Consumer/Household Economics, Demand and Price Analysis,

Lesser, William H.

McLaughlin, Edward W.

English

Research Papers in Economics

Experimental Price Variability and Consumer Response:
Tracking Potato Sales With Scanners*
by.
Edward W. McLaughlin
Assistant Professor
Department of Agricultural Economics
Cornell University
Ithaca, NY
William H. Lesser
Associate Professor
Department of Agricultural Economics
Cornell University
Ithaca, NY
Problem Addressed
Food manufacturers, with their relatively
large market research budgets, are often able
to make reasonable estimates of the profit-
maximizing price for their branded products.
Retailers have a similar responsibility for pric-
ing decisions regarding products as diverse as
deli foods, private label goods, meats and
fresh product. Yet retailer investments in
marketing research at the item level approach
zero. Most often, retailer pricing decisions
are based on a combination of judgment and
rules-of- thumb. While retail pricing decisions
thus made are likely quite good in general,
mis-estimates can develop over time, leading
to prices which are notably over, or under,
profit-maximizing levels.
The broad adoption of Universal Product
Code (UPC) scanning systems by many retail
firms (approximately 35 percent of all super-
markets had electronic scanners in 1985) now
makes it possible for these organizations to
conduct in-house marketing research at modest
expense. By systematically varying prices and
tracking subsequent movement through scan-
ning reports, retailers can calculate appropriate
demand elasticities for individual products,
even for individual stores. This paper reports
on the results of one such pilot experiment.
Methodology and Data Sources
One regional food chain cooperated with
the study team by identifying eight test stores
of comparable size, all of them in upstate
New York, to analyze the influence of chang-
ing prices on potato sales. Potatoes were
selected as the subject of study for a number
of reasons. First, although conventional wis-
dom and past research (see, for example,
Clevenger and Geithman, 1977) suggest that
the price elasticity of demand exhibited by
potatoes falls in an inelastic range, very few
studies have devoted explicit attention to the
l Margaret Meloy provided valuable research assistance in this project.
February 87/page 108 Journal.of Food Distribution Researchretail level; Hee’s (1967) study is a notable
exception. Second, the retail produce depart-
ment has undergone substantial change in
recent years as retailers attempt to capitalize
on the increased interest in and per capita
consumption of fresh fruits and vegetables by
consumers (McLaughlin and Harem, 1985).
Finally, since potatoes retain their commodity
form throughout the distribution system, the
implications of their responsiveness to retail
price changes can be incorporated more direct-
ly into growers’ pricing and marketing strate-
gies.
During the four-week test period, March
8, 1986 to April 5, 1986, the chain agreed to
adjust the prices of ten-pound bags of round,
white potatoes according to the Latin-Square
design in Table 1. Latin Square designs have
been found very effective in marketing re-
search for controlling or measuring variations
due to store and time differences (see Brunk
and Federer, 1952). The prices in Table 1
straddle the then-prevailing price of $.99 a
bag. Prices were changed each Monday morn-
ing. Random checks of the test stores verified
the correctness of the posted prices, and those
entered by the checkers on the price look-up
(PLU) system employed by the cooperating
chain. These special prices were not adver-
tised, and even the produce manager was not
informed of the pending price changes. Price
was simply indicated above the normal display
of ten-pound bags of potatoes on the standard
price card. Sufficient stock was shipped from
the produce warehouse to prevent stock-outs
during the test period. No other round white
potato specials were featured by that chain
over the four-week test.
Scanner file data for all the included
stores were provided for a total of 42 weeks,
from July 27, 1985 to May 5, 1986. Data were
by product/package type for all fresh potato
items. Previous experience with the scanning
files of this chain suggest that the data pro-
vide good estimates of actual disappearance
(Lesser and Smith, 1986).
Data were analyzed with standard analysis
of variance techniques (ANOVA: ANOVA
Minitab and SPSS) utilizing a simple two-factor
table. Replicated price combinations allowed
nesting two observations per cell. All data
were standardized to a 100-shopper basis as a
means of controlling for differences in the
number of customers. Shopper-count data
were derived from the scanning information
and supplied by the chain headquarters.
Table 1
Price Schedule for Ten-Pound Bags
Of Round White Potatoes,
Four Week Period
Stores 1 2 3 4
---- - Dollars - - - - -
1-2 .49 1.39 1.09 .79
3-4 ,79 .49 1.39 1.09
