To Buy Or Not To Buy

How to get consumers to buy now, not later — and love it 

It seems that people have caught on to many retailers’ pricing and discount strategies: buy those jeans now and pay full price. Hold off a few weeks and you might get them for half off. If you’re someone who decides to buy (or not buy) items without considering the potential benefits of waiting to make the purchase, you’re considered a “myopic” consumer; if you do think about the potential payoff of waiting, you’re considered “strategic.” Customers are likely to act strategically when they are confident that they will get greater utility from the product when they purchase at a later date (for example because of price drops). It’s an approach that benefits consumers’ pocketbooks, but tends to hurt the firm.

In general, people are assumed to fall into one of those two categories — a stable trait. But new research by Questrom’s Pnina Feldman, University of Pittsburgh’s Arian Aflaki, and Duke University’s Robert Swinney suggests that strategic and myopic behavior is more fluid than once assumed. “Customers decide whether or not they want to be strategic, and becoming strategic imposes costs on consumers. They have to return to the store or the site, and perhaps find that the item they need isn’t available. The decision to behave strategically can, therefore, be influenced by actions the firm can take,” says Feldman.

Retailers tend to stock a lot of products, hold inventories, and as a result, discount heavily. This influences consumer to act strategically. To nudge consumers to act more myopically, the trio found that an opposite approach — in which retailers hold limited inventory, change it rapidly, and discount minimally and unpredictably — ended up benefiting both consumers and firms. This latter approach is used by companies including Zara and H&M, and may explain the success of these companies.

With this latter approach, it becomes costlier for consumers to become strategic. They understand that not only will they be unlikely to get a significantly better price, but they may not find the item stocked at all if they delay too long. They’re more likely to buy immediately if they’re interested in a product – a decision that benefit both the consumer and the firm.

Feldman says that their research shows that customers are more than simply “strategic” or “myopic.” Instead they often modulate their behavior based on the strategies employed by the companies themselves. “Customers are smart about waiting for discounts, and they’re also smart about asking the question ‘Do I even want to wait?’ ” says Feldman. “Those are choices that consumers make. Firms can make it harder or easier for consumers to make these choices through their own selling strategies and should not take particular behaviors as given.”

The full research paper, “Becoming Strategic: Endogenous Consumer Time Preferences and Multiperiod Pricing” can be read here.