A study conducted by researchers, Zhang and Ozalp Ozer from the Massachusetts Institute of Technology (MIT) recently appeared in the journal Management Science. They studied the behavioral motives of consumers and found that retailers could raise their profits if they took the emotions of the buyer into account i.e., shopper emotions can impact store prices.
The study took data from existing research to construct a new model of consumer decision making. Factors that impact consumers were considered, particularly the feeling of regret associated with missing out an opportunity of availing a discount or a potential purchase and the possibility of that product being unavailable in the future. Consumers are mostly under the impression that the goods remain in the market for a shorter time period than they actually do.
However, the regret tends to vary from product to product. If a fancy jacket which is uniquely designed is no longer available, the ensuing regret would then be multiplied and consumers would even be willing to pay an extra amount had they known it would get sold out. This compared to t shirts that have now gone on sale and which the consumer did not end up purchasing results in comparatively deeper regret. Thus the ‘stock out’ regret is higher than the ‘high price’ regret.
Co-author, Karen Zheng and an assistant professor of operations management at the MIT Sloan School of Management says, “Human beings are not good at dealing with uncertainty.”
To gain a better understanding, two retail companies were studied, JC Penney and Macy’s. Their pricing strategies were scrutinized to assess whether a markdown strategy which is to start at high prices and then eventually reduce them over time is more profitable or an everyday low price strategy which is to keep price down at all times.
They found that JC Penney consistently switched to lower prices to make up for the revenue they had lost but failed. The CEO was eventually fired for this change and they switched to using promoted sales. They found that as time passes, the price you paid is disregarded and consumers are just happy that they own the product. The more price conscious customers however are still attracted to the occasional discount offers that arise.
At the same time, ordinary clothing items such as T shirts display different results. Consumers don’t intensely regret not being able to purchase a T shirt as there are many other alternative options available. They would much rather prefer to buy a T shirt at a lower price and avail the discount. Thus in this context the high price regret is greater than the stock out regret.
Macy’s, however, used different pricing strategies for different categories of clothing. For the high end clothes, they allocated higher prices and a sale every now and then; for the mundane items they had relatively low prices.
Zheng approves of the strategy employed by Macy’s and says “It’s a smarter strategy to differentiate your pricing based on products. The behavioral factors are not independent of the products.”
Retailers often miss out on these consumer patterns and behavioral motives and miss out an opportunity to adjust their revenues, profits and the ability to adopt to a new strategy regarding pricing.
If they took the emotions of the consumers seriously, they could achieve profits of up to 7 or 10 % higher. At least as far as the unique fashionable goods are considered, they would definitely generate more revenue along with the occasional sales as opposed to just lowering prices at a consistent rate.
Zheng explains “The high value customers will still want to buy the product as they want to avoid the feeling of regret which would occur if they wait now and then cannot get it in the future.” Failure to recognize this impact of regret and availability misperception regarding when and what consumers would want to buy could result in a loss of up to 10 % of the profits.
Thus it is very important for retailers to recognize the emotions and perceptions of the consumers and what motivates them to buy a certain product or purchase an item.
Karen Zheng continues to carry out research concerning consumer behavior and pricing strategies. She is currently working on a project with Georgia Perakis, a colleague from MIT, to investigate the extent of price markdowns and their effect on the way consumers perceive the quality of the products.