Warehouse Club Fees and Prices Lead Shoppers to Spend More
A new working paper appears to confirm what has long been suspected: that membership fees and perceived lower prices at warehouse clubs such as Costco and Sam’s Club lead shoppers to spend more.
Many people have had the experience of entering discount membership clubs to make a few purchases, only to leave with enough pasta to outlast a nuclear winter, Michael Norton of Harvard Business School and Leonard Lee of Columbia Business School note in The “Fees-Savings”Link, or Purchasing Fifty Pounds of Pasta. The authors suggest that the presence of membership fees can lead consumers to infer a “fees-to-savings” link, spurring them to increase their spending independent of the actual savings afforded by such clubs.
Using both field data and studies in which they created their own “membership clubs,” the authors show that:
- Fees serve as a signal of price discounts, such that stores that charge fees are perceived as offering better deals for identical items;
- The presence of fees can increase consumer spending and overall store profitability; and
- The presence of fees can drive choice of retail outlets, such that stores with membership fees are more popular even when they offer the same goods at the same prices as stores without fees.
The authors do acknowledge that the assumption that fees lead to lower prices is not completely unfounded. Membership clubs frequently offer better prices per unit due to factors such as lower costs for store and especially due to the volume discounts these retailers are able to offer.
Indeed, when the authors visited both a Costco store (which charges a fee) and a Wal-Mart store (which does not) and recorded the prices of a selection of 20 common consumer products they discovered that Costco had an average price advantage of 9.5% per unit across these product categories compared to Wal-Mart.
Thus discount stores like Costco do allow consumers to enjoy lower unit prices due to volume discounts compared to other regular stores that do not charge a fee.
If consumers believe that the savings offered by retailers like Costco are due solely to volume discounts, however, they would not infer the generalized “fees-to-savings” link that spurs increased spending. Different package sizes offered by the different stores make direct price comparison difficult for consumers; in addition, a discount club like Costco simply carries fewer items, making it even more difficult for consumers to compare products at discount clubs to other stores.
We suggest consumers may generalize from real savings offered on some goods by retailers that charge fees to a perceived “fees-to-savings” link.
If consumers do endorse this link, then they might erroneously perceive products to be a better deal if they encounter these products in a store that charges a fee than in one that does not, even when the two stores sell these products at the same price point, the authors conclude.
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