Very interesting post from Colleen Dilenschneider and IMPACTS Experience about research on gradually increasing pricing over time versus making one big increase.
According to them people have an internal meter that evaluates whether a price increase is too much to continue making a purchase. By having multiple incremental increases it forces people to continually re-evaluate whether the experience is now too expensive versus instituting one big increase and leaving the price there for the same amount of time.
In a study of price changes published in the Journal of Consumer Research, the authors found that multiple price increases were evaluated more unfavorably than a single price increase (Mazumdar & Jun). In general, consumers react more strongly to price increases than decreases because increases over an internal reference price are generally viewed as a loss by the consumer. While small increases may all still land within that band of elasticity identified as optimal by a pricing study, the repeated reassessments of their internal reference point can lead to and over time exacerbate frustration and dissatisfaction among audiences.
Essentially, rather than easing audiences through the “pain” of a price increase, stairstepping a price increase actually serves to prolong the discomfort.
The other thing they point out is that you lose revenue by gradually increasing a price versus making one big increase. They note that if you have 100,000 visitors a year and make one big $5 increase that you hold for five years, you making $1 million more than if you increased the price $1 each year for five years.
They also note holding a price for a number of years results in a perception of stability versus bumping on a yearly basis. There is a sense that you planned well and haven’t needed to make changes rather than always playing catch up with the pricing.
Now in terms of dynamic pricing, the outcomes are a little less clear:
Since dynamic pricing offers a different price dependent on market conditions, potential attendees’ internal reference points may prove less of a factor in evaluating their admission options, and thus attenuate their reaction to a price increase.
On the other hand, however, dynamic pricing can also increase distrust among consumers (Vomberg et al). Different prices for different potential visitors may be seen as unfair, and the short-term gain in revenue could be offset over time by the loss of trust in the institution
Personally, I am left wondering about the nuances that may be present in all this. Just thinking about grocery shopping, if I see prices varying in small increments, say between .59 and .89, I mostly suck it up. However, if something is now $1 more than it was last week, I hesitate to make a purchase. I have stopped buying goods where the price has shot up $1 in one week and not dropped again.
I am pretty sure there are things I have continued to purchase whose purchases are currently more than $1 more than they were a year ago, but have been increased more incrementally and haven’t tripped my internal calculus.
So I wonder if Dilenschneider’s research is based on intermittent purchases rather than weekly purchases or purchases of experiences versus purchases of goods and materials.
It may be if you are purchasing every week, you notice the big increases but aren’t alarmed by smaller increases because it part of a blur of 20 different items you are purchasing at a time.
Then if you are purchasing a handful of tickets once a month or maybe once a quarter or more, you may be more aware of what the price was last time because you are only purchasing a few items with less frequency.
If anyone has any insight into consumer behavior in these situations, I would be interested to know more. I know I am not the only person paying attention to the price of their groceries these days.
