Episode #0032 - Do price match guarantees increase or decrease selling prices?

In this episode of Pricing College - we discuss the concept of price match guarantees.

On first inspection - you would think a price match guarantee will reduce prices - as you match a competitors price.

In reality - there is evidence that they have the opposite effect - as the stop people shopping around due to a false sense of confidence.

It can also be a useful segmentation strategy.

 

Today we're going to talk about whether price match guarantees decrease prices. Now, we're talking about that because in Australia, in particular, there is a sort of a big focus on pricing and customers like to get a good bargain and also stores like to say that they will compete with anybody that can provide the lowest price. We're interested now in terms of if you're going to do that, Are you going to make money? or is it better to do something else?

You can see a price match guarantee and you see them commonly in any store, major stores. What I'm thinking of in Australia is Bunnings, who have a price match guarantee on hardware, drills, hammers, that sort of item. You also get them in an alcohol tick or a bottle shop they’re called in Australia, off licence in other countries, a liquor store in America, and they have a sign up in their window I can think of saying, we will match any published price in the local newspaper. The question is and there is a lot of debate about this in the literature and media. Does that sort of guarantee, How frequently do people come in and ask them to reduce their prices? or do people just slide over them and people forget about it? 

Surprisingly, even though people are kind of obsessed about prices here, very few people go into the store saying, I have found a cheaper price elsewhere. I think it's around sort of like 90% of people just don't. Yes, there's going to be a small percentage of people that do their research or their homework on different products or on the same product, they'll get the receipt and they'll go into the store to prove it and get the price discount back or a credit note or whatever the store has in their policy. But I think the majority of people, it's enough for them just to know that store is giving that price match guarantee and they sort of almost forget about it, like it's some kind of psychological sort of trick almost but it's sort of appeases, any sort of loss that they would have felt had they not have provided that offer or guarantee.

I sometimes think of it as that it's almost like a psychological assurance for people that they’re not going to be paying significantly more in this store than they would in another store. So to some extent it takes away the pressure on them that they feel they should go and do the hard work and the footwork and run from store to store to try to save those extra dollars. Particularly if it's a really small item, the bottle shop example we give where a bottle of wine says the bottle wine is $20 in this store, how much is it going to cost in another store? Even at the very minimum or on a special promotion it might be $10. But, are you going to run from store to store to save that money for the chance of that and to do the hard work? Probably not, so it gives people assurance and there's a lot of suggestions in the literature that it stopped people from shopping around, it makes them lazier because somewhere they think it's already been done.

So to some extent, the price match guarantee is also something that stores or businesses use to signal to other businesses that they are willing to. It's collisionally signalling to other businesses that don't compete with me on price because we will take a move and what are you going to do next? It's a price war sort of thing, preventing it may be, but also signalling that there is the ability to move if necessary.

I think that's a great point. Another thing I will say about it is, it's an almost false guarantee to some extent. Imagine that you are in a hardware store, and you know that one of the roads sells the same item. Say you're going to the store and in that store, a hammer drill sells $300 and in the store next to it has the price match guarantee and they're selling it at $400. The logical person would just buy it in the first store. They’ll buy for $300 rather than going to another store proving this to them, printing off some form, and then just getting the same price. To some extent,  that's ridiculous. You will just go to the store that sells the cheapest if you're aware of it. The only case where you wouldn't do that would be as if you valued the store with that price match guarantee, you were somehow already in that location, the other store was hard to access etc, but I think that's a very small percentage chance for the vast majority of cases.

And also there's been some really bad press on price match guarantees. Like people have gone into the store, they've got their evidence, they've got their dockets to show that they are more expensive and they want their money back. Often there's been sort of very long, arduous sort of pricing policies and it's almost been too much paperwork and too much of a headache for customers to get their money back. This has happened on numerous occasions, so I think overall, customers are now a bit wary. Yeah, it might have given them at the beginning when they were first introduced as a concept, some sort of assurance, but now it's a bit like, are they going to give me the money back? or is it just another gimmick?

I think the final thing I learned on this one is, it can be seen as a form of segmentation strategy. We often talk about segmenting, when you're running a retail business and you're selling, you know the bottle of wine or the hammer drill for example. Simple segmentation could be somebody buys one item or a business customer who buys 20, but at the same time, there are other customers if you look at the segmentation. It could be somebody who shops around, who prints off coupons and who really will do that legwork, and let's say that's 10% of the market. The other 90% they won’t bother, they go to the store and they want to take it away immediately. So with this segmentation strategy, you can appeal to both, you will sell to 90% at the published price, and then that 10% who potentially you wouldn't have been able to sell to, you can sell to them also. What you do is you're protecting the other 90%, you're still selling at the price you want to sell at but you can give these people the discount because they have done this legwork. So to some extent, it's an unadvertised non-marketed discount that appeals to a certain niche segment of people who maybe have a lot of time in their hands. 

All data is good data if they're giving you accurate insights into your pricing and your competitors' pricing, and if you haven't got that, then that's great for you because that’s another data point that you can calibrate in your system and readjust your prices.

That's all I want to add today, I'll be honest, I'm not a big shopper around. To be honest, for big items yes you will go and compare big items but for the smaller items, the everyday items under a certain threshold you have to weigh up the time and the effort versus the money you potentially save. And also, do you want to be negotiating every single time and asking to speak to a manager, and showing them a printed piece of paper? Life can be stressful enough without that.

Life is short. I don't think people have the time or the inclination to collect all the dockets anyway. Tax is bad enough.

That's certainly true, so we'll say thank you very much for listening and see you next time.