Costco is known for its low prices on bulk items. But shoppers may notice that most prices at Costco end in 7 cents. This pricing strategy is intentional and has a specific meaning behind those odd endings.
The Psychology Behind Prices Ending in 7
Prices ending in 7 cents (or 97 cents) are common in retail stores because of psychological pricing strategies. The theory is that prices ending in 7 feel “discounted” to consumers compared to round numbers. The slightly odd price makes shoppers stop and think about the deal they are getting.
For example, seeing a price of $9.97 tricks the consumer’s brain into thinking the price is closer to $9 than $10. Even though the actual difference is negligible, it creates the perception of a bargain or discount.
This pricing tactic works because of the way our brains process numbers and prices. We tend to focus on the first number we see rather than the whole. Seeing the 9 in $9.97 makes our brain automatically round the price down to $9 in our perception.
Retailers know this psychological quirk well and use it to make prices seem lower. The effect is enhanced when stores display the 7 cent price in large numbers and the 99 cents in smaller numbers.
Costco’s 7 Cent Pricing Strategy
While not all Costco prices end in 7 cents, the majority do. This pricing strategy is used to reinforce Costco’s brand image of providing discounts and good deals.
Some examples of Costco prices ending in 7 cents:
- Kirkland Signature Organic Milk, $7.97 per gallon
- Rotisserie Chicken, $4.97 each
- Costco Cashews, $17.97 per 3 lb bag
You’ll be hard pressed to find many round number prices at Costco. The 7 cent endings reinforce the warehouse clubs’ low price and bulk value messaging across the entire shopping experience.
Costco’s Pricing Psychology
Costco employs several psychological pricing tactics to make its prices seem lower:
- Odd 7 cent endings – As discussed above, the 7 cent endings give an illusion of deep discounts.
- Low initial digits – Most prices start with low numbers like 3, 4, 5 rather than 8, 9, 10. This makes items feel like a steal.
- Stripped down display – Costco stores have concrete floors and minimal decor. This warehouse aesthetic enhances the perception of low prices.
- Bulk quantities – Buying large, bulk units at Costco increases the perception of value.
- Required membership – Costco customers have paid to shop there and feel the need to take advantage of prices.
These tactics work together to make customers feel like they are getting an amazing deal on every Costco purchase. In reality, Costco’s prices are competitive but not significantly lower than other major retailers. The pricing psychology helps Costco stand out.
When Does Costco Use Round Number Pricing?
While 7 cent pricing dominates at Costco, there are certain situations where regular round number pricing makes an appearance:
- When selling very expensive high-ticket items like jewelry, electronics, and furniture.
- In the Costco food court, since eating out carries different expectations.
- For limited-time sales prices that highlight special markdowns.
- When selling in convenience store gas stations, since fuel pricing conventions differ.
- On price labels for generic clearance items or special buys.
The 7 cent pricing strategy is most effective for Costco’s regular bulk offerings. Round numbers are occasionally used for special situations when different pricing psychology is needed.
Does 7 Cent Pricing Actually Work?
Numerous studies have looked at the efficacy of 7 cent pricing. The results show it does work at influencing consumer perceptions:
- A study published in the journal Quantitative Marketing and Economics found that prices ending in 9 were 24% more effective at increasing sales than rounded prices.
- Another study found that prices ending in 9 increased revenues by an average of 3% compared to 0 endings.
- Researchers at the University of Maryland and University of Chicago found that prices ending in 9 helped goods sell faster than exact dollar amounts.
- A study in the Journal of Consumer Psychology showed that prices ending in 7 were judged lower than prices ending in 3, though both were odd endings.
The weight of research suggests that 7 cent pricing gives retailers a slight boost in sales compared to even dollar pricing. While the actual difference is small, in high volume retail, a 1-3% gain can translate into significant extra revenue.
Does 7 Cent Pricing Work on Everyone?
While most consumers are influenced by 7 cent pricing, certain groups are less swayed:
- Financially savvy shoppers who calculate the actual overall cost rather than relying on superficial perceptions.
- Younger shoppers who are less anchored to the left-digit bias.
- Lower income shoppers who have a stronger incentive to evaluate real affordability.
- Non-native English speakers, since the effect relies on pronouncing prices in English.
However, these groups represent a relatively small portion of shoppers. The pricing tactic works well on the general population who make quick judgments based on left-digit anchoring.
The Bottom Line
Costco’s ubiquitous use of prices ending in 7 cents reflects a deliberate psychological strategy. The odd pricing creates the illusion of amazing deals and discounts throughout the warehouse club.
While savvy shoppers understand the 7 cent prices are not necessarily lower, the effect still hits the psychological sweet spot for most consumers. The pricing tactic helps reinforce Costco’s low price brand image. It works – which is why Costco has no plans to end its 7 cent pricing strategy anytime soon.