Every now and then I see an article that I know immediately will inspire some grad student to write a paper. This story is one of them. It concerns Gap stores in greater Vancouver and a new program called Sprize. Here is how the company explains the program:
- shop Make a purchase at a participating Vancouver area Gap store. Don’t worry, if you forget your card, we can look up your Sprize account using your email address or phone number.
- relax After 45 days, if the prices on the items you purchased have dropped, we will automatically credit the difference to your Sprize account. Waiting 45 days helps make sure you get the best price.
- sprize Come back and use your SprizeMoney on whatever you want in our stores. We’ll send an email saying your account has been credited with SprizeMoney. SprizeMoney is valid for 1 year to spend at participating Gap stores.
So this seems — from the customer’s point of view — a fairly simple program. You can buy with some confidence that you will get the Gap’s best price and you have to do nothing more than show a card to register the purchase. In particular, you don’t have to watch sales prices and schlepp back in with your receipt. As pointed out on Fast Company (Beige Rage: Gap Sale Tool Justifies Crazy Khaki Cravings, Dec 18), Orbitz does something similar with airfare and hotel reservations (although the refund from Orbitz does not have to be spent with Orbitz) and argues such programs allow The Gap or Orbitz to attract bargain hunting consumers. Fast Company then goes on to link the program to behavioral economics:
And the real genius stuff lies just a layer below. The Gap is encouraging impulse buying, by eliminating one of the chief downsides–the possibility of paying too much. And, since your Sprize money can only be spent at The Gap, they’re making it more likely that you’ll spend it on a small, high-margin, non-sale item. (As Polaine points out, Sprize credits feel like free money, so you’re probably less careful with it.)
Finally, the program encourages repeat customers, who have always been the golden geese of retail. What retailers used to do with in-store credit cards with built-in discounts, The Gap is now doing with a clever hack of consumer behavior. …
How soon until we seen behavioral economists trucked into retail chains, to work on incentive programs and purchasing patterns? Or have we seen the first fingerprints already?
Behavioral economics is the flavor of the month in economics which is why Fast Company brings it up. However, it is not what interests me about the article. Over in Operations Management the flavor of the month is “strategic customers.” This line of work takes an established OM problem (such as managing inventory, pricing, and discounting of a fashion item) and looks at what happens when customers can anticipate the firm’s actions. Thus while a traditional model would assume a random number of customers just shows up and buys at full price. Contemporary models assume that customers weigh buying now (and being certain of getting the good) with waiting and hoping to get it at a discount. The Sprize mechanism eliminates this choice. A customer should buy the good now because she is assured of getting the discount should the price be cut. Of course, if everyone buys at full price, there should be little or no stock left over and hence little reason to discount.
This is where the comparison with Orbitz’s program falls apart. Orbitz doesn’t set airfare or hotel rates. That’s up to American Airlines and Marriott. But The Gap controls the decision to discount. The question here is how the Sprize program affects initial inventory and pricing decisions as well discounting decisions. Note that if the program gets more people to buy at full price, there is a reason to order more upfront. Also, suppose that at the start of the season The Gap has 100 units of some sweater. At the end of the season, suppose that 99 have been sold to Sprize participants and one remains. Should it discount the last sweater? The item has been popular and a modest discount will clear out the last one. However, that discount must now also be applied to all 99 earlier sales. It is much better to let that last item rot in the back room of the store. Ignoring any benefit of inducing return visits to the store (which I admit could be significant), the Sprize program should limit how many items get discounted at The Gap. Indeed, a Sprize member should expect that she will only get a refund on items that most Gap shoppers thought were just too ugly to buy.
Marty Lariviere
Gad Allon
Jan Van Mieghem
A very interesting article to read especially about strategic customers behavior.
I have a question whether this Sprize The Gap program would be applicable to all styles a customer buys or would be limited to specific styles?
The reason being if it is limited to certain styles in the overall merchandise then probably Gap is using the program to improve rate of sales of “non-selling” items (not so popular items in last season).
But if it not limited to particular styles in merchandise then Gap has developed a unique way to control markdowns. Generally retailers depend on demand to predict markdowns ahead of time during a season and already have an alloted markdown budget. But in Gap’s case they can give a markdown very late in the season after weighing their expected leftovers and target full price sales. They know customers now may buy at full price having a mental assurance that they would be credited the discount (which Gap already controls).
Ethics of this policy is also questionable.
The Sprize program applies to basically all merchandise but not to any services (ie to any sweater in the store but not to alterations). The one real fudge to the program is that you don’t get a retroactive discount when they use a multi-unit promotion. Thus, they don’t count a buy one get one free sale as a price cut since the first sale is still at full price.
Very interesting post.
I would be curious to see if customers really spend their Sprize money in order for the Gap to benefit from customer loyalty.
Mail-in rebates are very successful because people are attracted to certain products because of the rebate but end up forgetting to request it or just don’t want to deal with the hassle of having to mail them and then wait a few weeks to receive it.
Although the case is different for Sprize users since it is conveninetly credited to your account I would be curious to see how many people are motivated enough to visit The Gap again knowing they have $5 in their Sprize account which can only be used at the Gap.
Inspiring post.
I however tend to consider the program a marketing trick that delivers a misguiding message to the early-purchase customers as if they are guaranteed a price-match, which may not be true.
The thing is that 45 days is exactly half the selling season, whereas the “official discount” may not start till the very late stage of a season. This is to say that customers who made their purchases within the first 1/2 of the season will not get any refund, whether there is any discount in the end or not. Thus strategic customers would not advance their purchase timing too much.
So it seems to me that the targets of Sprize are “dumb customers” rather than “strategic” ones… and it is to my belief that the former are more representative and come along with higher margins.