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NEW HAVEN, Conn. -- Extreme-price grocery shoppers, or those who contribute negative gross margins to a retailer, account for a very small share of the market and don't have a significant adverse effects on retail profits, concluded a study by researchers at the Yale School of Management and SUNY Buffalo.
Widely speculated to be a considerable drain on retailer profits, this segment makes up only about 1 percent of a grocery store's shoppers and reduces the retailer's profit by less than 0.2 percent, according to the study.
The authors of the study, K. Sudhir of Yale, and Dinesh K. Gauri and Debabrata Talukdar of SUNY Buffalo, integrated two ways that consumers look for the lowest prices: across stores (spatial) and across time within the same store (temporal). Earlier research analyzed the two dimensions separately, thereby underestimating both shopper response to price promotions and the impact of promotions on retail profit.
Within the two dimensions of search, consumers fall into four price search profiles: incidentals, who don't search for price promotions at all; temporals, who are loyal to one store and time their purchases to the price promotions at that store; spatials, who travel to different stores on any given shopping trip to find the lowest prices; and spatio-temporals, who make regular weekly trips to more than one store to get the lowest prices over time and across stores for an item.
Geography and opportunity costs are key predictors of the price search strategy employed by a household. When competing stores are near each other, a household undertakes a more spatial search; but when a household lives near a store, the household does a more temporal search. Higher-opportunity costs of time reduce either type of search.
"This is a useful finding for retailers because they can implement targeted promotions using household geographic and demographic data -- information that is easily available to them," noted Sudhir, a professor of marketing at the Yale School of Management and a fellow of its Yale Center for Customer Insights, in a statement.
Not surprisingly, spatio-temporal shoppers, who search the most for low prices, are the most effective in getting good deals, while incidentals, who search the least, are least effective. Spatio-temporals got 76 percent of the potential savings available in the marketplace. Temporals, who search in their preferred store, saved 68 percent, while spatials, who search across stores, saved only 66 percent. Incidentals were able to nab 54 percent of the potential savings just by showing up at the right place at the right time.
"Even a household that doesn't actively look for price deals typically ends up capturing about half of the potential savings created by market promotions," confirmed Sudhir. "And a store-loyal household that simply timed its purchases, saved just about the same as a nonloyal household that shopped across stores but could not time their purchases."
On average, all four search segments were profitable to retailers. Incidentals contributed the highest profit margin, and the spatio-temporals contributed the lowest. The store-loyal temporal segment contributed the greatest average profits, suggesting that although periodic price promotions are often thought of as a way to lure price-sensitive shoppers, they're crucial to keeping profitable store-loyal customers.
Said Sudhir: "Retailers should be reassured by our results on their use of promotions. Price promotions serve an important role in retaining profitable store-loyal customers, while the negative impact through extreme cherry-picking is minimal."
The study, "The Temporal and Spatial Dimensions of Price Search: Insights from Matching Household Survey and Purchase Data" is available online at http://www.som.yale.edu/faculty/sk389/.