Until recently, most businesses changed their prices once or twice a year, usually when they printed new catalogs. As recently as a decade ago, even cutting-edge, upstart online retailers like Amazon didn’t change their prices all that much. In one study, for example, marketing scientists Mark Bergen, Robert Kauffman and Dongwon Lee analyzed book prices on Amazon over a 449-day period during 2003 and 2004. They found that a book’s price changed on the site an average of once every 222 days. In other words, Amazon changed its prices only once every 7 and a half months.
How things have changed since then! Nowadays many businesses use pricing optimization software that connects information about their internal costs with data points on their customers’ preferences and buying patterns. Much of this data sits in the cloud and is analyzed using sophisticated software. Additionally, companies have also started adopting dynamic pricing. These methods calculate best prices to charge in real-time based on how much customers are buying, what competitors are charging, and other market variables. Because the pricing decisions are made by algorithms and exclude humans entirely, in theory, businesses can change prices every second if they are so inclined. To add fuel to this fire, short-duration price promotions, flash sales, and daily deals have also all become very popular in the last few years. The cost of changing prices (or what economists call as “menu costs”) has kept falling.
It is not at all surprising, then, that everyone from movie theaters to Disney World and even restaurants are changing their prices more and more frequently. Not to mention airlines and hotels, who have relied on frequent price changes as part of their business models for decades. Even on Amazon and other online retailers' sites, it is now common for prices to change several times a day.
But is this a good thing? In an HBR.org article last year, I wrote about why changing prices too often is not necessarily beneficial for businesses. One thing I brought up in that article was that consumers hate frequent price changes. In this blog post, I want to dig deeper into this issue and consider the reasons why this is the case.
As consumers buy any product, over time, they become knowledgeable about its prices. Every time they shop, or read, or hear about prices through ads, social media, etc. they learn. Over time, they form a “reference price” for the product in their head, or what its normal price is supposed to be.
This process is disrupted when a product’s price changes constantly, and fluctuates over a wide range. Because of the volatility, many people find it hard to pin down the reference price. Price transparency is lost, and they have difficulty understanding what is driving the price changes, and whether these changes make sense.
Under normal circumstances, when purchasing everyday items, consumers use a relatively simple buying process. First, they look at the item’s price, and then they think of the reference price they already have in their head to gauge whether it is cheap or expensive. Based on this evaluation, they either buy the item or walk away.
When prices change frequently, however, this process becomes infinitely more complex for consumers. Now the reference price is no longer easily available. So when deciding whether to buy, the person has to search at different places, try to remember what they paid last time, check when the price changed and by how much, and so on. What should have been a habitual, straightforward 10-second process has now become very complicated and irksome.
In a complicated buying situation, consumers shift into the mode of questioning “Should I buy now or should I wait until later?” They don’ know when to pull the trigger. Even when prices have dipped, for instance, they will wait for prices to go down even further, and end up missing out on what would have been a great deal. Has this happened to you recently?
Consumer psychology research shows that when decisions become complex, many people delay making a decision or back out of it altogether. For example, when the price of a jacket, handbag, or a pair of shoes goes up and down many times a day on an online retailer’s site, the best option for many is to simply tune out and postpone the purchase. The following example from an AP news story illustrates this perfectly:
Take Aisha Senior, who recently watched the price on a coat she wanted rise and fall several times between $110 and $139 in a span of six hours on Amazon.com. She was so frustrated by the price fluctuations that she ended up not buying the coat on the site at all. "It's definitely annoying," said Senior, who lives in New Haven, Connecticut. "What exactly is making it go up and down?"
Another consequence of constantly changing prices is that it shifts the consumer’s attention away from the product’s features to its price. As economist Julio Rotemberg observed, “…consumers use nominal price changes as a trigger for reflection about whether producers are fair or not.” We are hard-wired to pay attention to stimuli that change, and ignore the ones that remain stable. So when prices fluctuate constantly but the product’s other features don’t change, consumers naturally turn their attention away from the functional and the experiential aspects of the product and focus their attention on price.
Nowhere is this phenomenon more evident in the marketplace than in furniture stores. In this industry, marketers have relied on constant sales for the past several years. Before this trend began, furniture-buyers used to base their purchase choice on factors like the furniture’s quality, durability, and brand reputation. But nowadays, influenced by the constant hype of sales, many furniture-buyers tend to focus much more on price.
What happens when people weight price too much? They often end up with lower-quality products or services that cause them grief instead of giving them happiness. Instead of buying something once and using it for a long time, they have to keep replacing shoddy items.
For customers, prices that change too often are like flickering traffic lights. They confuse, they frustrate, they annoy, and they stop customers in their tracks when they are out to buy.
It doesn’t look like companies are going to slow down the speed of their price changes any time soon. In my next post, I will look at how consumers can deal with this constant price fluctuation and still make good buying decisions.