When you see a price on an item, do you really know how that magic number has been calculated? The retail companies study the shopping behavior of customers in order to set the price at the most appealing number. If they set the price too low, customers may think that can indicate an inferior product. If the price is set too high, many customers may pass on the item as it appears to be too extravagant. Finding that ideal number, which strikes a balance between value and luxury is the goal of the retail industry. This paper will address the various aspects that go into finding that tipping point, along with an evaluation of high-low pricing and sample sales, and how they can benefit both the customer and the businesses who employ the tactics.
The Psychology of Retail: How Pricing Affects Buying Behavior
The retail industry would cease to exist if it was not for customers who wanted to buy their goods. However, the behavior of the customer is not always the most predicable. Over the years, the trends have changed vastly, with the retail industry needing to change in order to supply customers with their changing needs. Additionally, the materials available for various textiles have varied, due to availability or popularity. For example, during World War II, there was a strict limit on the availability of rubber, silk, nylon, and other imported goods were unavailable for use in the garment industry (Mason, 2011).
Due to the shortage of materials available, the fashion industry started to improvise with new materials, which continued after the end of World War II. New items were being introduced to shoppers who were used to rationing even the barest essentials. Novel items were a welcome change from the ready-to-wear clothing that was commonplace during the war, which was heavily restrictive as to the design and materials allowed to be utilized in the fashion industry. Boys under the age of 13 were not allowed to wear long pants, dresses could not have more than 2 pockets, and buttons were not permitted to be made out of metal or leather (Mason, 2011).
However, when the limitations were lifted following the end of the war, the previous constriction on the clothing available gave way to a burgeoning environment. In the United States, rationing during the war was the responsibility of the manufacturers, and if the companies were to violate the rules for rationing, they faced heavy fines and even jail time (Mason, 2011). When the rules were lifted, society experienced a return to pre-war normalcy, which included a large supply of items that were once rationed.
The current retail clothing industry is influenced by materials available, fashion trends, and even the state of the economy, as less disposable income can translate to less money spent on what some may deem as frivolous purchases. A more recent influence on the purchasing habits stems from the growing presence of social media in the lives of consumers, where “Keeping up with the Joneses” becomes easier with the click of a button.
What is it?
Even in a healthy economy, consumers like to think they are getting a good deal on their purchases. Retailers have the potential power to control how their consumers perceive the value of items through using a variety of pricing tactics. One such price manipulation is known as high-low pricing. In contrast to the everyday low pricing model, which is fading out within the retail industry, the high-low pricing method involves the setting of fictitious prices deemed the “regular” price, from which an often steep discount is shown as the comparison “sale” price (Kaufmann, Smith, & Ortmeyer, 1994).
An alternative way of using the high-low pricing method involves inflating the price for a short duration, after which the discounted price is introduced (Kauffmann, Smith, & Ortmeyer, 1994). One of the possibly unethical aspects of the high-low pricing occurs when retailers inflate the original price, sometimes by up to 500%, only to bring it back down as the “sale” or “discounted” price, which is closer to the appropriate price (Kauffmann, Smith, & Ortmeyer, 1994). When the prices are reduced to the “sale” price, they often remain at the discounted level for a considerable amount of time, sometimes longer than two weeks, at which customers may begin to question the validity of the reduced price (Volpe & Li, 2012).
Psychology Behind High-Low Pricing
Consumers enjoy feeling like they are making a wise purchase, which can be driven by the price they pay for an item, along with the perceived value and savings they are receiving. High-low pricing is able to create a false sense of satisfaction for the customer. An additional way of providing such an altered feeling is through the use of coupons or in-store discount codes, which can be redeemed either in the store or online at major retailers. Such promotional pricing offers customers the satisfaction of getting a bargain, when in reality, they are most likely paying the appropriate price for the item.
In order to assist the retail industry with insight to appeal to customers, a branch of psychology, known as consumer psychology, has evolved and provides a valuable service to companies. By studying the motivation, decision making processes, and emotions that surround consumer behavior, companies can set the most effective price points (Chartrand & Fitzsimons, 2011). Much of consumer behavior is relatively unconscious on the behalf of the shopper, and operates on an automatic process, which business can use to their benefit. High-low pricing principles allow consumers to rely strongly on their unconscious processes, as such behaviors relied on the positive success in the past (Chartrand & Fitzsimons, 2011), such as picking up a good bargain when they see a “sale” price, even if the price is not a discounted amount.
Another method businesses use within the high-low pricing that operates on the unconscious level is the use of prices ending in the number nine, such as $19.99. The preference for prices ending in $9 appears to be unconscious, as an experiment compared the likelihood of consumers buying an item that ended with $9 versus the likelihood that customers would buy the same item, but was either priced $5 more or $5 less (Anderson & Simester, 2003). The results indicated that despite the lower price, consumers were more likely to purchase the item when it ended in $9 versus the one that was $5 less. However, it is important to note that the price-ending practices, such as ending in $9 is not universal, as it appears to be ineffective in non-western countries (Nguyen, Heeller, & Taran, 20007)).
Retailers Who Use High-Low Pricing
Recently, J.C. Penney discontinued using an everyday low price method for sales, and are returning to a high-low approach in hopes of recovering from an economic downturn, which affected their revenue greatly. During the 2012 fiscal year, J.C. Penney had lost over $1.1 billion, partially due to their pricing strategy (Kim, 2013). Since undergoing their fiscal restructuring, including the change from everyday low prices to the more popular and profitable high-low pricing method, over half of their items received a price increase, with some marked up by over 60% (Kim, 2013).
