Shoppers aren't always happy about lower prices – especially when they come after higher ones.
That's the finding of research that finds that consumers are antagonized by price drops immediately following their purchase. The researchers from Kellogg School of Management and the Massachusetts Institute of Technology (MIT) found that consumers who are frustrated by sudden price drops are much less likely to buy from the company again.
The researchers used Apple's iPhone as an example.
"Back when Apple launched the iPhone in June 2007, thousands of people waited in line to be among the first to own one. Expectations were high, and so were the prices — the cheapest model with only 4 GB of storage sold for $499, hundreds of dollars more than even that era’s smartphones," the researchers said. "Initial sales were brisk, but many consumers and commentators balked at the high prices. So in September, Apple dropped the 4 GB model and cut the price of the 8 GB version by $200 to $399. People were outraged."
The result was that consumers who'd paid the higher prices felt ripped off and vowed to stop buying Apple products.
"Who was likely to buy the iPhone at $599? The people that love Apple,” said Eric Anderson, a professor of marketing at Kellogg School of Management, who conducted the research with Duncan Simester, a professor at MIT. "They were going to buy it as soon as it was on the market at a full price. And who did Apple upset when they dropped the price in September? Their best customers."
By dropping the price, Apple gained access to a new market. But in the process they learned a tough lesson about price stickiness and customer antagonism, Anderson and Simester said.
To understand how consumers respond to sudden price drops, Anderson and Simester worked with a retailer that specialized in selling durable goods, such as software, electronics, apparel and books. In the past, the retailer had typically kept prices high, but frequently offered small discounts and the occasional deep discount. Anderson and Simester worked with them to create test catalogs to determine whether and which customers would be antagonized by price changes.
The team worked with the retailer to create two catalogs – one featuring deep discounts and one featuring smaller ones. After the catalogs were mailed, Anderson and Simester tracked the purchasing habits of the 55,000 customers who were involved in the test. As expected, lower prices led to more demand in the short run. However, customers who had previously paid high prices for products and then saw them deeply discounted in the catalog where less enthusiastic.
"When you look at this segment of customers, what you see is that a substantial portion just stop buying,” Anderson said. “We call this the boycott effect.”
Customers who received the deep-discount test catalog placed 14.8 percent fewer subsequent orders than those who received the shallow-discount version. But even worse, the proportion of customers who placed no order at all after the test catalogs were mailed was 34 percent for recipients of deep discounts and 27.1 percent for recipients of shallow discounts.
"Merely sending these customers a catalog containing lower prices reduced purchases," Anderson and Simester said.
They estimate that customers upset by the deep-discount catalogs purchased less for 20 months after receiving the test catalog. And though those customers made up only 25 percent of the sample, they represented 52 percent of the revenue after the test catalogs were mailed. Anderson and Simester estimate that if the retailer had mailed the deep-discount catalog only—and not the shallow-discount version—profits would have declined by about $155,000.
Anderson and Simester also tested their hypothesis with a clothing retailer that also relied heavily on catalogs. For that part of the study, 110,000 customers received a test catalog just days after Christmas. Since sales are common after Christmas, Anderson and Simester reasoned that the test catalogs should not offend people’s sense of timing when it comes to discounts. Yet orders still dropped 4 percent after the mailing.
"Our study showed that the customers who are antagonized are not the worst customers—they’re the best customers," Anderson said. "It's a phenomenon that is important for both macroeconomic policy and managers."
Their research reinforces moves made by at least one retailer – JCPenney – recently. The clothing retailer decided to stop offering big sales and lower their overall prices.