Wednesday, March 14, 2012

Feather Pricing Changes with Precision

Dropping prices dramatically can attract new customers. But it also has a clear potential to irritate current customers. Economists use the term “rockets and feathers” to describe how prices on many item rise quickly, but drop slowly. The economists’ explanations for rockets and feathers have to do with supplier costs and consumer search strategies.
     Consumer behavior research at Northwestern University and Massachusetts Institute of Technology finds that lowering prices gently and with precision is a good way to ensure customers who visit your store often will continue to trust your pricing. The economists can still credibly use the word “feathers” to describe this pricing strategy, since one meaning of “feather” is to hit softly and precisely.
     In field tests, the Northwestern/MIT researchers created a merchandise catalog offering 86 products, 36 of which were discounted. In one version of the catalog, the discount averaged 34%, while in the other, it averaged 62%.
     Overall, the greater discounts led to more demand in the short-term. That did not necessarily mean higher profitability, since the dollar amount of each sale was less. More important, though, were the longer-term effects: Customers who had recently purchased one of the items that now was going at a 62% discount were upset. They subsequently bought much less than before, and this effect lasted for more than one and a half years. Sales dropped most severely for the loyal customers. The researchers called this a “boycott effect.”
     Does the boycott effect still operate if shoppers expect to see big discounts on items, such as after Christmas? When the researchers tested this out with a clothing retailer, sales did not drop as dramatically as in the first study, but still, there was a 4% drop.
     Another meaning of the word “feather” is “to adorn as if to attract notice.” And that brings up a provocative suggestion made by the researchers: If you do offer substantial discounts, target the notice so that the loyal customers are less likely to discover it. Don’t adorn it with feathers.
     Another study leads me to conclude this is a risky strategy. Researchers at University of St. Thomas and University of California-Berkeley analyzed a pricing policy used by Amazon in year 2000, in which some shoppers were offered a discount of 30%, while others were offered a discount of 40%. When customers discovered online what was going on, they had challenging questions for Amazon.

Click below for more:
Search for Better Supplier Costs
Offer Exclusive Price Discounts Cautiously
Redirect Consumer Boycott Anger

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