Live from NEMOA: Of Pricing and Men (and Women)

Cambridge, MA–Catalogers need to pay more attention to the effects of inventory management, mailing drops, and pricing strategy beyond the immediate response curve, retail researcher Dr. Duncan Simester said during his session at the New England Mail Order Association spring conference here.

A professor at the Massachusetts Institute of Technology’s Sloan School of Management, Simester has analyzed the effect of discounts and sales on forming long-term customer buying habits, revealed that while discounts are effective in luring prospects in, the lifetime value of already-established customers can be reduced by such price reductions. Giving proven buyers discounts may train these individuals to wait for sales rather than making purchases as soon as the first catalog of the season arrives. “If anything, it makes them more deal-sensitive, and more likely to wait for special deals in the future,” Simester explained. The exception to this rule, he said, are inactive buyers, who often need the stimulus of the discount to start shopping from the catalog again.

In addition, shoppers respond to what Simester called “price cues,” such as sale claims, price endings, and pricing guarantees, more than to actual price changes. He warned that companies have much less ability to raise prices on products whose costs customers are familiar with, such as a can of Coke, but have more leeway with products whose price most shoppers are less knowledgeable of, such as a pack of baking soda. He also advised against overusing price cues. “The effectiveness of sales signs go down the more often you use them,” Simester said, noting that customers will catch on to an overabundance of sales events. “It becomes an issue of credibility.” Similarly, he said that companies need to watch the timing of sales, pointing out that a spring catalog, for instance, probably won’t be able to get away with claiming that it has swimsuits for sale.

Simester has also examined the long-term effects of customer service handling of backorders at an undisclosed “moderately sophisticated” women’s apparel cataloger/retailer with 1.7 million customers and a six-year mailing history. The study tested the effectiveness of five backorder explanations from customer service reps. In some cases, customers were simply told that the item was out of stock; other times they were told it was not available due to a problem with the supplier or was out of stock due to extreme popularity. In some instances, after being told an item was not available, the customer was offered $5 off on shipping if she agreed to wait for the product; in the fifth scenario, she was offered 10% off the cost of the item in exchange for waiting.

Following a test period of 30 days, the company found that 34% of customers who were given no explanation for the item being out of stock cancelled their order; of those told that the backorder was due to a problem with the supplier, 33% cancelled. Only 27% of those who were told that the item was no longer available due to its popularity cancelled, however. Thirty-four percent cancelled after being given the option of $5 off on shipping of the product if they waited, whereas 28% cancelled after being offered 10% off on the price of the item in exchange for waiting.

“The long-term costs of being out-of-stock exceeds the short-term costs” of keeping inventory levels up, Simester concluded. He said that first-time shoppers in particular are deterred from future purchases by backorders: “The customers that respond most unfavorably are first-time buyers.”

Simester urged a long-term approach to looking at catalog response, emphasizing that one way of looking at catalogs is as an investment that may not pay off for a year or two. “A catalog is more than an order-starter; it’s advertising,” he said. “You have to wait 12 months to [really] see what happened, but we’re not that patient.” Simester said that the catalogers he works with usually tell him that they care primarily about this year’s numbers, somewhat about next year’s results, and not at all about the results of the year after that.

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