The Threshold-Crossing Effect: Just-Below Pricing Discourages Consumers to Upgrade

Abstract

Managers often set prices just-below a round number (e.g., $39)—a strategy that lowers price perceptions and increases sales. The authors question this conventional wisdom in a common consumer context: upgrade decisions (e.g., whether to upgrade a rental car or hotel room). Seven studies—including one field study—provide empirical evidence for a threshold-crossing effect. When a base product is priced at or just-above a threshold, consumers are more likely to upgrade and spend more money (studies 1–3) because they perceive the upgrade option as less expensive (study 4), and they place less weight on price (study 5). Testing theoretically motivated and managerially relevant boundary conditions, studies find that the threshold-crossing effect is mitigated under sequential choice (study 6) and when an upgrade price crosses an upper threshold (study 7). These studies demonstrate that a small increase in price on a base product can decrease price perceptions of an upgrade option and, thus, increase consumers’ likelihood to upgrade. Results suggest that just-below pricing, while sometimes advantageous at first, may not always be an optimal strategy for managers trying to encourage consumers to ultimately choose an upgrade option.

pricing, upgrades, left-digit effect, decision making