Why do businesses use prices like 99 cents or $499 instead of putting $1 or $500?

Partly traditional and partly for psychological reasons.

Before the advent of sales tax, businesses used less than whole dollar amounts for pricing to force sales clerks to make change for most transactions. Employee theft is a MUCH greater problem for most retail businesses than customer theft and always has been. If the price of a particular item is $10, a dishonest clerk could pocket the money if the customer gave them $10...but if it was $9.95, the clerk would have to ring the sale up on the register to give the customer his or her change for $10 (at least that was the thinking at the time).

Now, some research has shown that people have a psychological reaction to "odd/even pricing". For example, Schindler and Kibarian (Journal of Retailing volume 72, 1996) found that .99 ending prices resulted in higher sales volume than prices ending in .00 leading them to hypothesize that people think they are getting a "bargian" with odd prices.

Some businesses do use whole dollar pricing, also for psychological reasons. For example, doctors and other professionals use whole number pricing to denote quality...other "luxury" products (greens fees at golf courses, jewelry, and resort hotels) also use whole dollar pricing to suggest higher quality.

From Cecil Adams:

The topic does lend itself to wielders of the big shovel, no question about it. The most elaborate explanation I've seen is in 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. But there was a problem: with no sales tax, and with most goods priced for convenience at even-dollar figures, there weren't 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 weren't all that common then. The practice didn't really become widespread until the 1920s, and even then prices as often as not ended in .95, not .99.

So what's the real explanation? Having spent two hours poring over the microfilm--no guarantee that I'm not full of BS, but at least it's scientific BS--I'd say 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's also pretty obvious and trying to find out who invented it is like trying to find out who invented the hat.

--CECIL ADAMS

In my research for my company, I've found if you're trying to look like you're offering the customer a deal - you use the "99". If you want to project an image of quality, being higher end, or of significant worth - you should use "00".

Hope that helps. It's just a psychological thing - what image are you trying to create for the customer and for your business?

The "99" trick is said to have been inverted by J C Penney as a way to keep his clerks from shortchanging the cash register. He figured they couldn't think in terms of uneven units like "9" and so would be deterred from dipping into the till.

Turns out customers cant think in terms of "9" either and they only see the first number. So to many of them $19.99 is 19 dollars, not 20 dollars.

A quick explanation would be that the psychology of business tells us that an amount under the known price attracts more notice from the buyer than the top price that was normally used. People only notice the lower amount posted than the real amount.

Spartawo...

It works. My friend told me there was this great place that served huge sandwiches for $5. When I got there, it was $5.99 + tax.

When business advertise $5.99, people think it's more like five dollars, when it's more like six. It is an effective tool to make more money off people.

Psychology.

because its a mind trick, it makes you think that its less then it really is. most people only read the 4 or in there mind they reason well its not 500.

Retailers love to play subliminal mind games, $4.99 sounds cheaper than $5.00.

99 cents compared to a 1.00 advertised is more eye catching. all it this is psycological.