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.