Fair pricing blows away low pricing

Deliberately making shoppers jump through hurdles to get "better" pricing is arguably retail's most self-defeating idea ever

Bic Camera

Shoppers pass in front of a branch of Bic Camera in Tokyo's Yurakucho district on Oct. 5, 2015.

Credit: Martyn Williams

One of the most neglected but powerful attributes of retail executives is that, unlike almost all of their counterparts in other industries, they have an innate understanding of their customers because, when off-duty, almost all of them are customers. They may not be customers of their own chains, but they are almost certainly retail customers in general.

And yet these execs routinely make decisions that reflect a deep confusion about what motivates shoppers. Baffling indeed.

Consider a column that ran this week in the Harvard Business Review, a publication that has a rich history of publishing well-thought-out business strategy pieces. (I guess we all have our off days.)

Here’s the salient part: “It’s important for the company to embrace the fact that not everyone is concerned about price. In fact, many current customers are paying full price already. A better strategy is offering discounts with built-in hurdles, or requirements that must be ‘jumped over’ in order to receive the lower price. This method enables a company to provide discounts to customers who require them while simultaneously charging full price to customers who are willing to pay it. Customers who make the effort to clip, store, and redeem coupons, for example, are credibly stating ‘Price is important to me.’” As if that’s not enough, it opened that section by stating, “Amazon is heavily promoting its Prime program, which makes online shopping more attractive by providing two-day shipping.”

Those words are so wrongheaded, so potentially destructive to any retailer that gets fooled by them, that I think we need to break this down point by point.

  • “Not everyone is concerned about price” with one proof being that “many current customers are paying full price already.”

The reality is that just about all consumers are indeed concerned with price. The income level of the shopper matters not: Price is an issue for all. That said, consumers have quite a few priorities when it comes to making purchases and, depending on the situation, price may not be at the top of the list.

But just because other elements are, for the moment, more important to a consumer than price for a specific purchase, that in no way means that the shopper is not “concerned” with price. That mistaken logic leap can prove deadly to sales.

Consider a shopper who is moving into a new home and is strapped for dollars. It just so happens that the space in the new dwelling for a washing machine is not only very small, but unusually configured. Even though price is very much a priority for that shopper, the washing machine’s physical dimensions have to take a priority. Assuming that a shopper's willingness to spend more for one item means that the shopper is insensitive to price is a terrible and costly problem.

There’s something else at play here, too. Price has three dimensions. First, there is the price of the item versus the shopper’s budget (i.e., what can the shopper afford and/or justify?). Second, there is the price in relation to perceived profit/margin. Third is the sense of fair play. If shoppers think they are being ripped off, that will undermine sales even if they can afford the price that they perceive as too high.

  • “This method enables a company to provide discounts to customers who require them while simultaneously charging full price to customers who are willing to pay it.”

The problem with this statement is that it ignores how important fair play is to people. Even if a customer wants an item, can afford it and thinks the price is appropriate, the shopper will be alienated — and the sale killed — if the shopper thinks that another shopper is getting a much better deal.

Think of it in a non-retail context. Let’s say you negotiate for a job and are very happy with the salary and the particulars. But hours after you start the job, you discover that someone else with the same work profile took the same level job and is being paid significantly more. Even though the compensation and duties are exactly the combo that you were so happy with a few hours ago, you now feel unhappy and you want more money. Your self-worth is being shaped by your perception of deals offered to others. This is all part of your sense of fair play. It is ingrained and encouraged from a very young age, and retailers can safely assume that most of their shoppers will have this sense of fair play.

Now let’s look at that quote again: “This method enables a company to provide discounts to customers who require them while simultaneously charging full price to customers who are willing to pay it.” The customers “who are willing to pay” a higher rate do not, at the time, see price as the top priority. Trust me; the instant they realize — or even suspect — that they are paying more than the person standing next to them is the instant their priorities will be rearranged.

  • “A better strategy is offering discounts with built-in hurdles, or requirements that must be ‘jumped over’ in order to receive the lower price” and “Customers who make the effort to clip, store, and redeem coupons, for example, are credibly stating ‘Price is important to me.’”

Built-in hurdles? Requirements that must be “jumped over”? I have to ask: Is this how this author likes to be treated at stores?

This piece talks about the threat coming from Amazon and other etailers and yet it seems oblivious to the fact that this is a perfect example of the kind of in-store thinking/strategy that is the stuff of dreams for etailers.

The whole point behind mobile initiatives in-store is to allow the best offers — that’s not limited to price but to all areas of interest — to seamlessly and effortlessly go to shoppers. The Golden Rule — my preferred term, though, is "the ethic of reciprocity" — is powerful in its simplicity: Don’t do to your customers what you wouldn’t want to be done to you.

Shoppers have plenty of options today. Maybe this kind of sleazy tactic would have had a chance many decades ago for a store that was the only viable place to secure select and necessary goods. But options today are far more numerous, and switching shopping channels is far easier. In any event, those small corner merchants of yesteryear actually treated their customers with respect (for the most part). No merchant dared to try to make a living by ripping off his neighbors.

  • “Amazon is heavily promoting its Prime program, which makes online shopping more attractive by providing two-day shipping.”

This is going to sound like a nitpick, but it’s not. Prime’s attraction is not providing two-day shipping — which is obvious because Amazon has always offered two-day shipping to anyone who wanted it — but providing it for free.

But to understand Amazon’s strategy, and why it’s so popular with consumers, is to understand the psychology behind that free shipping. As referenced above, this isn’t about the price per se. It’s about shoppers seeing the system as fair and reasonable and perceiving that they are being treated with respect. Let’s say that someone discovers that the person standing next to him in line was charged $15 less. And that customer kills the sale and leaves the store. If a retailer thinks it lost the sale because of the customer not wanting to spend an extra $15 — and perhaps even thinking that the customer “can’t afford it” — it has missed the point.

What free shipping does is change the customer’s thinking. Before, shoppers saw little logic in going online for an $8 peripheral, given that the $9 shipping cost would exceed the cost of the product. It’s not about the $9 per se. It’s the indignity and lack of logic of paying more for shipping than the item. By removing the shipping cost, the convenience of Amazon rises to the top. Suddenly, there’s this perception that there is nothing that Amazon can’t deliver. And that annual fee makes the customer feel the need to push as many sales through Amazon as possible.

And Amazon’s seemingly endless series of small partners fuel what appears to be almost infinite inventory. Prime is all about changing how the shopper thinks about purchases. The actual dollars from shipping are trivial compared with the sales made possible by removing that hurdle.

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