Some people like to take a lot of time purchasing a handbag.
Described by the Wall Street Journal, one woman’s search started with a TV show. Seeing the purse she wanted on “Pretty Little Liars,” the woman went online to check it out. She observed it in action on YouTube, she researched color alternatives and she identified the bag’s size and shape variations. Six months later it all ended when she bought her purse for a bargain price of $75.
Where are we going? To how stores increase sales with price discrimination.
Shoppers and Time
According to a recent NBER paper, retailers are very aware of that some customers value time more than others. They know that “high-valuation” customers tend to remain in one store while the “low-valuation” shoppers with more time do comparison shopping among different establishments.
The result is that retailers generate purchases from both groups through different prices for the same item among similar stores or in one store. Whatever the approach, the goal is to have the high-valuation shopper pay more while also generating some business from the low-valuation shoppers.
Our Bottom Line: Price Discrimination
Prices that target different customers take us to what economists call price discrimination. Not necessarily a negative term, price discrimination just means that the business is charging a variety of prices because it has some price setting monopoly power.
Airlines do not ask if you are a business traveler who is happy to pay a higher price. Instead, they find out by giving a lower fare only to fliers who remain through Saturday night. Similarly, movie theaters hope to encourage the dollar poor/time rich elderly to go to the movies by charging them less but ask the rest of us to pay more. There is even a French café that makes coffee more expensive when a customer is rude.
The trick is to use 2 or more prices. The higher price attracts customers willing to pay more. The lower one grabs others who refuse to pay extra…
Like our handbag shopper.
My Sources: WSJ detailed the handbag shopper here while the research on why comparable stores charge different prices was in this paper. Please note that several sentences in Our Bottom Line were published in a previous post.