Have you ever become angry when you paid full price for an item, and then learned that the company had put that item on sale shortly after your purchased it? We have all been there. Now scholars have examined the long term effects of such deep discounting.
Kellogg School of Management Professor Eric T. Anderson and MIT Professor Duncan I. Simester conducted a study to examine whether such deep discounting angered customers, particularly the company's best customers. Beyond creating anger, they wanted to know if that negative emotional reaction affected long term sales. Here's what the researchers did, according to Kellogg Insights:
"Anderson and Simester worked with a retailer
that specialized in selling durable goods, like software, electronics,
apparel, or books. In the past, the retailer had typically kept prices
high but frequently offered small discounts and the occasional deep
discount. Anderson and Simester worked with them to create test catalogs
to determine whether and which customers would be antagonized by price
changes. (Most of the retailer’s customers purchased via catalog at the
time of the study.) The two types of test catalog were mailed according
to the regular schedule and included 86 products, 36 of which were
discounted by varying amounts depending on which test catalog people
received. The deep-discount version offered the 36 items at an average
of 62 percent off, while the shallow-discount version offered an average
discount of 34 percent."
The scholars studied customers who paid full price for items and then received a catalog offering steep discounts. “When you look at this segment of customers, what
you see is that a substantial portion just stop buying,” Anderson said.
“We call this the boycott effect.” Customers offered the steep discounts placed substantially fewer new orders than those people who were offered smaller discounts! Customers who received the steep discount catalog placed 14.8% fewer subsequent orders than those who received the
shallow-discount version. Moreover, many people who were offered subsequent deep discounts simply ordered nothing at all in the months that followed. It turns out the "boycott effect" lasted for awhile. The scholars found that customers who reacted poorly to the steep discounts tended to buy less items from that retailer for the next twenty months!