Taking your example:
We (the fast food chain) found that customers don't want to spend $3 on our hamburger.
Customers are willing to pay somewhere in the $2 range.
Our customers focus on dollars not cents.
So, anything less than $2.99 is throwing cents away.
The board gets mad when we throw money away.
Pricing is complex, Humans are lazy
I might almost go so far as to say we're dumb — but that's too far. Cognitively speaking, we look for quick, simplistic answers. In the case of pricing, consumers make glancing assessments based on prices we've encountered in the past. This assessment can psychologically override the actual value of the item. This is especially true for lower priced items, whatever that threshold might be.
Psychological Pricing Theory
The complexity of minute changes in price have been studied extensively and generally fall under the label of Psychological Pricing Theory. Read that page on Wikipedia for a lot of detail and some historical findings.
One key point, is they way consumers "round" the price. It's a higher level issue than simply left-to-right reading. It has to do with orders of importance. Specifically, the dollars are psychologically more important than the change. As quoted in the Wiki article:
Consumers ignore the least significant digits rather than do the proper rounding. Even though the cents are seen and not totally ignored, they may subconsciously be partially ignored.
Fast Company wrote an article, The Psychology Behind the Sweet Spots of Pricing, that speaks to a related concept.
According to a study conducted by Kenneth J. Wisniewski from the University of Chicago, when the price of margarine dropped from 89 cents to 71 cents at a local grocery chain, sales improved by 65%. But when the price fell two cents more to 69 cents, sales jumped by an astounding 222%!
FastCo also proposed that the digital age may have introduced new sweet spots, but this has not been proven out yet.
Has $5.00 usurped $4.99 as a sweeter spot for luring customers?
Historically, pricing format has also been used as a means of record keeping, odd as that may sound today. Some retailers, even up to my experience in e-comm 10 years ago, used one format for regular prices and another for sale prices. Picking up on the theory that .99 performs better with price-sensitive buyers, many companies made that their sale standard. This has a compound effect: Consumers are subsequently trained to recognize 99 as the sale number.
Working in the e-comm world for several years, I had the opportunity to evaluate some very interesting pricing studies. The exact numbers varied, but the common factor in on-line buying habits was that anything after the dollars was effectively ignored.
I reviewed tests run at .00, .50, .95, .97, and .99 (just off the top of my head). Once the priced moved up or down a dollar, the cents had minimal impact on sales. IOW, asking $29.50 for an item rather than $29.99 just lost the seller 49 cents. Sell 10-20,000 units and you start to feel the spare change.
In the data I reviewed, the 99 effect was not as dramatic as discount retailers have seen. I worked primarily with mid-range and some high-end markets. Interestingly, in these markets, we found evidence that the price brackets had a bigger impact than the 9s. For example, pricing an item anywhere between $40-49 made very little difference. As soon as that item moved into the $50-75 bracket, volume would decrease.
For mid-range markets, these brackets tended to brake down as follows:
* Those zeros aren't accidental. At these points, consumers responded best when the high point in the bracket stuck to the even dollar amount. In my findings the 99.99 and 149.99 points showed that it wasn't simply a matter of crossing some imaginary line. Some colleagues suggested that 25 and 75 became magic numbers after the 100 mark. YMMV ¯\_(ツ)_/¯
Effectively, it appeared that in mid-range price points consumers were mentally focused on the tens rather than the ones or cents. Price sensitivity up to a given bracket's
_9.99 was fairly light. Crossing into the next bracket triggers a spike in that sensitivity and volume was disproportionately impacted.
One side-effect worth noting: I have also seen an inverse effect to the "deal shopping" mentality. Consumers of high-end items (jewelry, haute couture, fine decor and furniture, etc) aren't supposed to care about price. That's part of the status of owning those items. In those markets, I have seen evidence that there is a sort of branding effect that happens when the price is set with .00, no cents notation at all, and even no $.
For example, a dress from a Parisian high-fashion designer valued at about $4,600.00 could be priced according to any of the following formats:
From what I've seen in tests between $200.00-599.99, #4 would be the winning option. To a status- or craftsmanship-conscious buyer, my hypothesis is that this format shows confidence in one's product and an unwillingness to compromise. #1 in particular implies a sales rather than craft focus and may turn this consumer away.