How Price Points Can Trick Us Into Making a Purchase
They simplify our buying decisions but encourage us to purchase thoughtlessly.
Posted Jan 21, 2019
“Five dollars is a magic number.” — Unnamed restaurant industry consultant.
Thanks to decades of behavioral economics research, we now know that microeconomic theories often fail to describe actual buying behavior. For instance, a basic microeconomic theory postulate is that as prices go up, demand should go down. In the real world, however, this is frequently not the case.
A great example of such irrational consumer behavior is how people react to price points. In this blog post, I want to explain what a price point is and how it influences our purchasing behavior. I’ll do this with the fascinating story of a Subway franchise owner’s accidental discovery of a powerful price point.
What is a price point?
A price point is the price level that is so well-known and well-accepted by consumers that they consider it to be the normal or usual price for the product. Consumers use the price point for making buying decisions with little or no cognitive effort. Around $5 for a meal, a dollar a day for news, coffee, shaving, etc., and $1,000 for a computer are all popular price points in the United States.
Price points are influential for the simple reason that consumers prefer to buy products at the price point than at other higher or lower price levels. In the fast-food industry, $5 is widely regarded as a powerful price point for a meal. Most fast-food operators sell a meal at this price point. Dairy Queen’s 5 buck lunch, Subway’s $5 footlong sandwich, McDonald’s McPick $5 for 2 menu, KFC’s $5 Fill ups, and Dunkin’ Donuts’ Go2 deals are all based on this price point, as is the Taco Bell Chalupa Cravings box (see the ad video).
As writer Brad Tuttle points out, “$5 is a nice round, approachable, affordable-sounding number. At a time when popular fast-casual chains are pushing the average diner bill upward, the $5 price point is especially likely to get the attention of deal hunters. And that’s why fast food customers are seeing more and more of the fiver.” This begs the $64,000 question of how marketers discover price points in the first place.
How a struggling Subway franchisee discovered the $5 price point
Price points are not always discovered through market research. The five dollars for a fast-food meal provides an interesting case study of this. Faced with slow business on weekends in 2004, Stuart Frankel, the owner of two small Subway locations in a Miami hospital, came up with an original idea for a price promotion. His brainwave was to sell all foot-long sandwiches on his menu for a flat $5 price, but only on weekends. This was a substantial reduction from their regular prices, which were in the $6-$8 range. In launching this $5 promotion, Frankel wasn’t thinking about how his customers would react, nor did he conduct research. His straightforward reason was, “I like round numbers.”
Once the promotion started in the two Miami Subways, sales took off. From stores that were deserted on weekends a few weeks earlier, customer lines extended beyond the doors, people drawn irresistibly to their favorite Subway foot-longs by the deal. Frankel had unknowingly struck a chord with his customers by using five dollars as the price. Years later, writer Matthew Boyle observed, “Nobody, least of all Frankel, knew it at the time, but he had stumbled on a concept that has unexpectedly morphed from a short-term gimmick into a national phenomenon that has turbocharged Subway's performance.”
The lower price on the foot-long sandwich increased ingredient costs in the profit equation. However, the substantial sales increase (which rose by double digits) when combined with greater productivity of the sandwich artists (they were making more sandwiches in their shifts) led to Frankel still earning a profit on each sandwich sold at the $5 price.
Subway’s corporate employees eventually noticed these spikes in revenue and profit and tested the $5 price point, first in other Florida Subway stores, and eventually throughout the chain by 2008. The promotion continues to be successful even now, a decade later, though inflation has made it more difficult to implement in some parts of the country. Franchise owners have been revolting against the $5 promotion, but keep having to bring it back because it draws customers to the store.
Unlike De Beers that deliberately created the “two-month salary” price threshold, Frankel and his colleagues at Subway’s headquarters accidentally discovered the $5 price point in fast food. In trying to explain why the $5 price works so well, public relations expert Derek Farley observed, “If the consumer needs something that gives them permission to experiment with a brand, $5 is the magic number. It is consistently the threshold that reinforces the idea of a deal.” This doesn’t sound very scientific, but it works.
How consumers respond to price points
The main lesson from Subway’s success is that although price points are often hidden, they already exist in the marketplace in every product category. Consumers do not have to be trained or habituated much to accept the seller’s offers at price points. They are already receptive to this price level. When offered, they instinctively understand it’s a good price and accept it more readily than other prices, even lower ones. This is why price points tend to be persistent, lasting for years or decades, long after the sellers and the products themselves have changed beyond recognition.
As consumers, price points simplify our buying decisions. But we should be cautious; price points can also encourage us to make purchases without thinking through the decision as much as we should.