You are ready to list your Moon Valley home in the Phoenix MLS. Your real estate agent has performed a comparative market analysis and recommends listing for either $299,900 or $300,000. But does it really matter which asking price is selected?
As consumers, we are bombarded with pricing in 9s inside a retail setting. Vendors use these price techniques to induce us to buy inexpensive goods. It’s called “charm pricing.” The practice incorporates numbers that end in 9, 95, or 99.
We read from left to right. Our brains process the number on the price tag to the left of the decimal first, utilizing the “left-digit effect.” Take for example a shirt priced at “$7.99.” In a microsecond, we have encoded the “7” first before we process the “.99” on the right.
It’s not perceived as eight dollars. In the absence of focused financial analysis, we mentally file it away as a seven dollar purchase.
Charm pricing works best for small purchases, not big ticket items
Charm pricing is very effective in a discount setting like the grocery, department store or a fast food restaurant. But these are small, frequent purchases and there is very little emotion involved. Low dollar purchase decisions are made in only a matter of minutes, if not seconds. Grab the back of chips and a soda and you are out the door.
Too often, Realtors and homeowners use the same pricing technique to market real estate. In my opinion, it’s a mistake and another method is more sensible.
A rounded price with zeroes transmits a quality to a buyer while the use of 9s telegraphs a discount proposition.
A quick shopping trip to the mall or supermarket reveals .99 pricing for consumer staples and discount items everywhere. It seems though as if consumers prefer round prices for luxury goods. Charm pricing is most effective on consumer staples. For example, doesn’t a gallon of milk at Fry’s Supermarket make more sense at $2.99 than $3.00?
In a 2001 doctoral analysis of restaurant prices, Sandra Naipaul and H.G. Parsa collected menu data from 231 restaurants and 3,290 menu items. Of the 62 fine dining establishments analyzed, only 13% of the prices incorporated charm pricing with 9s. Overwhelmingly, rounded prices had been chosen for maximizing sales in this upscale environment. Meanwhile, charm pricing was used 63% of the time in the menus of the lower-tier restaurants and chains.
To an extent, the seller controls the buyer’s perception of the home simply with his price.
Look closely at the menu of an upscale restaurant like Steak 44 in Arcadia. Consider both of the following possible prices for their sizzling bone-in filet mignon entrée:
$47.95 or $48-?
Which price tastes like higher quality? Steak 44 prices it at $48-. The difference is higher by a nickel and fine dining establishments like this will sell more of the $48 steaks. Patrons will then wash the marinated filet down with a $12 glass of merlot. An identical $11.97 merlot just doesn’t have the same bouquet when presented on a wine list.
According to a 2014 academic study by Wadhwa and Zhang, This Number Just Feels Right: The Impact of Roundness of Price Numbers on Product Evaluations, the authors contend that round prices (e.g. $300,000) are more effective in emotional purchases while nonrounded prices (e.g. $53.76) are most effective in a cognitive setting. An example of a cognitive setting would be a supermaket soup aisle.
My experience pricing and listing homes indicate that pricing homes with even numbers is more effective, but it is also about practicality just as much as it is about psychology.
The practical side
If you regard yourself and most sellers as individuals who can transact real estate without emotion, consider then the practical rationale that involves simply getting found online as a seller.
It is much more effective to price your home on round numbers, like $300,000 rather than $299,990.
According to the National Association of Realtors® 2015 Profile of Home Buyers and Sellers, over 89% of homebuyers used the internet to search for homes last year. Browsing real estate in print yielded long ago to the speed of instant online search. With the recent emergence of home search apps on smartphones, this number will only increase.
Regardless of the chosen search portal, when buyers scour the greater Phoenix MLS online, they are usually presented with predetermined sequential prices in a pull-down menu. Prices graduate in round figures… 300K, 350K, 400K, etc.
Even if she manually enters her price parameters, the buyer types in her lower range as round numbers. $300,000+ instead of typing “$299,900 and above.”
When sellers price their home at $299,900 with “charm pricing,” they attempt to attract with the discounted price of a consumer staple. However, their buyer is only searching online from $300K to $400K. The sellers miss their buyer by $100 and may never know that a potential sale slipped away.
When the seller prices at $300,000 in round numbers, she gets exposure to both buyers searching from $200,000 to $300,000 and $300,000 to $400,000. She has effectively doubled her exposure to the market using this method.
Another reason is that pricing with zeroes is easy for the brain to process in an emotional purchase.
Listen to the market
Don’t “set-it-and-forget-it.” The asking price, that is. Be attuned to how many showing requests that you are receiving per week. A good rule of thumb is that if you are price competitively with a good location and polished condition, you should receive an offer within your first 10-12 showings.
Consider a price drop if you do not have an offer by the third week. Don’t wait several months to drop your price. At that point, your home will no longer be the “Belle of the Ball.” You will be chasing the market down at that point.
Two notes on price reductions
Pricing close to the market value on your MLS launch day is essential, but sometimes list price reductions weeks later are unavoidable. A loud “Price Reduced!” message sends a desperate signal. It essentially broadcasts, “We miscalculated our price and were asking more than the market would bear.”
Simply reduce the price without fanfare. No explanation needed in the MLS notes nor yard sign banner in the front yard to announce the price drop. Buyers will respond when your price is within striking distance of the value proposition.
How much should you reduce the price of your home if it hasn’t sold in a few weeks? In my experience, your price reductions must offer at least a 3% discount to move the needle with homebuyers who would otherwise rule it out. A price reduction from $290,000 to $288,000 just won’t entice buyers to take a second look. The next lowest actionable round price threshold here is $280,000.
Too many rapid-fire price reductions resemble the ubiquitous “sale” sign in the window of a mattress store. They lose their effect, so use them sparingly, make them count and price your home competitively right out of the gate.
Charm pricing with 9s, 95s or 99s can be effective when you are hosting a neighborhood garage sale or advertising the used family car on Craigslist. However, buyers do not perceive most real estate as a discount item and it should be priced with round numbers. If nothing else, round number pricing increases visibility online in the MLS.
Bring out the zeroes.
Wine pricing is an art – like painting. – Joe Bastianich, an American restaurateur, winemaker, and TV personality in MasterChef and Gordon Ramsay’s Hell’s Kitchen on the Fox network