Research Digest Odd prices are relevant in the luxury sector too
In The not-so-odd couple: Odd pricing in a luxury context, published in the Journal of Business Research, ESCP Business School Professor Sandrine Macé, former student Annalisa Fraccaro (Toulouse Business School) and Béatrice Parguel (Université Paris Dauphine) show that the practice of odd pricing (setting a price just below a round number), although unexpected in the luxury market, exists and is relevant.
Why study this
Sandrine Macé had previously shown that odd prices convey favourable perceptions of value and result in increased demand and sales for consumer-packaged goods. So far, the practice had not been studied in the luxury market, as its consumers are supposedly not price averse. The research focused on luxury handbags, which represent some $51 billion in global annual sales and form the largest accessory segment in the market for personal luxury goods. Odd pricing could boost sales in this segment that experts consider to be the engine driving luxury brands today.
Odd pricing (choosing a price's ending so that the price falls below a round number, for example €2490 instead of €2500) appears to be a dominant management logic in the luxury handbags market.
When setting odd prices, luxury managers tend to act on beliefs about the price endings. They rely on the “meaning” mechanism, where odd prices signal relatively good deals for more accessible or conspicuous products.
Compared to the fast-moving consumer goods sector, luxury managers act less on the belief about the “drop-off” mechanism, whereby consumers tend to ignore a price's rightmost digits and underestimate the price.
Luxury managers are more likely to set odd prices when the digit in the hundreds signals a moderate rather than overly obvious price underestimation, which may give the impression that the brand is not being fully honest or straightforward (e.g. favouring an odd price of €1950 over €1990 for a €2000 item).
A large proportion of luxury consumers, especially the medium luxury consumers, prefer odd prices.
Odd prices ending in “90” or “95” play a relevant role in a luxury context, as they can increase the likelihood of a luxury purchase.
Although odd prices are supposed to convey a low-price image at odds with the values associated with luxury consumption, well-established luxury brands benefit from strong, favourable associations that insulate them from such negative connotations. Instead, odd prices encourage self-indulgence by alleviating the guilt associated with luxury purchases.
“In terms of product portfolio, luxury managers should opt for odd pricing for conspicuous products. Being motivated by the desire to signal wealth, status and social power, conspicuous consumption triggers guilt and, therefore, calls for a guilt-reduction mechanism. Odd pricing could thus be particularly relevant when consumption is driven by status display (...) such as when they display prominent logos or designs and are highly identifiable by others (e.g., monogrammed handbags). However, pricing managers should avoid odd pricing for more classic, iconic products, whose timelessness means they are also perceived as an investment.” Therefore, the authors recommend “applying fewer odd prices for formal, businesslike handbags and apparel, and more odd prices for handbags and apparel that are purchased for evening events or casual occasions."