Showroomers and Price Elasticity: Intriguing Results Suggest Impact of Free Shipping

July 25, 2013

This article is included in these additional categories:

Digital | Household Income | Mobile Phone | Retail & E-Commerce

parago-Showrooming-Price-Elasticity-July2013A new “Shopper Showrooming Study” [pdf] study from parago contains a host of “core” statistics related to showrooming (58% of smartphones owners do it! It’s growing quickly!), but it’s perhaps best to leave aside exact percentages as surveys often turn up different results. (Here’s a roundup of some data on showrooming behavior – and here’s one study that argues that it’s over-hyped). The more intriguing snippets of the parago study come in the discussion of price elasticity and in some of the behaviors of low- and high-income respondents that appear on the surface to be counter-intuitive.

The data concerning price elasticity looks primarily at what it would take for a smartphone owner to abandon (or not abandon) an in-store purchase in favor of a purchase from Amazon, which happens to be the leading method by which respondents compare prices, per the study. The results suggest that 63% would buy from Amazon if a $50 item in-store were $45 on Amazon, while 76% would buy from Amazon if a $100 item in-store were $90 on Amazon. (These respondents appear quicker to switch than some others.)

The key point in those results being that in both cases, Amazon offers a 10% discount, but respondents are about 20% more likely to switch when presented with the option that provides larger dollar savings.

Similarly, 91% would buy from Amazon if they offered an item that was $100 in-store at $80, but “only” 82% would buy from Amazon if they offered an item for $40 that was $50 in-store. (Again in both cases the discount is equal, at 20%.)

The results suggest that consumers are more tempted by dollar than percentage savings. However, there is an alternative explanation: respondents are factoring in potential shipping charges, which could eat away their savings on a $50 item more so than on a $100 item. (Previous research has shown just how influential free shipping is to online purchase decisions.) But it’s also worth taking into account that 46% of respondents to the survey are Amazon Prime members who do not pay for shipping, which mitigates this factor to some extent.

As the study does not break down price elasticity by Amazon Prime membership, the results are inconclusive. Readers are encouraged to comment on their experiences with “$ off” versus “% off” deals, or whether they feel that potential shipping costs are a key factor.

The study does break down price elasticity by household income level, with some interesting results. Below are some data points to set the scene.

  • While 46% of respondents on average named “best price” as their most important factor when comparing products in-store on smartphones, only 39% of those with less than $20,000 in household income (HHI) agreed. Those with low HHI were above-average in their likelihood to say that expert reviews were their top factor (22% vs. 13%).
  • The higher the income, the greater the likelihood that the respondent would switch to Amazon to save $5 on a $50 item, $10 on a $100 item, or $50 on a $500 item. For example, 73% of those with HHI greater than $200,000 would ditch the store to save $5 on a $50 item, while only 51% of those with HHI of less than $20,000 would do so. Shipping costs could be an explanation here also, in that higher-income respondents were much more likely than the average respondent to be members of Amazon Prime (76% of those with $200k+ HHI and 61% of those with $100-200k HHI, compared to the 46% average).
  • In the same vein, those with the lowest HHI are the least likely to say they’d switch to Amazon to save on an item even if it was not an exact match.
  • While the lowest HHI group is the least likely to ditch the store, it is the most likely to stick with the store if it offers a price-match rebate for higher ticket items ($50 on a $200 item or $100 on a $500 item). In fairness, they are not the most likely income group to stick with the store for a $10 rebate on a $50 item or a $25 rebate on a $100 item, a finding which just confuses the matter more…

A lot of this could conceivably be explained away by the impact of shipping charges, with higher earners more confident that they can realize the full savings online at Amazon due to their Amazon Prime memberships.

However, there could be other factors at play, also. In a study released last year examining holiday shopping plans, the Conference Board found that the higher the income of the respondent, the more likely the respondent was to plan to buy discounted gifts, and the more likely the respondent was to plan to buy gifts online. Those results suggest a similar gap in tendencies between lower- and higher-income groups as found in the parago study: namely, that higher-income respondents are more likely to seek out a deal, and that lower-income respondents are more likely to want to make their purchases in a store.

About the Data: The parago study data is based on a survey of 1,043 smartphone owners surveyed via a nation, online study conducted in June 2013.

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