Discount retailers, such as Target, Macy’s, and J.C. Penney, have tried various pricing strategies over the years to lure customers to buy more of their products. The primary tool in the competitive arsenal is to offer the best value because they know that customers are motivated to seek out price savings and great deals on frequently purchased products.
Seems simple right? Just offer low prices and people will come. That is not necessarily the case, though.
Feelings Affect Our Shopping Decisions
An economist would say that customers are rational beings who try to get the most value for their money. In a tough economy, people should be especially focused on savings and prefer shopping at a store that always offers the lowest price. Psychologists, however, know that people do not always make rational decisions that offer the greatest economic gain because emotions play a critical role in guiding decision making and behavior. For example, positive emotions tend to evoke creative thinking and persistence when trying to solve problems.
An important study describes how specific emotions like disgust can reduce how much people are willing to pay for something and how sadness can increase how much we
are willing to pay. The expression “retail therapy” confirms that many people might attempt to change their sad mood by shopping purely for the entertainment value. Though shopping may serve a basic utilitarian need to acquire goods for nourishment and comfort, people are also motivated to feel competent and socially connected. Satisfaction might be gained when a shopper has a sense of expertise in selecting the best product for the best price, from knowing that some effort on their part resulted in a savings. Shoppers may get an additional self-esteem boost when they share their market expertise with other members of their community.
When J.C. Penney recently ousted CEO Ron Johnson, industry insiders began speculating what went wrong with its pricing strategy. A recent NY Times story describes some of the psychology behind discounting and what factors go into creating the sense in a customer’s mind that she got a great deal.
1. Deals are motivating
The first involves establishing what a fair price should be. Who knows what a box of cereal or a pair of boots should really cost anyway? Morning game shows, such as “The Price Is Right” or Let’s Make a Deal,” have taken advantage of the difficulty people have when guessing the price of everyday retail items. People make their best guess typically from how other similar items are priced. Psychologists who study decision-making call this type of estimation anchoring and adjusting. We fixate on a number that we have paid in the past and adjust our guess from there. We feel like we are getting a great deal when the anchor is a high “list price” and we pay a lower sale price that may even be below what we originally adjusted for in our mind.
2. You can't change the way the mind works
The Times article points out that J.C. Penny stopped offering discounts due to the complexity and effort involved with constantly changing prices and managing inventories. It simplified by offering everyday low prices much the way Walmart or Costco does. Unfortunately, customers stopped buying because without the anchor of a higher retail price, they no longer felt like they were getting a deal.
3. Discovering a great deal is a fun game
Another aspect touched on in the article was the game price-conscious shoppers like to play by clipping coupons and feeling the satisfaction of earning a lower price. Everyday low prices at a certain store may result in savings but shopping there might not be as fun or at least provide the satisfaction to a savvy shopper who realizes anyone can get the low price without any effort or special knowledge.
4. Sales should be engaging
Les Wunderman, the direct marketing ad executive, famously increased sales for Columbia House records by mentioning a “Gold Box” treasure hunt in late-night TV ads for the company that would appear later in TV Guide and Parade magazine ads. The treasure hunt created a cheesy but amusing game that created customer interest and potential for increasing how customers interact with the company. Today, social media affords another platform to engage customer interest by making digital platforms a source of insider information and a potential “treasure” of future discounts.
5. Sales are naturally social
Finally, people love to share inside information with those in their social networks. People gossip and share funny videos on YouTube in order to feel like a valued member of their social group. People also derive more pleasure from giving to others than spending the same on themselves. J.C. Penney’s everyday low price strategy likely fell flat with customers because savvy shoppers had nothing of value to share with their friends when discussing purchases at the store.
6. Sales are satisfying
In the end, effective pricing strategies not only need to give customers a tangible sense of satisfaction that they got a good deal by using anchoring techniques---but offer interactive methods to keep customers coming back to social media and marketing campaigns for future deals. The trick is to make these efforts somewhat challenging and fun to keep customers interested. Once they realize the gains from their efforts, they may be more likely to spread the word and create the desirable buzz that every retailer wants to sustain about their brands.