How pricing interacts with demand and the importance of taking a long-term view

19 years ago   •   1 min read

By Marcia Kadanoff

A study conducted by the MIT Sloan School and reported in DM News:

Repeated discounting can hurt demand among existing customers

A cataloger mailed sales books to its house list. Half of the recipients received a catalog that discounted an item they had bought previously by 30 percent, and the other half got one that doubled the discount to 60 percent. Sales fell off dramatically for customers who made their initial purchase 50-200 days before getting the sales catalog. The falloff was less dramatic for those who made a purchase 200-800 days prior. It wasn’t until the initial purchase had been made more than 800 days prior to receipt of the second catalog—or more than two years—that no negative effect was seen.

Discounting is appropriate when acquiring new prospects vs. mailing a catalog to existing customers

When a discount catalog was mailed to prospects, two positive effects appeared: The mailing produced a high response rate and, over the long term, those customers bought more than prospects who didn’t get a discount catalog. 

Consider the pricing context

Some products have a well-known price.  Discounting a product where the price is ingrained in the customer’s mind can help drive incremental demand.  But – for a product where the price is not known – either because the product is new or because the product is purchased infrequently – discounting will do little except to reduce your overall profitability. 

Certain Words may Prompt Buying Activity

In and of themselves. An example is “Pre-Season Sale”.  The example cited was a catalog with “pre-season sale” printed before the price of one item and not the other.  Inf act, the price was the same in both versions. The version without the sales prompt sold 100 units of the item, and the version with the prompt sold 157.

The effectiveness of a sales prompts like this one will go down over time with continued use. 

Dynamic Catalog Mailing Policies … an academic research paper
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