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Retail Pricing Strategies: Do Shoppers Prefer Deep Discounts or Everyday Low Prices?

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Consumers seem to prefer many small discounts to a few large ones and their perceptions of average prices do not drive their store choices.

Finding the best value for money is a key objective for many shoppers at supermarkets and other retailers.  But where do you go if you don’t know the pricing ahead of time?  
 
In a new study, NYU Stern Professor Vicki Morwitz and her co-authors, Shai Danziger of Tel Aviv University and Liat Hadar of the Interdisciplinary Center Herzliya, find that consumers who try to maximize savings will choose retailers that they believe offer lower prices more often.
 
“We looked at the impact different pricing strategies have on the stores people shop at when they do not know the product prices unless they visit the store,” the authors write.
 
During several experiments conducted in the United States and Israel, study participants were asked to purchase products from one of two competing retailers on 100 different occasions to simulate weekly purchases from a store.  Participants were given a monetary incentive to minimize their total spending and were instructed to base their selections strictly on price.
 
On each shopping trip, participants selected a retailer before they were shown the store prices for that week.  The authors manipulated the pricing strategies, but in most cases, one retailer used deep-discount pricing (i.e., large, infrequent discounts), while the competing retailer either used everyday low pricing or offered frequent but small discounts.  While the average price of the two retailers was the same across most of the experiments, the studies showed that people consistently choose the retailer they believe is less expensive more often than the retailer they believe is cheapest on average.  This pattern held whether or not the retailer used frequent discounts or everyday low pricing.
 
These findings offer insight for retailers that use pricing strategies to compete for and attract consumers.  The authors suggest that the most effective pricing strategy is to offer prices that are generally lower than their competitors’ prices all of the time.  “One reason consumers find these retailers so attractive is that their product prices tend to be cheaper than those of their competitors on the majority of shopping trips.  Consumers seem to prefer many small discounts to a few large ones and their perceptions of average prices do not drive their store choices,” the authors conclude.
 
The co-authored paper, “Retailer Pricing Strategy and Consumer Choice under Price Uncertainty,” will be published in the October 2014 issue of the Journal of Consumer Research.