The Role of Selling Costs in Signaling Price Image

Abstract

To attract potential customers, retailers often advertise low prices with appeals such as “Prices start at $49” or “One week in the Caribbean from $449.” These appeals are deliberately vague in the sense that they give little information about the product to which the prices refer. The author offers an explanation of how such advertisements can construct a credible price image even with this vagueness. When retailers must incur costs in the process of selling a product, advertising low prices to lure potential consumers can backfire. This is because attracting too many consumers who are less likely to purchase the retailer's higher-priced products on the basis of vague promises imposes unwanted selling costs but yields little extra revenue. Therefore, a store with a relatively high selling cost will be dissuaded from attempting to use such a strategy. The author shows analytically that such advertising can be credible only when there is a substantial difference in retailers' costs or when the selling cost is high.

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