5-6 1.09 .79 .49 1.39
7-8 1.39 1.09 .79 .49
In addition to the statistical data, an
exit survey of consumers was conducted with
a total of 441 shoppers at four randomly se-
lected stores. The survey was scheduled dur-
ing the last week of the test period and the
week immediately following to determine con-
sumer perceptions of and sensitivity to the
rather dramatic experimental price changes.
Over 80 percent of interviewed shoppers made
potato purchases during the experimental
period,
Major Findings
Intra-Store Sales Variability
Scanning data on price and movement of
all potato varieties were collected from the
eight designated stores for 32 weeks prior to
the onset of the Latin Square pricing experi-
ment in order to establish sales patterns and
identify any particular abnormalities in the
responses of potatoes to normal weekly price
changes. Despite similar size and formats of
the eight supermarkets, and identical prices
for each of the potato varieties, these data
revealed dramatically different sales levels
among the eight stores. Two stores serve to
illustrate the point (Figure 1). In store #2,
for example, sales averaged 19.3 pounds per
\
Journal of Food Distribution Research February 87/page 109100 customers over the 42- week period while
in store # 1 weekly potato sales averaged near-
ly 70.0 pounds per 100 customers, 360 percent
greater than store #2. Since the variables
normally associated with changes in sales were
effectively constant, and display space and
competitive conditions varied very little across
stores, the vast differential in sales responses
to price changes must be attributed primarily
to differences in localized consumer demand.
These differences include such factors as in-
come levels, household size and ethnic back-
ground.
Not only did average sales levels differ
across stores, but frequently so did the magni-
tude and, occasionally, even the direction of
the sales response. Referring to Figure 1,
when price was reduced to $.69 from the pre-
vailing $.99 level (a 30% drop) during the two
weeks beginning November 9 and 16, sales in
store #2, perversely, fell initially to 8 pounds
per 100 customers. The second week, sales
increased to approximately 88 pounds per 100
customers, over a 1000 percent rise. In store
#1, the same change in prices generated a
comparably modest saIes reduction in the first
week. However, in the second week, sales
increased to approximately 200 pounds per 100
customers, or over twice the sales of store
#2. In several other instances equally drama-
tic sales changes occurred even when prices
did not change.
Three basic insights are gained by the
inspection of these scanning data. First,
store-level demand factors appear to differ
considerably. Second, under certain circum-
stances, weekly potato sales respond drama-
tically to price changes. Third, in the weeks
immediately following a surge in purchases,
sales did not fall back below their recent
trend line. That is, potato shoppers apparently
did not reduce their average purchases due,
for example, to larger home inventories of
potatoes. Seemingly, reduced prices did not
simply shift weekly sales levels, but actually
induced consumption increases.
Latin Square Experimental Results
Responses to the four-week experimental
prices are shown in the highlighted areas on
Figure 1. Several alternative applications of
ANOVA were used to analyze the data. Using
the unsoothed data, price effects were sta-
tistically significant at approximately the 5
percent level (Table 2). That purchases were
not influenced even more may be explained by
the sizable residual sum of squares resulting,
in part, from the very sharp response to the
$.49 price in store #1 (378 pounds per 100
customers were purchased). When this value
was replaced with the group mean for the
$.49 price, price effects became highly signi-
ficant, at about the .001 level.
Table 2
Analysis of Variance Results of Latin Square Potato Pricing Experiment
Dependent Variable Pounds
Sou u r DF Sum of Souares Mean Souare F Value
Model 15 82495.616 5499.708 1.99
Error 16 44185,311 2761.582
Corrected
Total 31 126680,928
Sou ce r DF Tv~e I SS F Value PR>F DF
Week 3 26641.094 3.22 0.051 3
Price 3 26542.374 3.20 0.052 3
Week*Price 9 29312.148 1.18 0.370 9
February 87/page 110 Journal of Food Distribution ResearchFigure 1
Sales of Ten-Pound Bags of Round White Potatoes in Two Test Stores
1,49
1.39
1.29
I*I9
1.09
g .99
k .89
,79
969
159
“49
I 49
I 39
129
119
I 09
g 99
z 89
79
69
59
49
7/ 8/ 8/ 9/ 9/ 10/ 10/ 11/ 11/ 11/ 12 12/ 1/ 1/ 2/ 2/ 3/ 3/ 4/ 4/ 5/
27102472151921630 {428112 S 822822519 3
II
. . . . . . . . . . . . . . . . . . . . . . . . . ::::: :::::.:: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Store No. 2
........... ~;~~~ . .................... ........... .,:.:,:.:.:.:.:.* .... ....... ;,:,:,. ..................
i
........ :::::::::::::::::::::
—Price
..... ................. ..... ................ ..... .. .:.:. W..:.:.:
,x
