In trying to lure customers into their stores, retailers often run promotions, temporarily lowering prices on specific products by as much as 20% to 30%. Consumers, though, don't always take advantage of these deals, even if they're for items that they buy fairly often. Stephan Seiler, assistant professor of marketing at Stanford GSB, thinks he's found the reason customers pass up good deals: Too often, they aren't even aware that a promotion is going on.
Focusing on one specific product — laundry detergent sold in tablet form — Seiler looked at detailed purchase data from more than 100,000 shopping trips in the United Kingdom. Based on his modeling, he estimates that on roughly 70% of the trips people don't take the time to search for promotional prices.
Seiler thought that the reason for missing out on temporary promotions was that customers simply didn't know about them. After all, going down each supermarket aisle on every shopping trip in the hope of spotting a sale price takes time, and the potential bargains might not be worth incurring this search cost. But there was another possible explanation to consider for missing a promotion: Because detergent takes up space at home, customers could well have knowingly passed up good deals simply because they already had all the detergent they could handle. "It might be the case that the supermarket has a promotion two weeks after you bought the detergent, and you can't be bothered to store a second pack, so you wait until you run out," Seiler says. "I tried to disentangle that type of story from one in which people might have bought it, and the only reason they didn't is they weren't made aware that a promotion was going on."
Poring over the data from several British chains to see which account was more likely, he noticed that the typical consumer made one large shopping trip per week and several smaller trips on which she'd buy only a few items, such as bread or milk. Detergent, it turns out, was much more likely to be bought on a large shopping trip than on a small one, even by people who always drive to the store and therefore have no problem carrying hefty packages. What's more, people were missing discounts on detergent more often on smaller trips — unless, interestingly, they happened to have bought another cleaning product on that same trip. That fact tells Seiler that when people are strapped for time, as they are on short trips, they don't bother with promotions unless they happen upon them from being in the same part of the store.
Seiler's look at individuals' purchases over time likewise suggests they're trying to minimize search costs. That's because people tend to buy large pack sizes, he found, and this preference for large over small doesn't seem to be due to the discount that comes from buying in bulk. The typical volume discount, Seiler says, is about 8%, whereas a typical promotional price is 20% to 30% off. "If people are really price-sensitive, and they really like the lower price from the larger sizes, then I should also see massive reactions to promotions," Seiler reasons.Yet he didn't see strong reactions to promotions. Therefore, people seem to be buying large packs to reduce purchase frequency, thus saving search time.
The beauty of search-cost explanations for consumer behavior is that they give marketers something to work with. "Price information is something the store can alter, whereas if it's just that the customer didn't like the product or had a large stock of it, then you can't tackle it with any marketing tool as much," Seiler says.
So what can marketers do with these findings? One implication is to raise awareness of promotions through circulars, especially in places like the UK where these kinds of ads are underused. Seiler also suggests offering deeper discounts — perhaps even 50% — although the optimal level obviously depends on the product's wholesale price.
The conventional wisdom is that deep discounts, while luring customers away from competing retailers, also eat away at the store's own future sales of that product at regular price. But Seiler says that deeper discounts build customer expectations that there are good deals to be found — and thus encourage more searching. This extra searching pays off for the store in the form of additional sales near the discounted product. "The deeper promotion works as a loss leader," Seiler says, "not for the store as a whole, but in that category."