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Selling costs are costs that a firm incurs to serve a consumer who may or may not purchase a product. For example, a car dealer must expend time and effort to take consumers on test-drives regardless of whether they buy a car. A shoe store needs many salespeople to help consumers find shoes that are the correct size or that match their color preferences, but there is no guarantee of a sale. In addition, if a store is crowded with consumers who may or may not buy a product, some potential buyers may not bother to come in to the congested store. By serving the wrong consumer, the store gives up the opportunity of making another sale. An important feature of selling costs is that they are a function of the number of consumers who visit the store, including consumers who do not make a purchase. This has important implications for firms’ strategic decisions. This article explores the effect that selling costs have on retailers’ advertising strategies.

To attract potential customers, retailers often advertise low prices with appeals such as “Prices start at $49” or “One week in the Caribbean from $449.” These appeals are deliberately vague in the sense that they give little information about the product to which the prices refer. The author offers an explanation of how such advertisements can construct a credible price image despite their vagueness and lack of commitment. Although retailers incur costs in the process of selling a product, advertising low prices to lure potential consumers can backfire. This is because attracting too many consumers who are less likely to purchase the retailer’s higher-priced products on the basis of vague promises imposes unwanted selling costs but yields little extra revenue. Therefore, a store with a relatively high selling cost should be dissuaded from attempting to use such a strategy. The author shows analytically that such advertising can be credible only when there is a substantial difference in retailers’ costs or when the selling cost is high.

Selling costs also shed light on a mystery surrounding the practice of online advertising: Why do extremely low-price claims appear more often in online advertising? For example, many Internet sites claims that their goods are “absolutely free,” but this is never the case. The solution to this mystery may be a difference in selling costs. Online firms’ selling costs are much lower, sometimes virtually zero, so they can afford to attract shoppers with an extreme “free” claim, even if only a few consumers make a purchase at the actual price. In contrast, brick-and-mortar sellers incur huge costs if people come to the store but do not buy after they observe the actual prices. Thus, whether a bait-and-switch tactic or informative advertising is the optimal strategy hinges on the selling cost structure of the firm.

Biography
Jiwoong Shin is Assistant Professor of Marketing in the Yale School of Management at Yale University. He received his doctoral degree in Marketing at the Massachusetts Institute of Technology. He holds a Master of Science and a bachelor’s degree in Business from Seoul National University. Much of his current research focuses on two major fields: game theory and behavioral economics. His analytical research focuses on the modeling of rational behavior of retailers, consumers, and their interactions. This includes work on the credibility of advertising, the effect of free riding on retail competition, and the loss-leader view of coupons. His other behavioral interest lies in the area of behavioral decision theory. This includes incentives that keep options viable under unavailability. His previous works appear in Management Science and Journal of Database Marketing.

J Marketing Research, Volume 42, Number 3, August 2005
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