::::
‘., 1’7
,.., ~,
----- Quontity
r! #. II it ,,,. ,...
821/ !3j1910, 1yll/11/12nl/ 92/93/3/4/4/5!
‘27%0124 7 21 S 19 2 16 30444811 2S 8 228 22 S 193
165
150
135
120 z
2
105 ~
9(3 g
75 ~
60 ~
45 ;
30
15
’65
150
135
w
120 g
a
105 y
90 8
75 !$
60 ~
45 “
30
15
Journal of Food Distribution Research February 87/page 111Table 3 presents the mean sales associ-
ated with each price and the results of
Tukey’s Studentized Range Test for contrasts
among the variables. Tukey’s test indicates
that the sales level associated with the $.49
price is significantly higher than the other
three mean levels and, similarly, the sales
produced by the $1.39 price are significantly
lower than the other three. Of equal interest,
however, is the mean sales generated by the
two intermediate prices. The lower price
,$.T9, actually produced a mean sales value
(57.7 pounds per 100 customers) that was mar-
ginally lower (but not statistically significant)
than that produced by the higher price, $1.09
(58.9 pounds per 10 customers).
Table 3
Four-Store .Mean Weekly Potato Sales
Associated With Four Prices,
Per 100 Customers
Price (.$) Mean Sales*
Per 100 customers
1. .49 115.42
2. .79 57.72
3. 1.09 58.92
4. 1.39 38.30
*One is statistically different from 2, 3 and
4, and 4 is statistically different from 1, 2
and 3. Otherwise means are not statistically
different at the 5 percent level usipg Tukey’s
test.
These findings are contrary to general
expectations and much empirical analysis which
generally conclude that potatoes are price
inelastic. This study indicates that potato
sales can be quite responsive to price changes;
that is, they are price elastic, at least on an
individual store basis. However, the sales
data from store #l suggests that the level of
statistical substantiation for this conclusion is
limited. Individual retailers need also to con-
sider the effects of competition in the longer
term. Competition tends
level demand more elastic
to make the store-
as shoppers exercise
the option of cross-store shopping. Since the
price reductions in this study were short-term
and not advertised, however, it is likely that
sales shifts due to cross shopping were insig-
nificant. Thus the elasticity estimates here
appear to be true representations of underlying
demand relationships, within the appropriate
confidence intervals.
The experimental data from this study
suggest, in fact,. a rather unique demand curve
(Figure 2). The expected monotonic downward
slope is interrupted by a nearly vertical, or
discontinuous, portion; between the $] .09 and
$.79 prices there is virtually no quantity re-
sponse to price changes. That is, when price
was varied by modest increments around the
prevailing price of $.99, sales did not fluctu-
ate.
Substantial research demonstrates that
such a lack of response is often explained by
consumers’ inability to perceive variations in
stimuli over a limited range (see Assael, 1983,
p. 130, for a review). That is, consumers are
not able to detect variations at levels below
their “differential threshold.” In this experi-
ment, such a consumer threshold appears to
have existed between $.79 and $1.09 for ten-
pound bags of potatoes. However, when price
was changed to levels beyond this threshold,
specifically to $.49 or $1.39, consumers reacted
in a way consistent with conventional price
theory.
The price and volume”data collected dur-
ing the test period allow the computation of
approximate mid point elasticities (Figure 2).
The elasticity estimates thus derived tend to
support the above conception of perception
thresholds. When price is lowered from $1.09
to $.79, pounds purchased per customer barely
change, thus total revenue is naturally re-
duced, indicating a highly inelastic (nearly
vertical) demand in this range. However,
when the price is raised (lowered) outside
this range, total returns to the retailer de-
creases (increases), suggesting a price elastic
demand. For the aggregate data these elasti-
cities ranged between -1.42 and -1.75. These
data then suggest that price changes large
February 87/page 112 Journal of Food Distribution ResearchFigure 2
1.39
I .09
al
u .- .79
c
.49
Mean Sales and Total Revenue Associated with Four Price Levels
For Round White Potatoes
elastic
inelastic
elastic
\
t o
=-1.75
~, o *
\
D
=-1,42
20 40 60 80 100 I20
Pounds / 100 Shoppers
Journal of Food Distribution Research February 87/page 113enough to be detected by consumers lead to
relatively elastic demand at the aggregated
store level. However, computed elasticities at
the individual store level varied considerably,
from -4.94 at the most elastic store (Store
#1, Figure 1), to, surprisingly, 2.65 at the
“least elastic” demand store (not shown).
This detail emphasizes the desirability of mak-
ing pricing decisions at the store, rather than
the price zone, level.
Consumer Response
The consumer survey responses allowed
testing the hypothesis that a majority of con-
sumers, even regular potato shoppers, would
