MIT Sloan visiting professor finds behavioral motives key to pricing strategy

Cambridge, Mass. -- An ongoing debate in retail is whether it’s a better strategy to use markdowns or everyday low prices. Research by MIT Sloan School of Management visiting professor Özalp Özer and his colleague Karen Zheng at MIT Sloan supports basing pricing strategy on consumer behavior compared to a one-size-fits-all approach.

They find that ignoring behavioral motives can cause retailers to forgo up to 14% of potential demand. In light of these behaviors, the optimal pricing strategy depends on the product category, according to the study. For example, some products like undershirts don’t trigger regret because consumers know they are not in limited supply nor would they be disappointed if the retailer occasionally runs out of stock. For that type of product, an everyday-low-price strategy works better. In contrast, a product with a higher emotional attachment like a fashion jacket is more likely to trigger regret. If the consumer doesn’t purchase it now, the right size may not be available during the markdown period. For that type of product, markdowns are optimal.

The study also points out that it’s possible to prime customers’ sense of regret by highlighting inventory information, and that inventory information has a greater impact on consumers’ purchase decisions than regret. As a result, marketing campaigns acting on availability misperception are more effective than ones that only emphasize regret. Many e-commerce sites like Amazon use this strategy, indicating how much of each item is left in stock.

“In the past decade, customers have become very strategic,” said Ozer. “Many will wait until end-of-season sales to make purchases whereas others will choose to pay a higher price to guarantee they get what they want. This presents a challenge to retailers to determine the best pricing strategy.”