Holiday shoppers seek “pricing cues” as they hunt for the good deal

But do retailers help or mislead customers with their sale claims?

CAMBRIDGE, Mass., December 12, 2005 — 'Tis the season for countless “On Sale” signs in retail stores across the nation, but according to an MIT Sloan School of Management professor, just posting such a discount sign won't necessarily work. And sometimes, the sale sign won't even be needed if customers are receiving other “pricing cues” about good discounts.

“If a store charges charge $2 for a can of Coke and claim that it is ‘On Sale,’ customers will not be fooled,” said MIT Sloan Associate Professor of Management Science Duncan Simester. That's because customers already have good price knowledge about frequently purchased items such as Coke. Pricing cues are often much more effective on items for which customers' price knowledge is poor. In fact for these products, says Simester, putting a sale sign on such a product can be more effective than actually lowering price when it comes to generating sales.

According to Simester's research, pricing cues extend to much more than sale signs. Wal-Mart, Costco and other major discounters, for example, “have a storewide image of being low-priced, so people assume all items will be cheaper there.” That's why Simester thinks that discounters will succeed as they start introducing higher-end, higher-priced items to their traditional inventory. “If you want to buy a 42-inch plasma TV at a good price, people will look for cues such as the location of the store, the size of the store, the level of customer service, all to evaluate whether the prices will be low. Even if a TV is the same price at Tweeter as at Costco, a lot of customers will think the Costco price is lower. It's all about perceived prices, not actual prices.”

Many consumers depend upon pricing cues more than they realize, said Simester. “It's not just the “Sale” signs. We are often unaware that we are being affected by other price cues. For example, we have collected evidence that just displaying a credit card logo prompts people to spend more. We're not sure why, but we speculate that customers have formed an association between this cue and consumption. Even ending a price with a digit ending in 9 can be effective at convincing customers that they are getting a good deal.”

Should customers rely on such price cues? “In general the answer is yes,” said Simester. “If an item has a sale sign, it doesn't guarantee the price is low. However, if it doesn't have a sale sign, you can be sure it is not discounted. This raises an interesting question about what came first? Do we see price cues because customers have poor price knowledge — or do customers have poor price knowledge because they can rely on the price cues?”

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MIT Sloan graduates join one of the world's most influential alumni groups, which includes the former Secretary-General of the United Nations and the former CEO of Hewlett-Packard.

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