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Tuesday, October 25, 2011

Price Competition: Shoppers Value a Bargain!

Do you know a bargain hunter? You know, the type of person that is drawn to a "SALE" sign like a moth to a flame...  Most of us know one or two, I'm sure.  I learned a little more about these people last week, thanks to a paper presented at a conference by some researchers from Washington State University (Li, McCluskey, and Mittelhammer).

The research team analyzed the responses to "permanent" price drops (that is, those that were due strictly to supply and demand conditions) versus promotional, or short-term, price drops.  They used data from supermarket scanners, so they were able to analyze real transactions under real market conditions.  They did this for several different types of vegetables.

Guess what they found...  Consumers were more responsive to short-term price decreases than they were to permanent ones.  This suggests that promotions may be a better method to generate increased sales than being viewed as having low prices all the time.  On the other hand, it also means that promotions that happen too frequently may cause customers to pull back when a promotion isn't underway.

This phenomenon doesn't really surprise me.  I may or may not be related to a bargain hunter and I have come to understand that the purchase is more than the purchase.  Getting a bargain is a badge of honor; a story to tell friends, family, and co-workers.  I get that.  But there may be other factors at play.  In a stagnant economy like this one, we see shows like TLC's "Extreme Couponing" become popular.  To get these types of bargains, it often means buying in bulk.  So hoarding, or "stocking up" is a factor that drive sales during promotions.  (For something like vegetables, this may mean freezing or canning, so be sure to offer tips on how to do that.)

There's good science and economics behind pricing strategies that include short-term promotions.  Business owners should think about using them frequently, but not so much that they become the norm.  Watch sales (in dollars and quantities) to see how effective the promotions are.

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