Research & Deploy: Low Price Guarantees
Low Price Guarantees (LPG) are a well-known marketing tool for convincing consumers of a retailer’s price competitiveness. A statement like “If you happen to find a cheaper price on a stocked item we will beat it by 10%!” is a clear example of this strategy, which is also called price matching and is used by for example Bunnings.
But how effective is this strategy in inhibiting consumer visits to competitors and do people actually believe these claims? And what happens if they do find a competitor with a lower price? The study by Professor Harmen Oppewal from the Department of Marketing at Monash University, Professor Shankar Ganesan from the University of Arizona and Dr Dixon Ho from Singapore will soon be published in the Journal of Retailing, the premier international academic journal for scholarly research in retail marketing.
Their study is called “The Impact of Store-Price Signals on Consumer Search and Store Evaluation”. It compares Low Price Guarantees as in the above example with Always Low Price (ALP) guarantees, where retailers only claim to have the lowest prices but do not explicitly promise any compensation to customers if they were to find cheaper competitors.
Retailers using ALP include Wal-Mart and Costco but the distinction is not always very clear as for example Bunnings, which offers LPGs, actually uses ALP as its main message in price communications (“Lowest prices are only the beginning”). Retailers thus may mix the two strategies (as long as the price guarantees conditions are made clear). Both are assumed to create a favourable store-price image and to discourage consumers from comparing prices across stores. But which is better?
Low price guarantees have been studied before but studies typically only concerned consumer perceptions. This study extends the research area to include behaviour, which was observed under carefully controlled conditions.
The authors conducted a simulation study where consumer respondents had to conduct a shopping task with limited information, mimicking their real search journeys as they shop for a big ticket item like a computer or television set. Always Low Price claims have not received much attention in the past but provide intriguing opportunities. In particular: there is no obligation to pay customers a difference so the actual cost, including administration cost of such a price claim would be lower.
Secondly, being a broader statement, the price promise is less easy to falsify, hence the retailer runs less risk of defaulting on its price promise, regardless whether this is by accident (poor price monitoring) or intentionally. In contrast, the explicit low price guarantee runs the risk of defaulting from any lower price found, with the severe negative effect of reputation loss. Although it is often assumed that loss can be compensated through service recovery, by paying the promised price difference, it is not clear if such compensation actions truly satisfy customers and restore (or would even enhance) trust.
The study was conducted at Monash and involved an online shopping simulation among a sample of Australian shoppers recruited via an online panel. Additional tests are being conducted in the new behavioural lab of the Faculty of Business and Economics. Respondents had to imagine wanting to purchase a particular branded television set or computer in their own metropolitan area. They were then guided to a screen where they could ‘visit’ stores one at a time to find out about its price for this item. No other information about the stores was revealed and respondents had to choose whether to ‘purchase’ at the visited store or whether to continue searching.
In different conditions different price levels were used and it was varied if a visited store offered a lowest price guarantee, or just claimed to always have the lowest prices, or neither. The main outcome variable was after how many store visits consumers would purchase, although perceptions of trust and perceived retailer motivations were also measured.
Findings from the study revealed that when search costs are relatively low, ALP discourages consumers from visiting more stores whereas LPG triggers continued search. They also show that consumers evaluate ALP stores less favourably, as having lower integrity and being more self-serving, than LPG stores.
These findings suggest that LPG is a superior tactic for creating a favourable store image while ALP is more effective for discouraging consumer search. However when LPGs default, meaning consumers encounter a lower priced item elsewhere, they are less inclined to continue searching as they will either want to claim refund at the defaulting LPG store or purchase at the competing store.
Last but not least the results show that even financial compensation though refunds does not fully recover an LPG store’s credibility. This means that retailers should be very careful when they use these price matching strategies. The twist in the tail is that this means only retailers who genuinely can live up to the expectations created by LPG can afford to run a LPG; this knowledge by itself will enhance the credibility and market effectiveness of LPG. Conversely the ALP strategy seems less risky and more robust, and was shown to reduce consumer search.