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Price Cutting Doesn’t Always Result In Better Retail Sales: Study

Does having the lowest prices result in more sales? According to a Bain & Co. survey, customers’ perceptions are often at odds with reality.

Bain and ROI Consultancy Services surveyed almost 2,200 shoppers in Atlanta and Washington, D.C., about prices at eight retail chains, and the results showed that consumers often thought retailers were cheaper or more expensive than warranted by the actual shelf prices. In other words, companies’ actual prices are often at odds with how consumers perceive their prices.

Despite aggregator and comparison websites that have enabled greater price visibility and ease of product comparison, most consumers rely on predetermined attitudes when it comes to actually purchasing.

The survey shows that retailers that align their marketing strategy with the pricing strategy perform better. If consumer perception does not align with the company’s intent, that undercuts expensive investments in discounts, price matching, coupons and advertising. Any shift in prices must fit in the context of delivering greater value, Bain said. In fact, other tactics — such as clear in-store or website signage and clear marketing communications — generally cost less and do a better job of helping shoppers understand a brand’s position in the price-value equation.

For example, one major discount retailer, facing stiff competition from other discounters, fought back by slashing prices across the board. But the price cuts did not produce the anticipated benefits in price image and sales volume. When the company did some analysis, it learned that consumers incorrectly believed it had higher prices than a key competitor. A key reason was that the retailer offered many more price points, which confused people. Also, the company discovered that customers were more price sensitive about certain product categories.

The retailer defined clear roles for each product category, based on perceptions of the category and whether it had a halo effect, meaning it influenced how people perceived the retailer’s brand overall. The retailer refined communications about pricing so they were consistent with the price images it wanted to portray, and it reduced the number of price points. As a result of the program, the company was able to achieve its target price image, develop stronger internal pricing capabilities and grow revenues by roughly 1 percent.

As this retailer discovered, lowering prices may not supercharge sales. Worse, it might backfire if consumers’ perceptions don’t give the company sufficient credit on its relative price position. More indirect tactics, such as signage and private-label goods, on the other hand, may have an outsize impact on pricing perception.