Compilation: Consumer Inferences and Processing of Price Information

Donald Lichtenstein
Academic
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Key Takeaways
  • ​Importance of price with regard to consumer store and brand choice decisions cannot be overstated. 
  • Four articles provide insights at store level, product category level, and brand level.


Selections from Journal of Marketing

June 2014 | Pricing

The importance of price with regard to consumer store and brand choice decisions cannot be overstated. However, a widely known truth among marketing practitioners and academics alike is that consumers do not respond to price per se; rather, they respond to their mental representations of price. Thus, any factors that influence consumer price perceptions will necessarily affect purchase probabilities. For this reason, there has been a history of research investigating contextual influences that make prices appear more or less favorable to consumers. This collection features four recent articles from Journal of Marketing that provide valuable insights into factors that exert this kind of contextual and perceptual influence at the store level, the product category level, and the brand level. Two primary themes run through the four articles in this collection. First, Hamilton and Chernev (2013) and Miniard et al. (2013) explore how consumers form price inferences. These authors investigate the types of observable price- and non-price-related information consumers use when inferring important but unobservable prices, such as store-level and/or competitors' prices. Second, Chen et al. (2012) and Biswas et al. (2013) explore the influence of promotional price presentation on consumers' numerical (price) information processing. 

Hamilton and Chernev (2013) note that an important price inference consumers make is the store's price level: Is it a higher-priced or lower-priced store? Such perceptions have a pronounced influence not only on store choice but also on consumers' propensity to search competitive stores for lower prices. The authors provide a conceptual framework for considering both price- and non-price-related influences that are under the control of the retailer and directly influence the retailer's price image. For example, beyond the actual price level itself, pricing policies (e.g., price match guarantees) and physical attributes (e.g., larger stores with larger parking lots) can signal lower prices to consumers. 

Miniard et al. (2013) investigate consumer price inferences from a different perspective. A common retailer practice is that of "partially comparative pricing": when a retailer such as Wal-Mart provides a shelf label for one of its brands that compares its price with that offered by an identified competitor (e.g., Toys "R" Us). Prior research has shown that these price comparisons result in more favorable price perceptions for the referent product. However, such comparisons have also been shown to have the unintended consequence of leading to consumer inferences of higher prices for the advertising retailer (Wal-Mart in this example) across product categories in which prices are not compared (Barone, Manning, and Miniard 2004). For example, if Wal-Mart were to employ a comparative pricing strategy relative to Target for a Sharp calculator, this would result in lower price perceptions for the Sharp calculator at Wal-Mart but higher perceptions of other products at Wal-Mart (e.g., backpacks). An open question, however, is the influence of this practice on other products in the product line (e.g., other calculators at Wal-Mart). Miniard et al. address this void and find that when comparative pricing is used on a single brand in a product category, consumers perceive other brands in the product category to also be priced more favorably than the named competitor's prices. However, in line with the premise that one comparatively priced brand in a category is the norm, if a retailer compares prices on more than one brand in the category, consumers will infer that the selected brands are cherry-picked, and the spillover to other brands/models in the product line will be diminished. 

The other theme explored in this collection is how price perceptions are influenced by consumers' abilities and norms in processing numerical information. Drawing on research that shows that many consumers are poor processors of numerical values presented in terms of percentages, Chen et al. (2012) advance the concept of "base value neglect" (BVN). The BVN phenomenon represents consumers' tendency to ignore the base value to which percentages apply and instead focus their judgments exclusively on the percentages themselves. One marketing context in which this plays out (and is used as an experimental manipulation in Chen et al.'s studies) is marketers' choice to provide a bonus amount of a product (50% more) versus a lower price (33% off) in a promotional context. For example, if coffee costs $12.00 per pound, a marketer can offer a promotion of 50% more (24 ounces) or sell the pound at 33% off (at $8.00). In both cases, the effective price would be $.50 per ounce. However, consumers overwhelmingly prefer the bonus amount because 50% > 33%. Consumers simply ignore the differences in base values (16 ounces, $12.00) when forming their preferences. 

Biswas et al. (2013) use the "subtraction principle" to explore consumers' reactions to how price discounts are presented. For example, retailers commonly advertise promotional prices such as "Was $99.95, Now only $52.95." In such cases, consumers merely subtract the second price from the first and realize that the retailer is claiming to offer a discount of $47.00. However, many retailers present this type of promotion by listing the lower sale price first, followed by the higher reference price: "Sale $52.95, Previously $99.95." Because the former mode of presentation is consistent with how people first learn subtraction (with the larger number on the left), it is easier for consumers to "do the math," and they are more likely to perform the calculation than in the latter condition. The authors call this tendency "the subtraction principle." When the sale price is listed first and the reference price is listed second, consumers are less likely to perform the calculation and instead simply default to assuming a 10%–15% discount. Thus, it is only when a discount is very low (e.g., 5%) and consistent with the subtraction principle that a discount framed in the alternative mode will generate more favorable price perceptions. 

Taken together, these four articles highlight simple but previously unrecognized promotional practices that managers can employ to enhance the positioning of their prices. For example, one of the most ubiquitous promotional practices is the use of reference price advertising. Reference prices have been shown to have a powerful influence on consumer responses across products and contexts. However, to further enhance their influence, advertisers should simply design their promotions so that the reference price is placed above or to the left of the sale price, rather than to the right or below it. In addition, managers are often eager to use on-shelf displays to show that their price on an item is lower than some competitor's price. In their enthusiasm to create low price perceptions, they may believe that "if it works well for one product, it will work doubly or triply well for two or three." This logic may seem reasonable. However, the findings cited here show that it is not sound: managers can destroy favorable price perceptions by trying to offer "too much of a good thing." 

Another simple decision rule managers can employ when deciding whether to offer either a price discount or more product for free in a promotional format is to offer the one with the largest percentage; this is very simple, but the research cited herein shows it to be effective. Finally, all of these tools, as well as others, influence the general perceptions of overall store prices, which may be the most influential factor in getting consumers to the store in the first place. 

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Biswas, Abhijit, Sandeep Bhowmick, Abhijit Guha, and Dhruv Grewal (2013), "Consumer Evaluations of Sale Prices: Role of the Subtraction Principle," Journal of Marketing, 77 (July), 49–66.

Chen, Haipeng (Allan), Howard Marmorstein, Michael Tsiros, and Akshay R. Rao (2012), "When More Is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts," Journal of Marketing, 76 (July), 64–77.

Hamilton, Ryan and Alexander Chernev (2013), "Low Prices Are Just the Beginning: Price Image in Retail Management," Journal of Marketing, 77 (November), 1–20.

Miniard, Paul W., Shazad Mustapha Mohammed, Michael J. Barone, and Cecilia M.O. Alvarez (2013), "Retailers' Use of Partially Comparative Pricing: From Across-Category to Within-Category Effects," Journal of Marketing, 77 (July), 33–48.

Additional References
Barone, Michael J., Kenneth C. Manning, and Paul W. Miniard (2004), "Consumer Response to Partial Price Comparisons," Journal of Marketing, 68 (July), 37–47.


Author Bio:

Donald Lichtenstein
Donald Lichtenstein
Professor Lichtenstein is Chair of the Division of Marketing at the University of Colorado, Boulder Leeds School of Business. His research has focused on consumer processing of reference price advertisements, consumer price-quality perceptions, influences on consumer price acceptability, and consumer perceptions and response to alternative sale promotion techniques. More recently, he has done research regarding corporate social responsibility, consumer-company identification, and consumer processing of nutritional labeling information. He currently serves on the Journal of Marketing editorial review board.
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