In a traditional cash transaction, fractional pricing imposes intangible costs on the vendor (printing fractional prices), the cashier (producing awkward change) and the customer (stowing the change). These factors have become less relevant with the increased use of checks, credit and debit cards and other forms of currency-free exchange.
The psychological pricing theory is based on one or more of the following hypotheses:
The theory of psychological pricing is controversial. Some studies show that buyers, even young children, have a very sophisticated understanding of true cost and relative value and that, to the limits of the accuracy of the test, they behave rationally. Other researchers claim that this ignores the non-rational nature of the phenomenon and that acceptance of the theory requires belief in a subconscious level of thought processes, a belief that economic models tend to deny or ignore. Research using results from modern scanner data is mixed.
Now that many customers are used to odd pricing, high-end retailers such as Nordstrom psychologically-price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Kenneth Wisniewski and Robert Blattberg at the University of Chicago's Center for Research in Marketing showed that when the price of margarine was lowered from 89 cents to 71 cents, sales volume increased a mere 65%, but when it was lowered from 89 to 69 cents, sales volume increased by 222%.
In another study, the perceived value of all the numbers between 1 and 100 were studied, and 77 was shown to have the lowest perceived value relative to its actual value.
Schindler & Kibarian (1996) tested odd pricing using three versions of a direct mail catalog for women's clothing. The catalogs were identical except for the prices, which ended with 00, 99, or 88. The version with prices ending in 99 generated 8% more sales volume and had more purchasers than the 00-ending version. The 88-ending catalog produced a similar sales volume and number of purchasers to the 00-ending version.
Others have suggested that fractional pricing was first adopted as a control on employee theft. For cash transactions with a round price, there is a chance that a dishonest cashier will pocket the bill rather than record the sale. For cash transactions with an odd price, the cashier must make change for the customer. This generally means opening the cash register which creates a record of the sale in the register and reduces the risk of the cashier stealing from the store owner.
A third theory is that the practice arose during that period as an attempt by merchants to appear to be significantly underselling the competition while in fact lowering prices by only a small margin.
In former Czechoslovakia, people are used to call this pricing "baťovská cena" -- "Baťa's price", referring to Tomáš Baťa, Czech manufacturer of footwear. He began to widely use this practice in 1920 .
A recent trend in some monetary systems is to eliminate the smallest denomination coin (typically 1/100 of the local currency). The total cost of purchased items is then rounded up/down to the nearest 5/100's of the local currency. This may have an effect on future "odd-number" pricing to maximize the rounding advantage for vendors by favoring 98 and 99 endings (rounded up) over 95 and 97 ending (rounded down) especially at small retail outlets where single item purchases are more common.