Business Psychology - Latest Findings

Article No. 148
Customer Psychology Findings, by James Larsen, Ph.D.

Effective Price Cues

Researchers resolve questions surrounding reference prices and provide guidance for retailers.

The next time you have the opportunity to watch a few customers, notice what they do when items seem to interest them: they glance at the price -- every time.

That moment, when interest is aroused and customers check the price, is a doorway to a purchasing decision, and if the door is open, further effort will be given to the decision-making task. But if the door is closed, the customer will move on and the item will remain on the shelf. Needless to say, lots of merchandise stays right where it is, and that's very frustrating for retailers.

But retailers are a resilient lot, and they often add information when they present prices in a effort to enhance product appeal and discourage further searching. For example, a reference to a higher, regular price and a lower, current sale price on a price tag enhances a sense of value and creates an urgency to complete the purchase before the price rises. A reference to a competitor's higher price on shelf tags or in newspaper advertising invites a favorable comparison and discourages further searching.

Or at least these reference price comparisons are supposed to do that.

Researchers repeatedly test these pricing cues and obtain contradictory results, and that's very frustrating for researchers. In 1990, two groups of researchers even discovered consumers responding to shelf tags with no pricing information at all! They simply called attention to an item and implied a special price, and sales went up.

There must be a reason for these findings, believed Dhruv Grewal, from the University of Miami. So he led a team that explored the theory surrounding consumer response to price cues, and he found two theories that offered ideas he could test.

The first maintains that consumers prefer different kinds of information about prices depending upon where they are. If they're at home reading an advertisement, they'd prefer reference prices that compare different stores' prices of an item that interests them. That helps them select a store to visit. But if they're already in a store, they'd prefer confirmatory reference prices, that is, information that encourages them to do something they already want to do, like purchase a product that interests them.

In the store setting, a reference to a high regular price confirms that the present time would be a good time to buy this item. And it is this tendency to respond to confirmatory information that causes customers to respond to shelf tags that lack pricing information.

The second theory maintains that the size of a price reduction influences how much effort customers give to the task of deciding whether or not to buy a product. A small discount discourages effort because the financial incentive is missing. A large discount also discourages effort, because the financial incentive is clear and further effort isn't necessary. But a moderate discount (33%) encourages effort, and reference prices provide comparison information consumers value.

Now theories are fine, but do they work?

Grewal conducted two experiments and each revealed findings exactly as the theories predicted, so these theories do work.

Try this. Walk around your store, and browse through your ads and see if you're following these guidelines:

    1. Use reference prices for comparison when your sale price is 25% to 40% lower.
    2. Use competitors' prices for comparison in advertising your customers will examine at home.
    3. Use your own previous, regular prices for comparison for in-store advertising.

Grewal's research suggests that these guidelines will give you the best customer response.

Reference: Grewal, Dhruv, Howard Marmorstein, and Arun Sharma (1996). Communicating Price Information through Semantic Cues: The Moderating Effects of Situation and Discount Size. Journal of Consumer Research, 23 (September), 148-155.

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