Perception Of Pricing

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Evil marketing at its finest:
We all know that price promotions usually give an uptick in sales, but it doesn’t matter whether you’re actually cutting price – it only matters whether customers think you’re cutting price.

Case in point: GM’s “Employee Discount” pricing, launched on 2005, turned out to be hugely successful for the company in driving unit sales. However, it turns out the the average transaction price during this period was higher than usual, because shoppers had to pay sticker price (no haggling) and were unable to get the same rebates as usual. A double win for the company!

Even worse, it turns out that shoppers don’t pay much attention to pricing. Two marketing professors went around shops asking people if they could recall what the price was of the item they’d just put into their basket. Here’s what happened:

  • 21.1% had no idea
  • 31.8% guessed and got it wrong
  • 47.1% got it right

The implication there is that price matters, but perhaps less than marketing think it does. Sure, it’s not conclusive – some people could guess right, some people just have bad memories, there’s some variance depending on the item type and so on.

A subsequent study focuses on coffee only – as a staple food, one expects price sensitivity and hence recall to be higher, but the results appear similar. Score one for our conclusion.

However, if we equate “customers think we’re cutting price” with a promo barker, sticker or similar, then we’d need to do a slightly different study. The follow-on study also states that “price-recall accuracy is significantly related to promotion status of the brand and category purchase frequency of the consumer”. So, we have to take the results with a tiny pinch of salt.

Conclusion? If you’re cutting price to drive sales for a promo, just think carefully about how much you actually need to cut. It may be that creating a convincing perception of promo is more important for driving up volume sales.

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