Don't just shout 'sale' - think about the price cues

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By: Wise Marketer Staff |

Posted on December 23, 2005

Don't just shout 'sale' - think about the price cues

Simply posting "On Sale" and "Special Discount" signs in retail stores is becoming outdated, and many consumers won't automatically believe that there's anything special on offer until they see for themselves. According to MIT Sloan School of Management professor Duncan Simester, retailers must now provide "pricing cues" that are obvious to the shopper instead of relying on "Sale!" advertising.

According to Simester's research, pricing cues extend to much more than sale signs. Wal-Mart, Costco and other major discounters, for example, have a storewide image of being low-priced, so people assume all items will be cheaper there - even when they're not actually the cheapest available.

Perfect example For example, Simester cites an unlikely but expressive example: "If a store charges charge US$2 for a can of Coke and claims that it is on sale, customers will quite rightly not be fooled. That's because customers already have good price knowledge about frequently purchased items such as Coke."

But sale notices aren't always pointless - they have their place. Pricing cues such as "sale" signs are often much more effective on items about which customers' price knowledge is poor. For such products, putting up a sale sign can actually be more effective than lowering prices - largely because the consumer didn't know the original price, and so is correspondingly less likely to be impressed by even a genuine 50% discount.

Discounter success Simester also believes that discounters will succeed as they start introducing higher-end, higher-priced items to their traditional inventory: "If you want to buy a 42-inch plasma TV at a good price, people will look for cues such as the location of the store, the size of the store, and the level of customer service - all to evaluate whether the prices will be low. Even if a TV is the same price at Tweeter as at Costco, a lot of customers will still believe the Costco price is lower. It's all about perceived prices, not actual prices."

"Many consumers depend upon pricing cues more than they realise," warned Simester. "It's not just the sale signs, though: we are often unaware that we are being affected by other price cues."

All about cues For example, Simester has found evidence that just displaying a credit card logo prompts people to spend more. He admits he's not really sure why, but speculates that customers have formed an association between this cue and greater consumption. Looking at common retail psychology, even ending a price with a '9' can still - and probably always will - be effective in convincing customers that they are getting a better deal.

Simester concluded: "If an item has a sale sign, it doesn't guarantee the price is low. However, if it doesn't have a sale sign, you can be sure it is not discounted. This raises an interesting question about what comes first: Do we see price cues because customers have poor price knowledge, or do customers have poor price knowledge because they can rely on the price cues?" A good question indeed...

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