http://www.ami.org.au/followon.aspx?PageID=6357
Many of us probably remember 'buyer behaviour' as a subject in an undergraduate marketing course. Some recent academic research reminds us of the importance of managing buyer behaviour, specifically their pricing expectations, in achieving sales volumes and profit margins.
The 'loss leader', a product/service advertised at a ridiculously low price to get the prospect in the door so they can be up-sold to a more profitable option, is a well-known sales tactic.
In an extensive analysis of online auction results, researchers (1) from Cornell and Washington universities found that a well-chosen 'buy-it-now' price can lead to higher final auction prices for a given item, provided that the 'buy-it-now' price is set higher than the buyer's expected price for the item. A 'loss leader' price can get prospects 'in the door', and a well-chosen 'buy-it-now price can get them to pay more than they planned.
The 'buy-it-now' price is a common feature of most online auction sites, although it can operate in different ways on different sites, i.e. some remove the 'buy-it-now' price once auction bidding on the item starts. Generally, the 'buy-it-now' price offers the buyer the opportunity to circumvent the auction process and purchase the item immediately for a set price.
This research found that setting the 'buy-it-now' price higher than the 'expected' price for the item usually leads to a higher final price (provided it is not set ridiculously high), and vice versa. It also identified that the majority of 'buy-it-now' prices are actually set sub-optimally (slightly too low), probably because the sellers under-estimated the impact of competition between bidders driving up the final price.
The bidders' curse
Another set of researchers (2) found similar results, but also concluded that overbidding (the so-called 'bidders' curse') at online auctions is most common when competition is fierce and when recommended retail price (RRP) expectations have been actively managed, such as:
- In auctions with long listing periods.
- Where there are many bidders.
- Where the item has a high position on the website.
- If the item description explicitly states the manufacturer's price (RRP).
While these results are based on online auctions, they undoubtedly have implications for the marketing of any product or service in a highly competitive marketplace.
Marketers should seek to actively manage buyers' price expectations. Few buyers have the time or energy to conduct a rigorous market audit, but all want to think that that they are not paying too much. Most buyers will therefore use those value signals that are immediately available to them, e.g. the stated RRP, the quality of the retail experience, the buy-it-now price, etc., to estimate a 'reasonable' price for the item.
Value signals for 'reasonable' price
These findings suggest that if the seller actively manages these signals to create a slightly higher perceived 'reasonable' price, then they are more likely to get a higher selling price for the item.
But what about our old reliable 'loss leader' strategy; don't we need to get prospects in the door?
Research (3) conducted in several FMCG categories found that an increase in sales at a lower (discounted) price frequently came at the expense of future sales at the full price. Eventually, this led to lower volumes and lower overall profits for major market share brands.
In essence, repeated price discounting can teach buyers how to 'manage the system'. Buyers learn to expect regular discounting cycles and then tend to wait for the next cycle to stockpile their favourite brand when it is on special. This in turn leads to pressures on sales volumes, which can entrench the pattern of repeated price discounting.
The key to using loss leaders may depend upon your distribution channel. If you are a car manufacturer or similar where you have the opportunity to 'up-sell' prospects who are drawn into the showroom by an attractive 'loss leader' deal, then an occasional 'loss leader' promotion may be worthwhile. This is especially so when you make sure that you manage up their expectations of the perceived value of the item and, therefore, what is a 'reasonable' price for that item.
However, if you are a FMCG manufacturer distributing your products through supermarkets in which you don't have the opportunity to up-sell prospects on your products, then acting as the 'loss leader' may not be such as great strategy.
First, while it may lead to a temporary sales increase, eventually it may lead to an overall decrease in sales volumes and profits. Second, whenever your brand is offered at a discounted price, it probably helps to lower the expectations of what is a reasonable 'normal' price for that brand. Consumers reflect this when they lament in focus groups that 'Quality brands never go on sale'.
Maybe it is time for us all to dust off our old marketing text books and think again about how we manage our prospects' price expectations!
Why price promotions aren't the best marketing strategy - Discounts don't drive up saleshttp://news-info.wustl.edu/tips/page/normal/10839.html
Extract: Jan. 22, 2008 -- Sorry, Charlie. Price promotions may not be the best way to increase sales of canned tuna — or any other frequently purchased consumer good. The iconic cartoon mascot never got the message: "StarKist doesn't want tuna with good taste; it wants tuna that tastes good." Some companies may not be getting the message that "if value is driven only by price, price becomes the only value proposition you have," said Chakravarthi Narasimhan.
Discounts are no way to increase business. According to Narasimhan, a marketing professor at the Olin Business School at Washington University in St. Louis, "managers can be overly focused on losing market share and get caught up in a mindless cycle of discounting - without regard to the long-term implications of their actions."
Take automobile manufacturers, for example. Dealers want to move more vehicles. In response, manufacturers initiate price promotions, offer rebates and lower buyers' financing costs. "The additional volume that comes from these promotions will slowly fall," Narasimhan said. "Why? In the mind of the consumer, there's always another promotion and no real pressure to buy at a particular time. This dynamic, in turn, leads companies to continue price promotions.
"Strategic consumers are those who form expectations about future prices," he explained. In other words, they anticipate that certain products fluctuate in price and react in one of several ways.
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