The phenomenon of negative prices
Why should you pay the buyer?
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Negative prices run counter to the laws and logic of exchange processes, namely that an appropriate consideration must be provided for a good received, which usually takes the form of the payment of a sum of money. A transaction only takes place when, from the buyer's point of view, the perceived benefit of the good is at least as great as the (positive) price demanded for it. In principle, it only makes sense for suppliers to sell a product if this results in a positive contribution margin per unit, i.e. the price exceeds the variable costs per unit.
Negative prices are not new
However, negative prices are not entirely new. They have been established on some two-sided markets for some time. Due to the overcapacity that arose during the coronavirus crisis and the need to reduce the associated excess supply, negative prices are now much more common. The marginal costs of almost zero that are possible for digital goods and intense price wars in many sectors mean that a higher frequency of use can be expected. The European Central Bank's negative interest rate policy is also prompting banks to pass on negative interest rates to consumers. Negative prices are even used temporarily as a promotional tool when launching new products and as an incentive when acquiring new customers in order to exploit the psychological motive of scarcity.
Swiss Marketing publishes the full-length article on this topic on its website. >www.swissmarketing.ch/news
4 tips from the expert
1.
To reduce overcapacity, negative prices should only be used by brands or companies in the low- and mid-price segments, as the price elasticity of demand in these price segments is negative. In the premium and ultra-premium position or for luxury goods with positive price elasticity, on the other hand, negative prices would result in brand erosion. Instead, a reduction in production figures is recommended.
2.
Customers respond well to cash-back strategies. Even if mathematically and economically there is no difference between a sales price of CHF 15,000 and a sales price of CHF 20,000 and a cash-back payment of CHF 5,000, the repayment as an expression of a negative price generates a higher net benefit for consumers.
3.
The market launch of new products or the distribution of new offerings can be supported by negative prices - possibly for a limited period of time and limited to take advantage of the psychological motive of scarcity. This is particularly suitable for digital products with marginal costs close to zero.
4.
Referral programs are ideal for acquiring new customers. It creates additional trust to be invited or referred by a friend who is rewarded with a bonus payment.
Author
Prof. Dr. Sören Bär is Professor of Marketing and Event Management at the Hochschule für Medien, Kommunikation und Wirtschaft (HMKW) Berlin. He conducts research at the universities of Leipzig and Bayreuth.
