Harms of Price Slipperiness – Lessons for Retailers

Recently, I noticed a post on the OnePlus 6 subforum on Reddit. A customer was “gutted” that Amazon had announced a discount of Rs. 5000 during an upcoming price promotion on the OnePlus 6 phone that he had only recently purchased at the full retail price.

Amazon Great India Sale OnePlus 6 discounted by Rs 5000

It isn’t hard to imagine why the guy (OP in Redditspeak) was upset. After all, he had just plonked Rs. 35,000 a few days ago and then Amazon’s PR was happily splashing around headlines showing the price was discounted to Rs. 29,999 – which, by the way, is psychologically “under 30K”.

From the point of view of the retailer, this was an ideal scenario – let paying customers pay the full price as close as possible up to the discount period, and then announce the discounts to generate hype and command eyeballs. Some customers would undoubtedly hold off on their purchases till the sale period, but that is a good thing for the retailer.

If the OP had decided to approach Amazon regarding this, the request would certainly be met with some sort of I-cannot-help-sorry-but-not-sorry drivel. So, what would a “gutted” customer do?

Eric Anderson, and Duncan Simester of Northwestern University, and MIT-Sloan respectively, had researched the impact of such price slipperiness in 2008.

I quote from their published abstract:

We use a 28-month randomized field experiment involving over 50,000 customers to investigate this question. The experiment reveals how customers react if they buy a product and later observe the same retailer selling it for less. We find that customers react by making fewer subsequent purchases from the firm. The effect is largest among the firm’s most valuable customers: those whose prior purchases were most recent and at the highest prices. Average revenue earned from these customers falls by over $90. The effect spills over to other products sold by the firm and represents an apparent “boycott”; many customers simply stop purchasing from the firm. The boycott persists throughout the 28-month measurement period and lowers overall firm profits by approximately $155,000.

Customers are indeed antagonised by the lack of price stickiness and can potentially hurt the retailer or the firm in much greater measure.

It is entirely possible that the customer who posted on Reddit is a very regular shopper on Amazon. Perhaps he orders a bunch of things around the home – daily necessities, groceries, food, and such from the giant retailer. When you think of the total value of his basket, the indifference of Amazon becomes more appalling.

This Diwali, Amazon and Flipkart together are spending close to Rs. 400 crores on advertising. With such massive budgets for customer acquisition, there’s always the temptation to let the unhappy existing shoppers fall in neglect. After all, there are plenty of fish in the ocean, and with a gigantic market such as India, the temptation to go after new customers is even greater.

I have no doubt that that plenty of new customers would be added, but many of them will not be repeat shoppers and, therefore, would have to be lured again in the future leading to a very high cost of customer acquisition. While I don’t suggest that the focus be entirely removed from acquiring new customers, firms should not be blind to the tremendous value in retaining their most valuable existing shoppers.