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MIT Sloan Visiting Professor Finds Behavioural Motives Key to Pricing Strategy

May 21st 2014, 09:00

MIT Sloan Visiting Professor Finds Behavioural Motives Key to Pricing Strategy

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 professor, Prof. Özalp Özer and his colleague, Karen Zheng, also at MIT Sloan, supports basing pricing strategy on consumer behaviour, versus a one-size-fits-all approach. They find that ignoring behavioural motives can cause retailers to forgo up to 14% of potential demand.

“In the past decade, customers have become very strategic. 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,” explains Özer. “This presents a challenge to retailers in terms of determining the best pricing strategy.”

The study identified two behavioural issues that impact consumers’ purchase decisions:

1) Regret about choosing one action over the other, so choosing to buy one product over another.

2) Misperception about the likelihood of the product’s availability during the markdown period. The availability misperception may occur due to lack of ability to process all relevant information or simply because customers – when faced with uncertainty – tend to assume that the product will likely be unavailable.

In light of these behaviours, the optimal pricing strategy depends on the product category. 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.

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