Retail prices are often expressed as odd prices at a little less than a round number, e.g. $19.99. Psychological pricing is a marketing theory that this form of pricing has a psychological impact that drives demand higher than would be expected if consumers acted rationally in their purchasing decisions. It is hoped that this strategy will attract people to purchase the product as it appears to offer better value for money. Psychological pricing is an underlying reason for the use of price points. A price point is a price where demand is relatively high. Increasing the price beyond a price point decreases demand by an amount more than proportional to the price increase.
The strategy is based on the belief that consumers ignore the least significant digits, rather than round the price up to the higher figure. It is thought that this effect may be increased if the cents are in a smaller print, e.g. $1999.
Historically the practice of odd pricing was developed to control employee theft. For a cash transaction with an odd price, the employee is forced to record the purchase through the till to give the customer change, thus lowering the risk of theft by an employee who simply pockets the cash.
However, this is not the only form of psychological pricing. Firms which produce high value, high-status items may employ the opposite strategy. They do not want the product to be perceived as cheap or good value as they want the price to help confer some 'status' on the product. So, for a product that may be around $200 in price, instead of charging $199, they may instead charge $225 to try to match consumer expectations of higher quality.