Dec. 16, 2005--Small retailers looking to increase customer during and after the holiday season should think twice about simply slashing prices, according to recent studies by a pair of professors from the Massachusetts Institute of Technology and the University of Chicago.
As part of their ongoing research, Duncan Simester of MIT and Eric Anderson of the University of Chicago contend that shoppers know little about actual prices, and are therefore more likely to be persuaded by how they're presented. Their latest study, which will be published in early 2006, is a follow-up to a 2003 paper that found most customers base their buying decisions on pricing cues, such as whether prices ended in 9 and the number of sales signs in a store. The professors found that customers looking for sales would buy more items that ended in 9, regardless of whether they were on sale or not. They also learned that once stores put sales signs on more than 30 percent of their goods, demand started falling, because customers began to question the credibility of the sales.
In their latest study, to be published in the journal Marketing Science, Simester and Anderson found the effect of another pricing tactic: When a women's clothing retailer slapped higher prices onto extra-large items, it faced a drop in demand as customers deemed those prices unfair. (Several clothing retailers, such as Lands' End, currently charge more for larger sizes.)
The customers who wanted to buy extra-large items thought the items should cost the same, regardless of size. Thus, profits for the retailer that sold larger sizes at higher prices lagged 4 to 7 percent behind profits for the same retailer when it priced the larger sizes the same as other sizes.
Last year's holiday numbers seem to indicate that more sales signs don't necessarily mean more demand. From November 2004 to December 2004, the National Retail Federation's pricing index, which gauges the retail sector's price levels, dropped by roughly 24% because of heavy discounts, while the NRF's demand index fell by 14%.
Pricing cues are particularly important for new businesses, which have yet to impress their image upon their customers like big-box stores. "Often for small retailers, people don't have a lot of branding cues," Simester said. "Think about a new retailer versus Best Buy or Wal-Mart, where there are established brand perceptions. When there's a new firm around, or new customers, they're going to form an overall price image for those retailers."