The definitions below team up with the definition of psychological pricing made in the previous page:
Significant figures: all non-zero digits of a number or price, and also zeros that are surrounded by non-zero digits. For instance, the digits ‘3’ and ‘5’ in $35 are both significant figures. The digit ‘2’ in $2,000 is also a significant figure. However, the three digits ‘0’ in $2,000 are not significant figures. They are at right, but not in the middle of the price. If the price were $2,001, instead of $2,000, then the zeros between ‘2’ and ‘1’ would be considered a significant figures.
Round price: a price with no more than three significant figures, and usually only one or two. $2,000 is a round price, because it has only one significant figure. $35 is also a round price, because it has only two significant figures. Trailing zeros, like the ‘.00’ in $35.00, does not affect the counting of significant figures. $35.00 still has only two of them and, therefore, continues to be a round price. But $12.34 is not a round number, since it has four significant figures. That is also the case of $2001. It also has four of them, as zeros in the middle of a price are significant figures. It is open question whether a 3-significant-figure price is round or not.
Just-below price, also known as odd price and as charm price: a price just below a round one. Examples: $198 and $199.99 (in relation to $200), $37.90 and $37.99 (in relation to $38).
“Discount”: neologism to designate the distance from a just-below price to its related round price. It can be simply calculated by subtracting the round price by the just-below one. Example: $2 is the “discount” of $198 in relation to $200. $0.01 is the “discount” of $199.99, and also of $37.99.
The definitions above are essential for understanding not only the psychological pricing but also the solution we propose. There are some extra considerations about them. Reading them now is optional. What are very important at this moment are two other definitions that enables us realize how psychological pricing works from the point of view of the seller.
Product profit per unit: The difference between the price of a product and its cost per unit. PS: We will not get into detail of how to calculate cost per unit, but it you need or want more information, it is to find in Internet. Here is one example.
Product profit: Product profit per unit times the quantity of units sold.
And psychological pricing (or PP) really works, as we see next: