How Consumers Understand (and Misunderstand) Pricing Cues

Giant suburban stores with tacky displays always have the best prices, right? Just as urban stores with beautiful gourmet sections have the highest ones? New research suggests that people persist in believing these stereotypes, even though they’re not always true. Ryan Hamilton, of Emory University’s Goizueta Business School, and Alexander Chernev, of Northwestern’s Kellogg School, were fascinated by how certain discounters—especially Walmart—do such a good job of projecting a low-price image that consumers believe their prices are rock-bottom despite the more nuanced reality. Other stores, such as Whole Foods Market, can’t shake the misperception that their prices are always higher. Hamilton and Chernev realized that projecting a price image is like sending consumers a coded message. In an academic study, they describe three signals retailers need to understand and manage in order to avoid sending incorrect cues. High volume = low cost. Several elements have been shown to signal that a store moves lots of product. Location is one: People generally assume that stores in big shopping malls outside city centers serve a large consumer base. Size is another: Extensive square footage and a large assortment create a high-volume impression. Stockouts are a signal too, because they suggest that a store runs through vast quantities quickly. When consumers believe that a retailer is focused on volume, they infer that the store can secure deep discounts from suppliers and sell at low margins—a combination that presumably results in low prices. Frills = high cost. Consumers believe, often on a subconscious level, that they’ll have to pay for anything extra, whether that’s beautiful decor and well-organized displays, well-trained employees, a high staff-to-customer ratio, extended business hours, a generous returns policy, or a prominent social-responsibility strategy. Unconventional products = high cost. Customers associate unadorned functionality with low prices. Quirky, specialized, or highly designed items make people assume that even the store’s mainstream goods have steep prices. Understanding these cues is vital as retailers compete against other physical retailers and with online sellers, whose prices can be quickly checked on a smartphone. And as Whole Foods and other companies try to combat consumers’ notions that they are overpriced, they should realize that working on the pricing cues they send may be nearly as important as actually lowering prices. Based on “Low Prices Are Just the Beginning: Price Image in Retail Management,” by Ryan Hamilton and Alexander Chernev

How Consumers Understand (and Misunderstand) Pricing Cues

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