UNC Kenan-Flagler Business School

Shaping Leaders, Driving Results

UNC Kenan-Flagler Business School

INSIGHTS FOR BUSINESS


New research on how to make customers buy now

3/16/2009

With the economic downturn, many consumers are strategically planning their purchases to ensure they can hit a sale and get the best price. Many retailers have “trained” their consumers to wait for sales, but are firms taking the best steps to manage the trend of consumers waiting to buy?

This is one of the research focuses of professor Ali Parlakturk that is especially relevant in these trying economic times as companies search for ways to maintain market share. Parlakturk is assistant professor of operations, technology and innovation management at UNC Kenan-Flagler.

Parlakturk also has studied mass customization and ways to identify which companies could benefit from allowing their customers to personalize their products.

The Best Time and Way to Discount Products For retailers grappling with finding the best times to offer sales, Parlakturk has ongoing research that looks at the effects of “intertemporal cannibalization,” or how timing can cause tradeoffs that hurt revenues. In other words, how do customers waiting for items to go on sale change what they buy today?

One way that retailers can avoid hurting their sales is by limiting supply, he said. They alert customers that an item is a “limited edition” and warn them if they don’t buy now the item may not be available in the future.

How Much Product Variety? Parlakturk’s ongoing research says that if retailers offer a large variety of products they can sell to a larger customer segment now without having to give discounts later.

This may prompt consumers to opt for a lower quality, lower-priced product instead of one that is more expensive and higher quality. But this strategy also could help deter cannibalization as customers learn over time that they should not wait to buy products that are already at low prices and will not go on sale.

“In making their decisions about variety of products, retailers need to take into account these effects of timing,” Parlakturk said. “If not, they may offer either too much or too little variety. For many retailers offering more lower quality versions of the product will help sales as fewer customers wait to buy.”

Over time, he added, this will give customers the message not to wait to buy because the retailer isn’t likely to give a discount later.

Does it Pay to Offer Customized Products? Another hot topic for many retailers is if they should allow their customers to customize their products. Parlakturk’s research has focused on the value of mass customization to retailers. Mass customization is the ability to create individually customized products at a cost that is on par with the cost of mass production.

Companies like Dell, Lands’ End and National Bicycle have done well with mass customization efforts. But others like Levi Strauss and Mattel have experimented and opted to abandon mass customization efforts.

Parlakturk’s research has found that the value of mass customization depends on a firm’s competitive position. Mass customization by itself cannot create a competitive advantage. But it can help firms with an existing traditional cost or quality advantage increase their profits and improve their market position.

“Firms need to check their fundamental operational strengths - how their costs compare to competitors, how their quality levels compare to competitors,” Parlakturk said. “They should have an advantage in quality or cost.”

Companies that have very high costs should not try to differentiate themselves with mass customization because their competitors can lower their prices, making the firm’s customization efforts futile, he added.

Companies without a cost or quality advantage should avoid mass customization to instead focus on improving operations in other ways like reducing variable costs.

Pricing Customized Products to Sell He has also researched the levels of customization that companies can successfully offer. The goal of offering different levels of customization at different prices is to minimize the amount of customer sacrifice to get a product customized to their requirements, he noted.

“By offering a higher degree of customization you are lowering the customers’ sacrifice, which enables you to set a higher price,’ he added.

For companies that can find the optimal formula for mass customization, the benefits can be substantial, he added.

“Mass customization allows the firm to operate in a make-to-order fashion,” he added. “You don’t need a lot of capital. You don’t need to have a lot of inventory, and you don’t take the risk of producing a lot of a product that customers don’t like.”