In 2003 Wharton professor Marshall Fisher and colleague Vishal Gaur conducted a

controlled pricing experiment in 18 stores belonging to the Zany Brainy retail toy chain.
Their experiment was designed to measure how demand for three separate products varied
with price.

The three products under study were – a family centre board game, a Phonics traveller and
a headset walkie-talkie – at varied price levels.

Zany Brainy experiment: Objective

Often store managers run no or ineffective price tests to mark a price on certain products to
be sold from the stores. The unreliability of these conventional methods of price testing led
Fisher and Gaur to design their Zany Brainy experiment.

At core of their experiment was the objective to tap the results in such a way that they were
representative of the entire chain. Their methodology is described in a paper entitled, “In-
Store Experiments to Determine the Impact of Price on Sales.”

Precautions taken for the Experiment @ Zany Brainy

• Stores selected were similar in age and in size (as measured by total dollar sales).

• Geographical location of selected stores was relatively isolated from other stores in
the chain.

• A small subset of stores was used so that the experiment was cost-effective and
relatively easy to execute.

• The experiment was conducted for a period of six weeks – long enough to produce a
sufficient sample of data without creating any seasonal variations.

• The labels of the products did not show the original list price so that customers would
not perceive that a product was marked up or marked down.

• Store managers were not informed about the experiment in order to make sure they
didn’t treat the test products differently than they did other products.

• Sufficient inventory was kept in the experimental stores to avoid running out of the
targeted merchandise.

• The difference in prices for each item was considered sufficiently large to cause an
observable change in demand.

• Also the experiment products were not available at any competition store. This
removed the chances of comparison-shopping.

• Moreover, each item was unique to avoid comparison with other brands in the same
category.

Execution of the Experiment

The test for the three products was run at three price-points in six stores, for a total of 18
stores. The three products were priced at three different levels of prices and then the
consumption pattern was recorded.

• The family game centre - price ranged from a low of $19.99 to a medium price of
$24.99 to a high of $29.99.

• The Phonics traveller - ranged in price from $24.99 to $29.99 to $34.99.

• And the headset walkie-talkie - from a low $14.99 to medium $19.99 to a high of
$24.99.

Observed Trend

1. It was found that sales of the family game centre and the Phonics traveller were
downward sloping in price. That is, more of them sold at the lower price than at the
higher price.

2. However, the walkie-talkie sold 74 units at the middle price point ($19.99), 47 units at
the lowest price of $14.99 price and 36 units at the highest price ($24.99).

Although the other two products sold more as the prices dropped, surprisingly the walkie-
talkie did not sold highest number of pieces at lowest price. Instead it sold the most at the
middle level of the cost experiment.

Explanation for the Observed Consumer Behaviour

To understand this behaviour, researchers took conventional approach and spoke with
merchandise managers at Zany Brainy and several other retailing firms.

They finally arrived at following reasons:

 Consumers often find it difficult to judge quality of complex products. So they

therefore rely upon price as an indicator when deciding to buy complex items.

 The family board centre, however, is easily understood by the customer. So price
need not be used as an indicator of quality.

 Brand recognition also plays a vital part in purchase decision. As the Phonics
traveller is a branded item made by a recognized manufacturer, consumers don’t rely
on price to judge the item’s quality. For this very reason a consumer may even buy
an extremely low priced product from a reputed brand, but may not do so with a low-
priced unknown brand product.

Researchers also noted that there is more to consumer behaviour than low price when
making purchase decision for durable products. Consumers give emphasis to quality in
such decisions for durable products – such as microwaves and televisions – than for non-
durable products, such as paper towels, orange juice and detergents.
This can be explained by the fact that consumers make fewer purchases in the durable
goods and find it difficult to evaluating the products’ complexity.

Family game centre & The Phonics traveller – price elasticity of demand and profit
maximization

Plotting the demand curves to the two products – to estimate the price elasticity of demand,
and to identify a price that maximizes profit, the researchers found that:

The optimal prices for the Phonics traveller and family game centre were $35.65 and $22.58
respectively (compared to existing prices of $29.99 and $24.99).

“The increase in expected gross profit from moving to the optimal price is 3.8% for the
Phonics traveller and 0.9% for the family game centre,” the paper notes.

Conclusion – Methodical testing Vs Historical data and conventional price testing

Researchers concluded that people tend to separate product pricing into markdown and
regular pricing. In fact, most of the world’s consumers and also the stores buy and sell
respectively at markdown prices.

Prices changes very often and hence a lot of inventory often sells at markdown pricing.
Hence demand forecasting becomes very important. Looking at historical data, companies
can do better demand forecasting. However, first there should be historic data in place.

However in their study, Fisher and Gaur have taken a different approach to testing. “If your
goal is to measure price elasticity – how consumers respond to differences in price – the
advantage of our test is you can control everything, compared with using whatever natural
variations there were in history,” Fisher says.

On the other hand, the advantage of relying on history is that it doesn’t require the effort
involved in consciously running a test. Retailers are so action oriented that they often have
a bias against testing. It’s not going to help you make this quarter’s numbers; it takes time
and energy; and you know that if you are testing three different prices, two of the prices will
be wrong. That will hurt the costs and numbers a little. So there is a cost to testing.

In favour of in store testing, the researchers have concluded that:

“Our methodology is useful not just for finding consumer reactions to different price points
but also to test the effects of different types of assortments and store-push levers such as
‘item of the week promotion,’ large shelf space display and salesperson push,” he says.

In-store experiments are valuable scientific tools for studying the impact of store
environmental variables - such as music, lighting, employee behaviour and store design - on
purchasing decisions. Also to a certain extent, such an experiment can help predict future
trends as well.