The promotional price: what happens after the deep cut
I remember once I was buying carpets. A large store, I was regularly passing by, was having a 40% sale on its rather large selection of Persian carpets. After significant rolling, lifting and looking at these beautiful pieces I selected two small ones and was looking at them trying to make a final decision. I was mostly imaging how they would fit. The sales person, maybe misreading my hesitation, took me by surprise. What additional discount would you like, another 30%? I bought the carpets at 70% discount but I never entered that store again unless there were sales. The sheer volume of the discount made me wonder about the profit margins the store operated on and as carpet prices were a rather unknown territory to me I was not sure should I be happy I got a deal or should I be relieved I was not cheated at an earlier occasion.
The price makes a statement about the product (or store). When applying pricing tactics to try to increase sales, attract customers or just clear the warehouse, the price you set speaks about the value of the offer, its credibility, the fairness of the price, the quality of the product etc.
In my story the deep reduction of price has ruined the credibility of the retail brand. But deep promotions do not necessarily have a negative effect on brand trust and reputation. Take the fashion brands. Their seasonal sales can start at 20%, 30% and often exceed 70%. This does not hurt the image and reputation of the brand. They influence directly customer behavior.
Sales sell in the short term. In the long term they have an impact on the future response of customers to price.
The sales of a high priced brand may attract price conscious and sales prone customers who would not have otherwise purchased it. However the regular customers who have not been price sensitive in the past also change their behavior. And this change in attitude and behavior is worth understanding as this is typically the core target. Once exposed to a decrease in price, some enjoy it and become deal hunters. They postpone purchase and wait for the sales or promotions or start buying lower priced brands. We are seeing this effect across industries. A large study followed the behavior of customers for nearly 2 years and showed that once regular customers make a purchase on a deep promotion they start to buy lower priced items. The study was done in 2002 and deep promotion meant 40% at the time.
Apart from the emotional excitement to follow promotions, another reason for customers to change their purchase behavior is the new information they gather about prices that shifts their price reference points. The reference points act as internal compass that gives direction in the complex world of prices. And the pricing policy conditions customers and changes the way they perceive prices.
To trigger a response a price change has to be significant for the mind firstly to notice it. In his research on price, Kent Monroe investigates the price thresholds, the price range above and below which customers would not purchase. These thresholds are first created as perceptions after the mind makes sense of all the price stimuli and information available and then trigger response. Price thresholds have levels and customers respond faster to price increases, while for price decreases more than one perceptual threshold have to be crossed to get a response. As Kent Monroe is saying in his most recent work the question is what price difference will make a difference.
A very small price change may go unnoticed. The price reduction should be significant to have a meaning to customers. The tricky thing is how the price reduction is positioned and communicated so that it does not change the internal reference price.
Once the reference price is decreased in consumer perceptions, next time it will take a deeper cut to make a difference.
What does it take to make a price change noticed? Isn’t there a magical number?
There are in fact some generally applicable proportions, but mostly there are principles and it pays well to establish and track the limits of price perceptions and utilize them in setting the price.