Caltech: Shoppers Willing To Pay 50 Percent More In-Store

Most retailers have built their Mobile Commerce systems with the assumption that, to customers, a smartphone is just like holding the store in the palms of their hands. But that may be wrong, according to researchers at the California Institute of Technology. A Caltech team ran experiments that show customers are willing to pay about 50 percent more for products they can actually touch while shopping, compared with purchases based on just a text description or picture.

That finding has some very powerful implications for both in-store and online retail. Maybe the fact that touch matters shouldn't be a surprise, though it certainly surprised the Caltech researchers. Of course, the in-store experience is different from online or M-Commerce. Some retailers, like Nordstrom, work those high-touch elements of the brick-and-mortar store to the hilt. And even a utilitarian approach—think Wal-Mart or Costco—gives customers a far more sensual experience than a Web site. Shoppers can handle products. Smells, textures and sounds all matter.

In-store purchases also provide the advantage to customers of being able to take products home immediately, nor do they have to pay shipping costs. A few weeks ago, I was in the market for laptop memory that would have cost me $40 online plus shipping. But I stopped in at a neighborhood PC store to see if they had what I needed. They did—for $70. (The associate actually pointed out that his price was significantly higher.) I thought a moment—$20 more after shipping, but I'd have memory now to get the upgrade done—and paid the higher price.

Those are all obvious in-store advantages. But what the Caltech researchers found is that, even without those advantages, customers would pay more for things they can touch. The research subjects received their food, mugs and DVDs at exactly the same time, under exactly the same circumstances, whether they were looking at text, pictures or the real thing—and they were still willing to pay more.

That effect—what the Caltech researchers call a "Pavlovian consummatory process"—underscores the problem most retailers have with pricing products the same in-store and online. If customers are willing to pay more in-store, does that mean they're only willing to pay lower prices online? Could E-tail sites actually be slowing down adoption of E-Commerce by, in effect, overpricing?

The Caltech researchers aren't willing to go that far. "Optimal pricing depends on many factors," said Antonio Rangel, a neuroscience and economics professor at Caltech, who worked on the experiments. "All the research says is that, for the limited class of goods that we have looked at, subjects were willing to pay about 50 percent more when the goods were present, as opposed to displayed on a screen."The researchers discovered this fact by showing junk food, DVDs and Caltech mugs to dozens of student volunteers and asking the subjects to bid on the items. When the subjects only saw pictures or text descriptions of the items, they bid much less than when the items were actually placed in front of them. (The researchers also tried putting the items in front of subjects but behind plexiglass; that also resulted in lower bids.)

In fact, the researchers tried every approach they could to break that pattern—all the way up to feeding their research subjects a tiny bit of the junk food that they were bidding on. Even with that, the bids were still about 50 percent higher when subjects had the item in front of them.

It seems that customers really will behave differently when they can actually reach out and touch products: They'll pay more. Keeping that in mind can give retailers an advantage when it comes to managing brick-and-mortar stores, as well as online and M-Commerce.

Then there are the actual pricing questions these results raise. Caltech's Rangel emphasized the experiments don't demonstrate that, if in-store and online prices are the same, shoppers will conclude they're paying too much online. And if online prices are so much more than shoppers want to pay, keeping prices the same in both channels may effectively be driving customers away from E-commerce and M-commerce.

That's a tricky issue to deal with. In light of the way many customers actually shop, it's hard to imagine that in-store shoppers with smartphones in hand will be willing to pay a higher price for an in-store product than the price they see on their phones or computers.

Then again, that might be an overreaction. A recent Forrester Research report suggests that having different prices online and in-store is no big deal. Most customers simply don't check prices that obsessively, and they have a lot of brand trust in their local stores.

That finding contrasts with the position that eBay has taken since its purchase of RedLaser, which lets shoppers scan barcodes to see who else is selling the same item online. The auction giant is sure customers will shop in the store and then buy online—very possibly from eBay, assuming they are seeking the lowest price.

Pricing aside, other findings from the Caltech research may be a lot more directly useful for E-Commerce and especially M-Commerce. The Caltech team found that, for items subjects were already familiar with, showing a picture didn't make an item more attractive than simply naming the product. In other words, there's no point in filling a phone's screen with a picture of a DVD or a bag of corn chips. It may make more sense to list additional products instead.

Differences in buying behavior in different channels don't end with that Caltech research. Travel auction site Priceline recently mined its own customer data to compare its mobile customers with desktop online customers. Priceline found that 82 percent of mobile customers book hotel rooms within one day of arrival, compared with 45 percent of desktop customers.

Maybe that's just a matter of convenience: Those mobile customers may merely be trying to trade up to a better hotel once they've landed in their destination city. But it does underscore the fact that you can't take the differences between channels for granted—and we're still finding out what some of those differences are.