These posts are a collection of notes and summaries from the book “How Brands Grow: What marketers don’t know” by professor Byron Sharp. This work is a must read for any marketer. My personal goal when I embarked on this series of posts was to get a deeper understanding of the book and its lessons, and as I have worked through them I have not only gained that understanding, but also an idea of the areas I need to investigate more deeply in the future. Sharp is always very insightful, but I feel the need for more perspectives on many of the topics he covers. You can buy How Brands Grow here.
I don’t know if the pricing promotion chapter required a deeper conversation and so I am splitting it into three posts, or if it was one of my favourites and I decided to spend more time on it.
In the previous post we saw some key aspects of pricing, today I will quickly discuss price perception.
Price in three big disciplines
Price, and consequently price promotions, is a field of research at least in three big disciplines:
- Classical economics
- Marketing
- Psychology
These three fields make different assumptions about consumers and price knowledge.
In the first one, classical economics, consumers are assumed to have a high knowledge of the price of a product and their alternatives.
In the second one, marketing, the main hypothesis is that consumers are aware of both prices and temporary reductions (e.g., Guadagni and Little 1983; Gurumurthy and Little 1987; Raman and Bass 1989; Winer 1986)
In the last one, psychology, the focus is on psychological theories of consumer information processing. These last studies evaluate how price information at the point of purchase is encoded, evaluated and integrated into memory.
Focusing on that, psychological theories explicitly state the existence of reference prices.
These references are the basis for the way consumers perceive new prices .
Consumer price knowledge is very tricky, past studies state that only 50% of shoppers remember the exact price of items bought (e.g., Allen, Harrell, and Hutt 1976; Conover 1986, Progressive Grocer 1964, 1975) .
On that, I enjoyed reading one of the research cited in the book.
Here the authors specifically evaluated “price knowledge immediately after the shopper has chosen an item and assessed the level of awareness of whether the chosen item was on special (a temporary price reduction)”.
As a side note, I will not spend time describing the experimental conditions, but if you want you can search for the specific paper.
The findings were quite surprising (for me as for the authors) and I want to share them with you.
Only 41.9% of special shoppers gave an estimate of the amount of the price reduction, and their average price reduction estimate was off by 47%.
The key point was the low level of price recall, but here some additional statistics that come directly from the paper:
- One in five of the shoppers (21.1%) did not even offer a price estimate; they seemed to have no idea of the price of the item they had chosen.
- Less than half (47.1%) were able to state the correct exact price (55.6% gave a price within 5% of the objective price)
- 31.8% gave a price estimate that was inaccurate.
- Price estimates of those who were inaccurate were off by an average of 30 cents (about a 15% error).
- There was a systematic bias in the incorrect estimates; the recalled price was on average 10 cents lower (4.2%) than the actual price.
- The amount of the price reduction was not displayed when an item was offered at a special price in the studied store environment. The shopper had to see the special price and calculate the difference from the normal price that was also displayed. Consequently, it is not surprising that the accuracy of knowledge about the amount of the price reduction was considerably lower (13%) than the price recall accuracy (49.1%).
- Only 41.9% of special shoppers gave an estimate of the amount of the price reduction, and their average price reduction estimate was off by 47%.
What are the managerial implications of these findings?
Well first of all improving the communication in the point of sales, especially when the goal is to reach a sales uplift leveraging the price variable.
In fact Hutchinson (1989) found that temporary price specials that receive no other promotional aid such as displays or advertising features are less profitable than maintaining regular prices.
We are always in a hurry, always distracted, so it’s understandable that many shoppers will hardly notice anything that doesn’t stand out from the crowd.
Look at these Nutella shelves for example, how they are so distinctive and recognizable.
Another consequence of a pricing strategy based on “special deals” is that consumers will focus on the price of the product and not on other attributes like specific qualities or features.
Moreover an aggressive price strategy based on frequent deals can escalate across competitors.
One of the examples cited in the book is related to two bus transportation companies.
Greyhound and Peter Pan Trailways (Heil & Helsen 2001).
The two companies started a massive war on prices, the ticket price went from $25 to $9.95 to $7 to $6.95, and then Greyhound offered a $4 fare, which was lower than the price it had charged 40 years previously.
And if you think it happened in a couple of years you are wrong!
The prices fell in just three weeks!
Price Promotions should be communicated properly, also leveraging digital channels
In the end after this short post it is important to bear in mind that price perception is far from perfect, so if you are conducting a promotion based on price be sure that is communicated properly, also leveraging digital channels if possible.
Secondly, be careful to start exploiting price promotions just because they drive sales in a very quick way, consumers get used and your product will be remembered for price discounts and not for other qualities.
I wanted to talk about how proportionally price promotions can increase sales by introducing the concept of elasticity, but I think this is enough for this blog post and I will need a third post to talk about it.
Also, focusing more on this chapter to write this post, I definitely feel it is my favourite out the whole book.
Additional Reference
“A Logit Model of Brand Choice Calibrated on Scanner Data”, Peter M. Guadagni and John D. C. Little
The Price Knowledge and Search of Supermarket Shoppers Peter R. Dickson and Alan G. Sawyer
Hutchinson J. Wesley (1989), “Profit Oriented Graph Paper: Promotional Strategies Jointly Optimal for Manufacturers and Retailers,” presented at University of Florida Marketing Colloquium Series (this is not online or google scholar, I just wrote to Peter Dickson and Alan Sawyer to know where I can found this paper cited in their work)
Allen, J. W., G. D. Harrell, and M. D. Hutt (1976), Price Awareness Study, The Food
Marketing Institute, Washington D.C. (Also here the paper is not available and I wrote to the FMI to get it, but it is often cited like in this Kellog Research on “Price Cues and Customer Price Knowledge”)
