Where would you rather shop: a store with high prices and occasional sales or a retailer where prices are consistently low? While reliably cheap prices might sound better on paper, businesses harnessing the former pricing strategy — rather than the latter — can be more profitable and successful with shoppers, according to newresearch by management professors at the Massachusetts Institute of Technology and University of Texas at Austin. The reason? It’s all about regret. There are two types of regret that consumers tend to feel with regard to shopping, said co-author Karen Zheng, an assistant professor of operations management at the MIT Sloan School of Management. One type results when you buy an item of clothing, for example, and then later see it on sale for a lower price than what you paid, she said. “But the other regret is if you don’t buy it and come back to find your size is gone,” said Zheng. “You will wish you had gotten it in the first place, … and it turns out people tend to believe certain products will be sold faster or sooner than they actually are.” Specifically, the fear that items will go out of stock can be powerful enough to make shoppers pay full price when they first see an item — and increase stores’ profits by as much as 10 percent, the study found. Of course, the strategy of keeping prices high will work better for some retailers than for others, said Zheng. Shoppers have an easier time holding out for sales when they are buying common items like T-shirts. “Branded fashion, on the other hand, is more likely to induce the fear of future regret,” she said. “My conjecture would be that for trendier items, there is a time value of wearing them, so they are more valuable at the beginning of the summer season versus at the end, for example.” Indeed, certain name brands are especially adept when it comes to urging shoppers to pay full price.
One such example is Zara, said Daniel Doiron, a senior teaching associate at University of New Brunswick who examined the retailer in a recent Harvard Business Review case study. The “magic” of Zara has much to do with its tight supply chain, Doiron said, which allows the company to manufacture clothes in small batches, get inventory into stores, and turn over styles quickly. “Scarcity is a big part of how they influence consumer behavior,” he said. “There’s always something new, and clothes are never stacked too high.” For that reason, Zara is successful at getting fashion-conscious shoppers to pay full price; consumers rightfully worry that the items they like might be gone if they wait for a sale. In fact, the retailer has fewer sales than competitors, Doiron said. “They mark down only about 15 percent of their clothes,” he said. “That’s the key in this industry.” Zara’s strategy seems to keep paying off over the years: Both sales and profits were up in the latest earnings report for parent companyInditex. If you’re a consumer who likes to stay current, it can be tough to fight the feeling of urgency that savvy brands plant in your mind. But there is one strategy that could save you from the other type of regret — wishing you hadn’t wasted your money on something you don’t need. Before you examine an item closely or try on a piece of clothing, consider glancing at the price tag. A recent study found that while seeing a product first and a price second makes people focus on how much they like that item, viewing the cost first primes shoppers to more closely scrutinize the object’s worth, said Harvard Business School marketing professor Uma Karmarkar, a co-author on the research. “Seeing the price first can attune you more tightly to the value of a purchase,” she said. “And if you consider value more strongly, you might realize the item won’t fill the right space or be truly useful for you.” One caveat: Looking at price tags tends to inspire pragmatic thinking only when a consumer is somewhat on the fence about a purchase, said Karmarkar. So if you’re already in love with that hat or shirt, this trick won’t work, she said. Good news for stores, bad news for your wallet. Source of Article: cnbc.com