Monday, September 23, 2013

Drop Prices Slowly

Because of an abundant harvest, commodity prices on coffee beans are at a five-year low. Yet we haven’t seen deep dips in what Starbucks charges for your barista-customized latte.
     A recent Bloomberg Businessweek posting explains why: Big retail coffee companies buy beans through derivative contracts which even out prices over time. As a result, they’re almost surely paying more than the market price to suppliers now. And when a Starbucks customer is buying a cup, the understanding is that the cost covers much more than the raw beans.
     Another reason we’ve not seen retail prices on coffee dive has to do with what economists have named Rockets & Feathers. Prices on many item rise quickly, but drop slowly. Notice how gasoline prices rise as fast and directly as a rocket, but any price drops we see at the pump come down as slowly and unevenly as feathers. The economists’ explanations for Rockets & Feathers have to do with supplier costs and consumer search strategies.
     University of Chicago analyses concluded that Rockets & Feathers have historically occurred in about two out of every three supplier-to-retailer and retailer-to-consumer product transactions. It also is seen with services such as banking: Deposit rates respond more quickly to an increase than to a decrease in money market rates.
     The consumer psychology perspective on Rockets & Feathers is that dropping prices or raising returns dramatically can attract new customers, but it also has a clear potential to irritate current customers. They might conclude you were charging unnecessarily high prices or giving unnecessarily measly returns previously.
     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.
     Do drop prices to attract shoppers. Consumers are price sensitive and online technologies allow easier price comparisons than in the past. The Bloomberg Businessweek posting reports that prices on bags of Folgers, Maxwell House, and Dunkin’ Donuts coffee have dipped 6%. Even Starbucks ended up cutting prices, although only on bags of coffee sold at grocery stores.
     In your store, lower prices gradually and be ready to explain price decreases in the same way you do price increases.

Click below for more: 
Feather Pricing Changes with Precision 
Explain Price Ups & Downs to Customers

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