By Nishant Shukla - Computer scientist, hacker, and author who can be found on shukla.io.
Ever wonder why MP3s sell for that awkward number $1.29?
There was a time when $0.99 was the norm. Throughout the years, a growing number of services, such as Google, Amazon, and Apple have taken the liberty to charge an extra 30¢ on some best selling tracks.
If we were privileged with the authority to establish an increased price for the hottest tracks, we certainly wouldn't expect to charge $1.31 or $1.26; those numbers are just too random. Psychological studies indicate that prices ending with 9 just simply sell better [1,2,3], leaving us with the following candidates for a new price: $1.09, $1.19, $1.29, $1.39, $1.49, etc.
Now, we can’t start charging too much for just one song.
How much is too much?
In the field of Economics, there’s something called price elasticity of demand. A close friend, Marisa, describes it as a measure of the responsiveness of consumers to increases in price. A good is really elastic if demand goes down when price goes up, and less elastic if demand doesn't go down as much.
We need to hit that sweet spot.
Apple made the first move in April 7, 2009 changing prices of the hottests tracks to $1.29.
Companies were then faced with the following constraints: Prices need to end with a 9, and had to be somewhere around the tight neighborhood of $1.29. otherwise they would suffer from the effects of price elasticity.
It turns out that $1.29 is a number that pairs well with $0.99 to maximizes unused currency in popular gift card denominations such as $10 or $25.
Most people that purchase in bulk from iTunes, Google Play. and Amazon MP3 are those with gift cards. The focus in pricing should be to pick a number that milks the most money out of gift cards, the primary source for bulk transactions.
Let’s suppose that in a less than sufficient attempt to personalize a birthday blessing, we were handed a $10 gift card. If the hottest MP3 tracks were priced at either $1.19, $1.29, or $1.39, then we can max out the gift card in one of the following ways, assuming the only other type of songs we buy cost $0.99.
On average, we end up with the most amount of unused currency if hit-songs are priced at the strategic $1.29. This is true for $25 and $50 gift cards as well. In fact, $1.29 is the magic number that leaves the most amount of pennies untouched. This, compounded with the thousands of people purchasing gift cards, makes for an incredible steam of revenue.
Of course, this is merely one of the factors that goes into pricing, but check the numbers yourself to be convinced that it can’t just be a coincidence.