Weird Science

Jennifer Polanz

Customers can be all over the board when it comes to pricing; some will think your store is too expensive and others will say you offer a fair value for your price. Even industry consultants vary in their opinions on pricing, with some saying our industry is perceived as too expensive and we need to rely on selective markdowns to improve this, while others say selective increases in pricing will go a long way to improving profits and discourage bargain shoppers.

What’s a retailer to do? How about we go back to some tested methods to explore the science and the psychology behind how consumers react to pricing. To warn the reader—some of the papers cited compete for the world’s longest title, but these studies are fascinating exercises into how the mind works—and many times it’s neither logical nor rational.

Determine Your Pricing Image
In a 2005 study conducted by marketing professors, research showed there are several factors that go into creating your store’s pricing image. First off, though, what is a price image? Price image “reflects the impression of the overall price level of an entire store,” and it’s just one aspect of your overall branding image, according to Ryan Hamilton and Alexander Chernev, authors of “Low Prices are Just the Beginning: Price Image in Retail Management.”

They say there are price-related drivers that contribute to your price image, including:

•  Average price level (how you compare to the competition)
•  The dispersion of prices (how high and low prices are distributed within the store)
•  Price dynamics (how prices change within a store over time)
•  Price-related policies (i.e. price-matching guarantees)
•  Price-related communications (i.e. sales tags and price-based advertisements)

There are also non-price-related drivers that contribute to your price image:

• The physical characteristics of the retailer (location, ambiance, décor)
•  Level of service offered (size and helpfulness of the staff)
• Retailer’s nonprice policies (i.e. return policies, etc.)

And finally, there are customer-specific factors that the retailer can’t control:

•  Individual factors (price sensitivity, information processing style and familiarity with market prices)
•  Situational factors that change with each shopping experience (financial consequences of the purchase, time pressures)

There were a couple of key takeaways from this paper in particular. One is this: “Frequently purchased, big-ticket categories tend to matter more in price image formation than do other categories.” 

Another deals with Known Value Items (KVI) or categories that can be price shopped. According to the authors, KVI brands and packaging sizes exert a disproportionate amount of influence on the formation of pricing image.

“By aggressively pricing these most influential items, retailers have a better chance of influencing consumers’ impressions of the average level of prices than they would by just lowering prices across the board,” the authors
determined.

However, the key here is what kind of image would you like to have? “Existing research suggests that the physical characteristics [of a store] can have even more influence on a store’s pricing image than the actual, objective price levels,” write the authors, who add if a store has a central location, exquisite décor and nicer amenities it’s associated with higher retail costs and, therefore, a higher price image. Stores with expensive, fashionable interiors and pleasant music also were associated with high-price image, while shabby, untidy stores connected with a lower-price image.

Having a higher price image isn’t all bad, though. According to the paper, customers adjust their reference price up when shopping at a high price-image store and down when in a low price-image store. “To illustrate, the price for a bottle of wine could be judged more favorably at a higher-end wine retailer than at a discount wine store.”

Unfortunately, higher price-image stores typically see fewer items per ticket sold than low-image stores. “Shoppers at high price-image stores tend to be much more deliberate about the options they purchase and, as a result, end up purchasing relatively fewer items.”

The authors gave a couple of great examples for questions to ask if a retailer would like to find out what customers thought of the store’s prices. Examples include:

•  Show customers a basket full of products and ask, “How would you evaluate the price of these items?”
•  Ask customers to rank stores based on price high to low.
•  Show customers an item and ask, “Would you buy this item at this store or shop for a better price elsewhere?”
•  Show them an item or basket full of products and ask, “How much would you expect this item/basket to be at this store?

Effective Pricing In-Store and in Advertising
Including pricing in advertising is obviously commonplace, but studies show there are better ways to do it than others. For example, in the same paper that studies price image, the authors also took a look at effective price communication in ads. Their research highlighted ads showing reference prices were more effective than those showing a sale price without a reference point. For example, if an item is $19.99 normally and the sale price is $14.99, the most effective ads showed either the regular price along with the sale price or the amount of the difference to show the magnitude of the price savings.

The authors also noted if the savings is a low dollar amount, it’s more effective to show the percentage of savings rather than a dollar figure (save 25%). If the savings is a large dollar value, it’s more effective to show the monetary representation (save $5).

If a retailer is looking for that low price image, then a discounting strategy can help with that. The authors cited research that showed frequent “shallow” discounts and price deals increase sales volume more than less frequent “deep” discounts and are more likely to foster a low price image.

Raising Prices: It May Be Easier Than You Think
But only if your prices end in .99. That’s based on a 1984 study conducted by Robert M. Schindler at Northwestern University titled “Consumer Recognition of Increases in Odd and Even Prices.” In it, he surveyed undergraduate business students who were shown a list of products and their prices. Some of the prices ended in .00, while others ended in .98 and .99.

Then, two days later they were shown a new list of prices, some with price increases. The students were more likely to forget the ones ending in an odd number. They also were less likely to realize the price increased on the products whose price ended in an odd number or .99.

The reasoning? Studies conducted over nearly a century have shown customers prefer prices ending in .99 rather than .00 because they focus on the left side of the decimal versus the right. If something is $4.49, they focus on the $4, and less on what comes after the decimal. They don’t remember what’s after the decimal. So, if your prices are currently $3.49 for a 4-in. annual, chances are your customers might not notice an increase to $3.99.

Pricing In Bundles
Bundled pricing is all the rage these days. You see it everywhere—Tank tops $9.99 each or 3 for $20. Bags of carrot sticks 2 for $3. But how do you do it effectively?

A study from marketing professors Manjit S. Yadev and Kent B. Monroe, “How Buyers Perceive Savings in a Bundle Price: An Examination of a Bundle’s Transaction Value,” shows just how consumers approach these types of pricing strategies.

They surveyed 252 undergraduate students (apparently the choice of marketing professors everywhere) to see how they perceived bundled pricing. They showed them two luggage items, a garment bag ($70) and a pullman ($78). They gave them a variety of different options—no savings individually, but a savings on the two items together (bundled); savings only individually and no bundled savings; and a variety of savings both individually and bundled.

The findings were pretty interesting. “The influence of additional savings offered on the bundle is clearly greater than that of savings offered on the items if purchased separately,” the authors determined.

However, there is a caveat. The bundled pricing worked best when savings were also offered for the products individually. “Instead of offering one large savings on the bundle alone (e.g. $40), dividing up that savings between the (individual) items (e.g. $15) and the bundle ($25) may be an appropriate pricing alternative to implement a mixed bundling strategy,” they surmised.

Pricing strategies are a tricky business, but hopefully, the science presented here can result in sales increases in your store this year. You could even conduct studies on your benches this spring to see what strategies work best for your customers. After all, customers are used to routinely changing prices at the grocery store—why not in the garden center, too? GP