One of the surprising retailers that succeeds in both the everyday low price approach while at the same time utilizing high-low pricing is the home improvement store Home Depot. By offering a large selection of products, they are able to satisfy customers while also making a decent profit. Customers are willing to pay more for the ability to access a large assortment of items, which translates to an increase in sales for the company. According to a recent pricing survey, items whichwere discounted by 40% were more likely to have positive sales reactions (Johnson, 2005)
What are Sample Sales?
In addition to high-low pricing, another method retailers use to attract customers is through sample sales. By offering deep discounts on items, customers are able to buy products at a price that allows them to feel satisfied, and businesses are able to sell off their excess inventory. Sample sales are often used within the retail clothing industry to reduce the previous season’s collection, in order to make room for the next season’s items.
In the past, sample sales were a way for retailers to sell their items which were used in advanced showings, fashion shows, and presentations for interested buyers. These samples were often very limited in sizes and quantities due to the purpose the items served, however, the present day sample sales are often much larger in both sizes and selection. Some of the items sold at sample sales are from previous seasons, overstocked items, returned, or were never sold in stores.
The Psychology Behind Sample Sales
Consumers may find themselves more prone to overbuying during a sample sale due to the limited quantity available. When retailers limit the supply, the demand increases, which drives up sales, even when the main items are no longer available. When the supply is insufficient, customers will often turn to alternative products (Eroglu, Williams, & Waller, 2011), which allows the retailer to decrease their stock while increasing their revenue. An estimated 22% of consumers have been reported to substitute items rather than leave the store empty-handed (Eroglu, Williams, & Waller, 2011).
With the limited duration and selection, customers often line up early at sample sales, in anticipation of finding the deals they are looking for in the store. And due to advances in technology, sample sales have started to infiltrate the internet, allowing customers to shop for steep discounts from the comfort of their own homes. Often online sales are held for a limited time, sometimes 10 minutes, but can give customers the ability to save a considerable amount of money. Sample sales also give customers the ability to keep up with trends, as they are able to purchase items that they may not otherwise afford. Being able to express wealth and opulence, a sense of personal accomplishment through the ownership of things (Matt, 2002) can often bring about a heightened feeling of wealth which can carry over into other realms of the consumer’s life.
It is important in society to fit in, which can drive the shopping behaviors of customers. Studies have shown that the effect of social influence is stronger in women when compared to men, which may be due in part to women being more likely to focus on building relationships with others (Cialdini & Goldstein, 2004). Additionally, the choice of retail business establishment is also influenced by the social context, including the motivation to fit in with the “in group” of society. It is important to note that the role of social influence appears to be stronger when the retail location is inside a large shopping mall, than when the shop is in a stand-alone or downtown location (Evans, Christiansen, & Gill, 1996). Retailers would be wise to keep the location and the role of social influence in mind when considering where to open a new store.
Retailers Who Use Sample Sales
Many retailers are able to liquidate their end of season stock during sample sales, as shoppers are usually keen on the perception of good deals. Some retail clothing stores have even started to specialize in operating strictly on the sample sales model. Such stores include offshoots of popular stores as well as boutique collections. The mainstream store, Nordstrom also operates The Rack, which offers customers a way to obtain the sought after designer items at an affordable price. Likewise online stores such as Clothingline.com often receive excess stock after the manufacturers ship their products to the stores. Instead of the companies taking a loss due to too much product, they are able to still make a profit by allowing secondary vendors to sell the excess merchandise.
Some popular clothing makers who utilize sample sales include Jimmy Choo and Dolce and Gabbana, who are able to take advantage of their labels to lure shoppers into their temporary stores, usually held in warehouses, to purchase their leftover items. Some reviews of the Dolce and Gabbana sample sales are critical of the lack of sizes and selection available (http://samplesally.com/apparel/random-merchandise-at-the-dg-sample-sale/). However, customers who are brand loyal or heavily influenced by social trends are more likely to frequent sample sales and provide positive feedback.
An interesting new addition to the realm of sample sales is automobiles. In 2008, the makers of the Hummer line of vehicles placed a small number of 2008 models in an online sample sale, offering deep discounts (Caffrey, 2008). While the use of sample sales may not be a popular method for selling vehicles, it allows for insight into the methods in which sample sales influence consumer behavior.
The price listed on an item is not a haphazard and random number, as there are many contributing factors that influence the ultimate price the customer is charged for an item, many of which are invisible to most consumers. Retailers have a variety of pricing methods at their disposal, which work to assist them in both ridding themselves of excess inventory, while at the same time making a profit.
By knowing the way shoppers are influenced by social cues, retailers can benefit by applying psychological applications to increase the likelihood of customers leaving the store with merchandise in their bag, and possibly creating a return customer who is interested in both brand and value. Some of the methods used allow the customer to feel they have some control over the price, such as sample sales. Other tactics such as high-low pricing gambles with the price customers have in their mind regarding the appropriate amount they are willing to spend. When retailers artificially increase the price of an item, they risk customers turning away from purchasing the item. However, when that same item is then put on sale, the customer feels as if they are getting rewarded and receiving the best value.
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