We all know the trick: a manufacturer wants $10 for its product, but charges $9.99 instead. We register the cost as $9 instead of $10, even though logically we recognize this is a gimmick.
Can a penny really make such a difference?
Indeed, studies show that it can…even with Denver real estate. And homebuyers are equally susceptible to this psychological tack.
The Washington Post recently reported on a study published in the Journal of Real Estate Finance and Economics that found that home sellers who employ this trick make more money than those who don’t—an increase, on average, of 2%. While 2% may seem like a small difference, that equates to as much as $4,000 on a $200,000 home.
“People have these psychological barriers. They’re artificial, and they’re a bit arbitrary. But they do matter,” said Michael Seiler, co-author of the study and a real estate professor at the College of William & Mary. Seiler was quoted in the Post article.
The tack of lowering a round number slightly to make the price seem more appealing – for example, changing $200,000 to $199,900 — is known as “charm pricing” or the “just below” strategy.
The study looked at 372,074 home sales in Virginia. Those using the “charm pricing” method tended to set higher prices than others. Nonetheless, “the just-below sellers still attracted plenty of buyers,” writes the Post. “It seems that just-below pricing on products big and small signals a bargain in our minds, especially if the price ends with the digit 9. It’s as if consumers perceive they’re getting something back from the higher round number.”
The brain, according to the article, “starts to record numbers even before the entire price is read.” Thus, with six-figure home prices, buyers look mostly at the first three digits. Coincidentally, this is the part of the brain that also generates feelings and emotions – creating a doubly powerful effect by changing the price from $200,000 to $199,900.
Want to find out more about how your broker would price your home to get the best offer? Contact our office to speak with an agent.