Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or $2.98. The theory is this drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.
The Story of the Dollars 99 Cents Price
The most elaborate explanation comes from Scot Morris's Book of Strange Facts & Useless Information (1979):
"In 1876, Melville E. Stone decided that what Chicago needed was a penny newspaper to compete with the nickel papers then on the stands. However, there was a problem: with no sales tax, and with most goods priced for convenience at even-dollar figures, there were not many pennies in general circulation. Stone understood the consumer mind, however, and convinced several Chicago merchants to drop their prices--slightly. Impulse buyers, he explained, would more readily purchase a $3.00 item if it cost "only" $2.99. Shopkeepers who tried the plan found that it worked, but soon they faced their own penny shortage. Undaunted, Stone journeyed to Philadelphia, bought several barrels of pennies from the mint, and brought them back to the Windy City. Soon Chicagoans had pennies to spare and exchanged them for Stone's new paper." Very interesting, maybe even true (up to a point), but probably not the reason prices end in .99 today. The problem: Melville Stone ran the Daily News for only a few months before selling out in 1876. Judging from Daily News advertisements, prices ending in 9 (39 cents, 69 cents, etc.) were rare until well into the 1880s and were not all that common then. The practice did not really become widespread until the 1920s, and even then, prices as often as not ended in 0.95, not 0.99. So, what is the real explanation? It was retail price competition in the 1880s. Advertising prices in the newspapers was rare before 1880 but common after 1890. At first prices were usually rounded off to the nickel, dime, or dollar, but it wasn't long before a few smaller operators looking for an edge began using what might be called "just under" pricing (49 cents, $1.95, and so on), no doubt in an effort to convince the gullible they were getting a bargain. The idea caught on surprisingly slowly. Even in the 1920s, some large merchants still rounded prices off to the nearest dollar or on larger items to the nearest $5 or sawbuck. Today's custom of having nearly every price end in 99, 95, or 49 cents or dollars (or just a 9 for items under $5) is of fairly recent vintage. The practice bespeaks a certain low cunning, but it is also pretty obvious and trying to find out who invented it is like trying to find out who invented the hat.
Control Employee Theft?
Google Answers suggests that there was another reason. Intentionally awkward pricing was adopted primarily to control employee theft, before the turn of the 20th century when stores expanded beyond owner-operators and used cash registers. For cash transactions with an odd price, most customers must be given change. Creating change requires the employee to open the cash register, recording the sale. This reduces the risk of the cashier stealing from the store owner?