Results of a Scientific Study Measuring Price Sensitivity of U.S. Businesses
MOUNTAIN VIEW, Calif., April 28, 2011 /PRNewswire/ --
Industry research shows that 96% of all U.S. businesses buy promotional items each year. Promotional items are also extensively used by nonprofits and government agencies. In almost every case, the buying organization has its logo added to an item for use at a special event, typically a week or two before the event. The most popular items are those that are both long-lasting and very useful to the recipient, such as aluminum water bottles, promotional bags, and pens.
Demand for these brand-building items has made promotional items one of the largest U.S. industries. With annual sales above $15 billion, the promotional items industry is larger than the annual ticket sales of every movie theater in the U.S. combined.
Branders.com is the world's largest online seller of promotional items. In January 2011, Branders used sophisticated split testing to isolate and measure changes in business-shopper behaviors when presented with 20% and 40% lower prices. The purpose of the study was to quantify the likely effect of a price reduction on sales, to better anticipate the necessary stocking and staffing adjustments to accommodate increased demand.
Branders found that promotional items buyers were significantly sensitive to price:
- 1.5 times as many first-time visitors to the website purchased when prices were lowered 20%; and
- 2.9 times as many first-time visitors purchased when prices were lowered 40%.
Scientific experiment protocol calls for holding every aspect of two situations constant, except for one. Experimenters monitor to see whether variations in this one aspect appear to cause a change in some other aspect.
When testing for the effect of change in a website on visitor behavior, sophisticated companies will create two or more identical versions of the website with only one difference between or among them. The company will then monitor website visitor behavior to see what, if any, effect the change in the one variable seems to have.
In January 2011, Branders tested for the effect of price changes on the shopping behaviors of first-time website visitors. Branders created three versions of their website, identical in every respect except for product prices:
- Version A had Branders' everyday pricing.
- Version B had prices that were 20% lower than those on version A.
- Version C had prices that were 40% lower than those on version A.
None of the versions mentioned the price differences, nor was the test or price variation communicated to shoppers in any way. The aim was to see if the different prices themselves, without any hint or promotion, would cause changes in shoppers' behavior.
The test result data were limited to only first-time visitors to the website. In this way, Branders reduced the possibility of a visitor having seen the normal price in an earlier visit and a lowered price in a subsequent visit.
To eliminate selection bias in determining which visitor would see which version of the website, Branders used randomizing software to select the version to be shown to the next visitor. Thus, even Branders itself did not know who would see which version of the website.
Branders showed versions A, B, and C to 76,908, 56,658, and 44,316 first-time visitors, respectively.
Not surprisingly, greater numbers of first-time website visitors made a purchase when faced with lower prices.
More interesting was the magnitude of their increased willingness to buy:
- When shown version B – 20% lower prices – the number of visitors that purchased increased 1.5 times.
- When shown version C – 40% lower prices – the number of visitors that purchased increased 2.9 times.
This price sensitivity is significant enough to conclude that many promotional items buyers feel that the promotional items themselves, as well as the services provided by the company selling them, are very similar, which suggests that large numbers of buyers would switch promotional items companies for lower prices. (2)
(1) While the cookie-based method can be affected by visitors who accept cookies but clear them between visits, industry data suggest that this behavior is rare enough not to meaningfully skew the results in a sample as large as the one Branders collected.
(2) Moreover, comparing these findings with 2007-08 buyer behavior suggests that the confidence of businesses and other organizations has not yet recovered from the recent recession.
The decade-old Branders.com is a low-cost leader in the promotional products industry. They sell all kinds of promotional items, such as pens, mugs, t-shirts, any thing you can put your logo on. A seven-time recipient of the Promotional Products Association International (PPAI) Gold Award for Best Website, Branders has been cited by Harvard Business School Publishing's Strategy & Innovation periodical for its "unique business model" that has "[upended] an industry."