I just posted a comment at TechDirt, and thought it was worth repeating here:
As much as we scoff at the “$.99” thing, it works. But considering it’s near-universal application, our brains usually adjust for it, such that 9.99 registers as “10 bucks”. We tend to shop logarithmically, such as we give little to no consideration to things at the $0.10 marker (look how often now you see nickels and dimes in those “Give a Penny, Take a Penny” trays), a quick snap judgement at $1.00 (ie Like=Buy), a brief value consideration at $10 (“Does this have a use for me?”), and so on and so forth for each order of magnitude. So, to maximize your profits, you want to price as close to the next mental step of the customer while putting some number play to use to ensure that they consider the price less than that next step. This book situation is a perfect example: $0.99 is less than a buck, so the mind doesn’t go to risk assesment or visualising a possible buyers remorse situation… if there is a light interest in the product, and there’s an easy way to acquire it, you hit that buy button. At $2.99, or even $1.99, or even $1.29 (*cough* iTunes *cough*), the mind sees that as “more than a dollar”, and thus, more consideration than a flippant purchase. Now, back to the number 9. Considering it’s abundant use, I suggest 8 be the new 9. If an 8 precedes a 9, it prevents the mind from rounding when making snap judgements. When you see “$0.89” or “$8.99”, your mind no longer subconsciously rounds to the full next step. You see “significantly under a buck” and “significantly under ten bucks”, respectively, so for $.89 songs, you may not even listen for the whole sample, and for that $8.99… whatever… hey, at least you’ll get SOME use out of it, and if it sucks, well, it was “cheap” (look around your house and find just how many “under $10” items you have laying around).
I’ll end with a warning: pricing is just one aspect of marketing and doing business in general. If no one knows your product exists, or can’t acquire it, it doesn’t matter how you play with the pricing.