"YOURS FOR ONLY $19.99"
Using Sale Cues to Influence Customer Purchasing
Research by Eric Anderson
When deciding whether to buy an item, every consumer faces the inevitable dilemma: buy now, visit another store to compare prices, or return to the same store in the future to buy the product on sale that is, if it is still available.
How do we decide whether or not to buy? If we are well informed about prices (and can predict the future availability of a desired product), then price alone may be enough to help us decide. But a series of studies investigating customers' price knowledge of grocery products suggests that we as customers are not well informed about market prices. These studies reveal that usually no more than half of customers questioned can recall the prices of recently purchased products. In other markets such as the fashion industry -- where prices and products change rapidly -- customers have even less knowledge of prevailing and future market prices.
So how do we make purchase decisions? Assistant marketing professor Eric Anderson of the University of Chicago Graduate School of Business and former Chicago faculty member Duncan Simester, now at MIT's Sloan School of Management, explain that people regularly rely on cues to guide their behavior. These include explicit claims that items have been discounted and more subtle cues, such as $9 and 99-cent endings.
"Retailers should realize that actual prices are not everything," says Anderson. "Customers are often more sensitive to price cues than changes in actual prices. Our findings show why this is rational given retailer strategies."
Sign of Savings
Sale signs are are inexpensive to produce, and they can be placed on any -- and as many -- products as stores desire. As important, stores generally make no commitment when using sale signs. So why do customers believe these signs accurately reveal which products have low prices? And why don't stores place sale signs on all of their items?
In a recent paper, the authors offer an "equilibrium" explanation for the effectiveness of sale signs by arguing that they do indeed inform customers about which products have relatively low prices. The authors' model yielded several predictions including the following:
Comparison of prices and sale signs at competing stores confirmed that sale signs contain information about which products offer good value. Because sale signs increase demand, firms prefer to place them on discounted products, which already tend to have higher sales volume (thereby driving unit sales even higher). Given this preference, sale signs do reveal which products are truly discounted, which in turn explains why they increase customer demand.
The data suggests that customers are sensitive to sale information and vary their purchasing behavior accordingly. In some cases, customers are more influenced by sale signs than by actual prices. So why don't stores place sale signs everywhere?
"If you walk into a store, and you see everything on sale, you know that not everything is on sale," says Anderson. "When a retailer uses too many signs they are less informative and therefore less effective."
In other words, the authors also discovered a self-regulating property to sale signs. Retailers face a trade-off when deciding how many sale signs to use: placing a sale sign on an additional product increases demand for that product but may reduce demand for other products that already have sale signs.
"Customers have already formed beliefs about how many sale signs they expect to see in certain stores," says Anderson. "These beliefs vary between stores, product categories, and times of the year. For example, customers would expect to see more discounted items at Wal-Mart than at Tiffany's, and would expect to see more swimsuits on sale at the end of the summer rather than at the start of spring. But ultimately, it is a credibility issue, and it doesn't matter if customers accurately know how many products are truly discounted in the store. If they perceive that too many items are on sale, then they may question the accuracy of the store's sale signs, reducing the signs' overall effectiveness."
Yours For Only $19.99
The authors' sale sign predictions are tested using historical and experimental data provided by a mail-order catalog. To confirm their predictions about customers' price perceptions, the authors also collected survey responses from a large sample of catalog customers. In a separate paper they investigate whether their predictions apply to a different cue: the "$9 and 99-cent" endings used by retailers.
The authors varied prices in a women's clothing catalog to test how $9 endings affect demand. In different versions of the catalog they compared prices of $44, $49, and $54 for the same item. Table 1 shows the basic pattern of results. Demand was almost identical at the $44 and $54, suggesting customers are not very sensitive to actual price changes. Yet demand was significantly higher in the $49 condition. These intriguing results suggest that charging a price that ends in $9 can lead to higher demand even when charging a higher price.
"Customers are not very sensitive to actual price changes," says Anderson. "However, when they view a $9 ending they infer that the item may have been discounted. A '9' price ending, like a sale sign, is interpreted as a signal of 'good value.'" These results have been replicated with different items in different catalogs.
The findings provide strong justification for reliance on sale signs in customer's purchasing decisions. They also are of considerable practical importance. The observed impact on demand is large, in some cases exceeding 50 percent, and led to immediate changes in plans for future catalogs. The success of these studies also has prompted investigation of other pricing cues, and plans are underway to extend research to the catalog's Internet site.
Eric Anderson is an assistant professor of marketing at the University of Chicago Graduate School of Business.