not perceive the rather radical experimental
price changes. This hypothesis could not be
rejected at the 5 percent level. When asked
whether any recent changes had been noticed
in the produce department, only one shopper
(out of 441) mentioned “potato price changes.”
Even when asked specifically about changes in
potato prices, consumers, on average, either
reported “no change observed” or, often, indi-
cated an incorrect direction of price change.
Weekly potato purchasers were no more accur-
ate in their recollection of the direction of
change than were monthly buyers.
Although these consumer responses uphold
the contention that consumers are insensitive
to, or do not perceive, price changes in pota-
toes, several qualifications to such a conclu-
sion must be considered. First, consumers
were questioned regarding “all potatoes,” not
specifically about ten-pound bags of round
white potatoes. Second, it happened that
store #1 (Figure 1), which consistently has
the largest sales responses to price changes,
was not selected as an interview site in the
random selection process. It may well have
been that potato shoppers in this store would
have reported noticing the potato pricing
changes more accurately.
Implications for Food Distribution
The recent availability of scanning data
provides potato marketers, among others, with
the potential of incorporating store-specific
demand differences in pricing decisions. This
pilot research suggests that retail potato sales
demonstrate substantial variability through
time and across stores. Furthermore, the
study produced some statistical evidence ~hat,
on average, consumer response to large price
changes is relatively elastic. For food retail-
ers this implies not only that total (round
white) potato sales may increase with substan-
tial price reductions, but also that pricing
according to individual stores, rather than
according to historical price zones, may be an
appropriate profit-maximizing strategy. Local-
ized pricing may become increasingly feasible
as retailers incorporate the newly available
information from demographic databases into
their pricing plans. Retailers could make use
of store-specific elasticities to assess impacts
of promotional activity, to determine optimal
space allocation and to develop improved sales
management models, Before such pricing ap- -
preaches can be recommended, however, fur-
ther replications of these tests are needed.
Applying these results also necessitates
an effective identification of the response
level of shoppers. That information must be
collected from observed purchase behavior, as
interviewed shoppers in this study were not
able to identify correctly the magnitude, or
even the direction, of experimental price
changes. At a more aggregate level, this
pilot project, while leaving many questions
unanswered, suggests that scanning data hold
great promise for developing new insights into
both applied and theoretical research. More-
over, pricing experiments appear plausible in
the supermarket with modest efforts and costs.
Finally, consumers do not seem as upset by
frequent, and even dramatic, price changes, at
least in the produce department, as retailers
often fear.
References
Assael, Henry. Consumer Behavior and Mar-
keting Action. Boston Kent Publishing
Co., 2nd cd., 1984.
Brunk, Max E. and Walter T. Federer.
“Experimental Designs and Probability
Sampling in Marketing Research.” Paper
presented at the American Statistical
Association Meeting, Chicago, IL, December
27, 1952.
February 87/page 114 Journal of Food Distribution ResearchClevenger, Thomas S. and Frederick F.
Geithman. “Market Prospects for New
Mexico’s Lettuce, Onions, Potatoes and
Sweet Potatoes,” New Mexico Agricultural
Experiment Station Bulletin No. 649, Febru-
ary 1977,
Hee, Olman. Demand and Price Ana!ysis for
Potatoes. USDA, ERS, Technical Bulletin
No. 1380, July 1967.
Journal of Food Distribution Research
Lesser, William and Jordan Smith, “The
Accuracy of Supermarket Scanning Data:
An Initial Investigation,” Journal of Food
Distribution Research, Vol. XVII, No. 1,
February 1986.
McLaughlin, Edward W. and Larry G. Harem.
“Consumers Demand Quality Produce,”
National Food Review, NFR-28, USDA,
Winter, 1985.
February 87/page 115

Consumer Behavior and Marketing Action. Boston Kent Publishing Co., 2nd cd.,

Consumers Demand Quality Produce,” National Food Review,

Experimental Designs and Probability Sampling in Marketing Research.” Paper presented at the American Statistical Association Meeting,

Market Prospects for New Mexico’s Lettuce, Onions, Potatoes and Sweet Potatoes,” New Mexico Agricultural Experiment Station Bulletin No.

The Accuracy of Supermarket Scanning Data: An Initial Investigation,”

EXPERIMENTAL PRICE VARIABILITY AND CONSUMER RESPONSE: TRACKING POTATO SALES WITH SCANNERS

EXPERIMENTAL PRICE VARIABILITY AND CONSUMER RESPONSE: TRACKING POTATO SALES WITH SCANNERS

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