Low Prices Do Not Sell More Plants
Today’s Garden Center commissioned a university study to learn how price sensitive customers really are to plants. The results are in.
August 17, 2012
We worked with Today’s Garden Center to learn more about customer behavior when faced with plants that are priced differently from comparable plants nearby. This is a joint effort involving The 10% Project at Today’s Garden Center and a study we will be analyzing extensively in a peer-review format later in the year.
Before we talk about the results of our study, it’s important to explain a few economic and marketing concepts.
Today’s Economic Conditions
The Great Recession of 2008 had a major impact on the national floriculture industry due to job losses, home foreclosures, declining consumer confidence, lower business spending and inflationary pressures on some key production inputs. Due to the cumulative impacts of these stressful economic conditions, we find that several of our peers are no longer working in the industry, with some estimates of one in four firms lost as fallout.
Of those that have survived, several we have interacted with indicated their sales are still way down; others say they have either been holding their own or they are doing “just OK.”
Why Some Garden Centers Thrive
There has been another, smaller subset of firms that have indicated their sales are up or that their business has been “expanding” during the recovery. So, naturally, this prompts the question: How did they do it?
What is it that separates the firms that are just doing OK from those who are doing well? As usual, there is no easy answer, but in general, firms who are doing better in today’s economic climate have been:
1. Proactive in shaving costs out of their value chain (through either lean flow analysis, adopting technology and/or mechanization),
2. Successful in differentiating themselves in the marketplace by effectively articulating their value proposition, or 3. Both.
The Study Results
Before reading further, make sure you understand the concepts of differentiation and price elasticity described in the sidebar.
Now it is one thing to talk about these concepts, but to test this theory (and provide some real-life backup to what we’ve been saying all these years), we collected price data this spring from three reputable independent garden centers that agreed to participate in our elasticity study: SummerWinds Nursery’s Northern California stores; Bachman’s Minneapolis stores and Stauffers of Kissel Hill stores in the greater Philadelphia area.
The study at the three stores became individual studies, meaning that the way the data was gathered was not exactly parallel. As a result, we looked at the results from each firm rather than cumulatively. Due to time constraints, we will discuss results from only SummerWinds and Bachman’s here. We are working on a fuller analysis for a peer-review journal, where the full results will be available.
How The Study Worked
We asked each store to select groups of test plants. For the first week of the three-week experiment, the prices of the test plants were reduced 10 percent from normal prices. During week two, the plants were held at normal levels, and during week three, the price of the plants was increased by 10 percent over normal prices. The stores also tracked how comparable plants performed during the same time period.
SummerWinds tested entire lines of plants: Proven Winners quart perennials; 4-inch perennials from a favored local plant grower, Blooms; and 6-inch pots of Burpee vegetables.The study began on Thursday, April 12, 2012, and ran through to Wednesday, May 2, 2012.
Branded plants, we assumed, were representative of a differentiated product.
During this three-week period, we noticed that overall SummerWinds saw increased sales from week to week.
But then we applied some rather sophisticated analytical tools. We found the test plants at SummerWinds during this time period were indeed inelastic.
More importantly, total revenue earned during the time period when we raised prices by 10 percent in week three was 2.3 percent higher, in spite of selling 8.27 percent fewer units; thus validating the economic theory we discussed in the price elasticity sidebar.
Conversely, when we lowered prices by 10 percent for the branded plants, actual total revenue received for that time period decreased 27 percent.
It is also very likely that by reducing inventory, the cost of production will also be reduced, and total profits will increase even more.
We then tested the validity of our model by using it to predict what sales would have been when we increased prices by 10 percent and the model correctly predicted what would have occurred and missed the actual units sold by only 56 units. This was less than a 1 percent difference between the predictive model and the actual results, so we feel pretty good about the elasticity estimate we calculated!
Bachman’s study took place later in the spring, from Wednesday, May 23, 2012, to June 12, 2012. Normally, this would be a similar point in spring, but in the Midwest, spring came earlier than expected. Unlike SummerWinds, plant sales fell over the three week test period.
Bachman’s tested three annuals (‘Baby Tut’ grass, ‘Kimberly Queen’ fern and Kong Coleus, all in 6-inch pots); three perennials (Astilbe ‘Deutschland,’ coreopsis ‘Zagred’ and Achillea ‘Strawberry Seduction’); and three shrub roses (‘Champagne Wishes,’ ‘Como Park’ and ‘Pavement Purple’).
When prices were raised 10 percent from week one to week two, there was an increase of 47.9 percent in total sales.
This would lead us to believe that indeed those plants were differentiated. With the additional increase of 10 percent in week three (and 20 percent from week one to week three), we saw a reduction in sales. Maybe the reduction was because that extra 10 percent was higher than the premium, but we also observed an overall reduction in sales for the garden center as a whole and not just the test plants. It was unseasonably warm that week, with three days in the 90s and two in the 80s.
It’s Time To Reconsider Your Prices
Both stores saw significant increase in revenue from week 1, when prices were lower, to week 2, when prices were average. SummerWinds’ test plants sales increased 37.2 percent, while comparable plants’ sales rose only 10.5 percent. At Bachman’s, total revenue for the test plants went up 47.9 percent compared to 35.3 percent for comparable plants. That difference is not trivial.
At Bachman’s, you see an increase in total revenue even though the plants were not branded.
These results are a pretty compelling reason to take a hard look at your pricing policies. However, we need to emphasize that the only way in which all of this makes sense economically is if your garden center is successfully differentiated in the mind of the customer. Otherwise, you’ll end up losing money faster than you would have otherwise. So while it may be too soon to start raising all prices in the short run (since we are, after all, still in the midst of a very slow economic recovery), our research shows that there is an opportunity for firms to test the pricing waters, so to speak, on some of their more differentiated product/service offerings.
Marco Palma (email@example.com) is a researcher and professor at Texas A&M University.
Bridget Behe is a professor in the Department of Horticulture at Michigan State University. You can eMail her at firstname.lastname@example.org.
Charlie Hall is a professor and Ellison Chair in International Floriculture at Texas A&M University. You can eMail him at email@example.com.