Extreme Price Shoppers Have Minimal Effect on Grocery Retailer Profits

New Haven, Conn., September 13, 2007 – Extreme price shoppers for groceries – those who contribute negative gross margins to a retailer – are a very small share of the market and do not have a significant adverse impact on retail profits according to a study by researchers at the Yale School of Management and SUNY Buffalo.

This customer segment – dubbed as ‘devils’ in retail – has been widely speculated to be a significant drain on retailer profits. However, the first research to quantify their effect finds that they are only about 1% of a grocery store’s customers and reduce the retailer’s profit by less than 0.2%.

The finding is one of several new insights from a study by K. Sudhir of Yale and Dinesh K. Gauri and Debabrata Talukdar of SUNY Buffalo that used a new method to examine grocery shoppers’ price search strategies, their effectiveness in saving money, and their effect on retailer profits. The authors integrate two ways that consumers search for the lowest prices: across stores (spatial) and across time within the same store (temporal). Previous research analyzed the two dimensions separately, and therefore underestimated both consumer response to price promotions and the effect of promotions on retail profit.

With the two dimensions of search, consumers have four price search strategies: shoppers who do not search for price promotions at all (incidentals); shoppers who are loyal to one store who time their purchases to the price promotions at that store (temporals); shoppers who travel to different stores on any given shopping trip to find the lowest prices (spatials); and shoppers who make regular weekly trips to more than one store to get the lowest prices over time and across stores for an item (spatio-temporals).

Geography and opportunity costs are key predictors of the price search strategy a household will use. When competing stores are close together, a household performs more spatial search; when a household lives close to a store, it performs 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,” said Sudhir, a professor of marketing at the Yale School of Management and a fellow of its Yale Center for Customer Insights.

Not surprisingly, the spatio-temporal shoppers who search the most for low prices are the most effective in getting good deals, while the incidentals who search the least are least effective. Spatio-temporals obtained 76% of the potential savings available in the marketplace. But incidentals were able to intercept 54% of the potential savings by simply being at the right place at the right time. Temporals who search in their preferred store saved 68%, while spatials who search across stores saved only 66%.

“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,” said Sudhir. “And a store-loyal household that simply timed its purchases, saved just about the same as a non-loyal household that shopped across stores but could not time their purchases.”

All four price search segments were profitable to retailers on average. Incidentals contributed the highest profit margin and the spatio-temporals contributed the lowest. But the store-loyal temporal segment contributed the greatest average profits, even more than the incidental price searchers who have greater profit margins. This suggests that though periodic price promotions are often thought of as a means of acquiring price sensitive shoppers, they play an important role in retaining profitable store-loyal customers.

“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.” said Sudhir.