It happens all the time: You buy an item at one price, and then see others buy the same item a little later on for a much cheaper price. This is standard practice nowadays, but it still gets customers angry. How angry? A new study demonstrates the “boycott effect,” in which consumers who pay full price for goods that are soon marked down substantially develop bad feelings about the company in question—and are more likely to stop buying the company’s products.
Northwestern’s Kellogg School of Management recently highlighted the research of one of its faculty members, Eric T. Anderson, who with MIT’s Duncan I. Simester investigated the concept of “price stickiness.” When a product or commodity’s price remains fairly stable, it is said to be “sticky.” When, on the other hand, prices fluctuate dramatically—as in the case of many consumer products today, gadgets especially—then there’s not much “price stickiness.” The prices are slippery, if you will.
What are the effects of rapidly fluctuating prices on consumers? To figure that out, the researchers look back on the 2007 arrival of the original iPhone. At first, the cheapest version (4 GB) sold for $499, and models with more memory (8 GB) retailed for $599. But within months, prices were slashed, and the 8 GB version was selling for just $399. Many Apple fans who had recently paid $599 for the same product felt like chumps:
“Who was likely to buy the iPhone at $599? The people that love Apple,” Anderson said. “They were going to buy it as soon as it was on the market at a full price. And who did Apple upset when they dropped the price in September? Their best customers.”
A less dramatic version of this same scenario occurred recently, with the introduction of a new iPad to the marketplace. In anticipation of Apple’s big announcement, Best Buy began selling the iPad 2 for $450 in early March, down from $500.
Anyone who jumped at Best Buy’s offer may now feel foolish, as last Apple itself marked down the iPad 2 to $400. By waiting a few days, these shoppers could have saved $100 rather than $50, and they also could have gotten to check out the new-new iPad as well, before making any decisions.
By now, consumers should be accustomed to seeing such price drops regularly. As newer models came out and quickly grew in demand, older iPhones wound up selling for $149, then $49, and now they can be free (all with a two-year contract, of course). Do these pricing games cause minor irritation among consumers, or something worse? J.C. Penney is attempting to revolutionize its pricing systems because it believes these games drive customers completely batty. Do major discounts put such a bad taste in a customer’s mouth that he’s likely to stop being a customer entirely?
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To try to answer this, Anderson and Simester experimented with a retailer that sold software, electronics, apparel, and books, among other goods. (Obviously, the retailer wasn’t Apple; in all honesty, Apple has some of the “stickiest” prices in the marketplace, and opts for permanent price cuts rather than gimmicky, blink-and-you’ll-miss-them discounts.) The researchers created special test catalogs with a wide range of discounts—one deeply discounted brochure, with markdowns averaging 62% off, the other a “shallow-discount” version with an average of 34% off.
The researchers took an especially close look at how customers who had previously paid full price for goods with this retailer reacted to the prospect of discounts. Presumably, these customers liked this retailer. Why else would they have paid top dollar for its merchandise? However, among this group of customers, those who received the deep-discount catalog placed nearly 15% fewer orders compared to their counterparts receiving the “shallow-discount” version. Those who had received the deep-discount offers were also more likely than the shallow-discount folks to place no orders at all: 34% vs. 27%.
The researchers read the results this way:
“Our study showed that the customers who are antagonized are not the worst customers—they’re the best customers,” Anderson said. “This helps explain why managers are so concerned about adjusting their prices—you risk antagonizing your most profitable customers.”
But there’s one other way to view the numbers. These customers weren’t necessarily “antagonized” by the fact that others paid less than they did for the same merchandise. There is a subset of consumers that views any and all discounts as signs that a product isn’t up to snuff. If it was really top quality, after all, the seller wouldn’t have to mark it down. These customers, then, may be turned off not by the unfairness of fluctuating pricing systems, but by the distastefulness of discounts. Discounts give off the whiff of desperation, and some consumers don’t want to be associated with any such “needy” products.