In an attempt to compete in the online market space against the likes of Amazon, Wal-Mart surprised competitors and market analysts alike with the largest ever deal for an e-commerce company, purchasing online discount retailer Jet.com for US$3.3billion.
This successful less-than-a-year-old business is responsible for growing its customer base by 350,000 a month, and attributes its success to its revolutionary pricing strategy; adopting an everyday low price approach which is complemented by an additional discounting structure to further compound consumer savings and ultimately offer products for up to 10-15% less than competitors.
Why is price important?
Price is the most accessible and objective cue in the purchasing decision (Chang et al. 2005), serving as a cue to either:
- Price-sacrifice: A measure of monetary sacrifice that consumers need to give up in order to obtain the benefits associated with a product; via means of evaluating preference-inconsistent features to reject the available options, with consumers focusing more on losses, costs, and negative aspects of the purchase (Chang et al. 2005).
- Price-quality: A cue that conveys information about a product’s quality (Cronley et al. 2005); promoting selection of purchase choice on the basis of matching purchase attributes with the consumer’s consideration set (Chernev 2009).
Subsequently, in order to succeed a business will tailor their approach to capitalise on the cue pricing serves in the purchase decision for their customers (Chang et al. 2005); emphasising product attributes when pricing serves as a cue to quality, or focusing on consumer savings when price serves as a cue to sacrifice.
How Jet.com does pricing
With the prevalence of online discount retailers providing ease of price comparison between competitor sites, this market is typified by elastic demand and highly price sensitive consumers who use price as a cue to sacrifice.
Subsequently, combined with an objective to maximize market share through sales volumes, Jet.com adopted a low-cost pricing structure which was so lean that it was sufficient to just cover variable costs; reliant upon membership fees to cover fixed costs and resulting in forecasted unprofitability until 2020. However, three months post launch, with larger than expected shopping carts, the membership fee component of their site was dropped in favour of more modest consumer savings of 4-5%, with Jet.com adding a mark-up to all supplier costs in order to cover fixed costs.
Most significantly however, in an attempt to steal market share from notoriously low-cost provider, and main rival, Amazon.com, Jet.com’s product pages referenced Amazon’s pricing and detailed the comparable savings obtainable through their website; a practice known as reference pricing and perhaps the largest contributor to Jet.com’s success, providing price sensitive consumers with the necessary incentive to abandon allegiances and purchase from their site.
The concept of reference pricing is based on the premise that a consumer compares a product’s price to some reference piece which can be either internal, such as the buyer’s own experience, or external, usually in the form of reference to the retailer’s “normal undiscounted” price; reference to a manufacturer’s suggested retail price; or in Jet.com’s case, reference to competitor pricing (Ahmetoglu et al. 2014).
Jet.com extended this approach by also including the comparable savings achieved on the basis of bulk purchases, multiple purchases from the same supplier, and the selection of return forfeitures, further compounding the already lowest-cost savings – an approach never seen before in the world of e-commerce.
This approach works because it is based on a psychological principle known as Anchoring; where the buyer anchors on the piece of information they consider most important –termed the anchor; e.g. comparable savings, and then adjust insufficiently for one or more items, such as the search costs if to purchase elsewhere, thus overestimating the total savings (Ahmetoglu et al. 2014).
Anchoring is based on the premise that “perceived value for money depends on perceived relative price and sales promotion perceptions,” (Sirohi et al. 1998, p223), influencing a range of consumer price-related responses, including perceptions of potential savings and purchase value, as well as decreasing additional search effort (Grewal et al. 1998), having been proven to increase sales comparative to a non-reference pricing situation (Lichtenstein 2005).
However, as with all pricing strategies, this approach has its limitations. Consumer scepticism is perhaps the main moderator to the effectiveness of reference pricing, although it is argued the mere presentation of a reference price can lead consumers to believe pricing claims which exceed initial price expectations by up to 200% (Kopalle & Lindsey-Mullikin 2003). Other moderators include price knowledge and product/brand familiarity (Ahmetoglu et al. 2014), both of which play a role in influencing consumer perceptions of price fairness and subsequently purchase intent (Xia et al. 2004).
Despite these limitations it is evident this approach works, so fasten your seatbelts because this is one pricing strategy which is sure to take off.
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