There is one little-known but important fact about prices that every consumer should know. It is this. The prices that are posted in catalogs, websites, or store shelves or quoted to customers differ significantly from what customers actually pay for the product or service. Pricing experts call this gap between asked-for prices and realized prices the price realization gap. The gap is found in every industry, although its size varies from one company to another. The main reason for the price realization gap is that sellers give incentives to customers in various shapes and forms to make the sale. Here are some examples of this gap.
In the consumer packaged goods industry, virtually every company distributes coupons, and most consumers use them. In 2016 alone, a total of 306 billion coupons were sent to American consumers, increasingly through digital means. As digital coupons become more common, the redemption rates of coupons are starting to rise again after years of declining. Coupons are increasingly important to consumers in deciding which products to buy and when.
85% of American consumers use coupons, and 42% claim to have saved more than $30 each week over listed prices of products by using coupons. Given that the average grocery bill is $77 per week, this is a substantial saving. It seems that whether it’s soup, toilet paper, or canned tomatoes, consumers who pay the product’s actual posted price in a store or on a website are few and far between.
In the restaurant industry, menu pricing experts Jack Miller and David Pavesic observe that: “Discount promotions are now so frequently employed that regular menu prices are rarely charged… When sweepstakes, games, premium giveaways, and value meals are included, an estimated 90 percent of all commercial restaurants will use some form of discounting.
The rising cost of higher education is a serious social issue. But the truth is that relatively few students pay the college’s actual listed tuition fee. Private colleges even have a specific name for this gap, calling it the “discount rate.” It refers to the difference between the quoted tuition price and the actual price, after accounting for grants, scholarships, and fellowships given by the college. In 2005, the average discount rate at private colleges for all undergraduates was 34.3 percent. It has grown every single year since then. In 2016, it was 44.2 percent. On average, students who went to private colleges paid just over half of the listed tuition fees for their education. According to New York Times reporter Kevin Carey:
“At many schools, the sticker price is close to meaningless — fewer than 10 percent of students at small private colleges nationwide pay full price.”
When you fly in an airplane, chances are that you paid a strikingly different price for your seat than the person sitting next to you. One 2014 tracking study found that prices for a New York – Miami flight changed 135 times and ranged between $197 and $479. Another study found that on any given flight, price variation ranges between 2X and 8X for tickets. In other words, someone paying the highest price will have shelled out two to eight times as much as the person paying the lowest price for the ticket.
The idea of a single fixed price for all customers is largely a myth today. Instead, you should think of the product’s posted price as the highest possible price you could pay for the product. Chances are good that you will be able to buy the product at a much lower price than what is asked for. This price variability also means that you cannot shop with a “business-as-usual” mindset if you want to avoid over-paying for your purchase.
If you shop habitually either by going to the same store or by maintaining your relationship with your current supplier, you will lose out. You will pay prices that are closer to, or equal to the company’s asked-for prices. On the other hand, if you make some effort periodically, search for price promotions or other incentives offered by the seller, negotiate, or even do something as simple as just ask for a good deal, chances are that you will be able to save money on most purchases.
Companies offer many different incentives simultaneously, which means there are multiple opportunities for you to benefit. Depending on the industry, the incentives can take many different forms. For instance, when buying an electronic appliance like a television, you can avail of a retailer coupon and/or limited time offer, a rebate given by the manufacturer, bundle deals (e.g., buy a tv, home sound system, and installation for a single price), flash sales, free or subsidized shipping (for an online purchase), free delivery and installation, free warranty, sweepstakes, and loyalty rewards. If they are savvy, customers will wrangle and combine multiple incentives, adding to the savings from the purchase.
The seller’s job is to close the price realization gap and to earn a price from you that is as close to the posted price as possible. Your job as a consumer, on the other hand, is to benefit from this gap. With some effort and planning, you can purchase most products at prices significantly below the seller’s posted or asked-for price.
My forthcoming book is titled “How to Price Effectively: A Guide for Managers & Entrepreneurs.” I teach marketing and pricing to MBA students at Rice University. You can find more information about me on my website or follow me on LinkedIn, Facebook, or Twitter @ud.