called 'Charm Pricing'.
Anderson, E.T. and Simester, D.I. (2003). Effects of $9 Price Endings on Retail Sales: Evidence from Field Experiments, Quantitative Marketing and Economics, 1, 1, 93-110