Discount Distortion: The Influence of a Leading Option on the Interpretation of Price

THE PROBLEM

Extensive research has found that consumers distort information about brands prior to making a decision. Specifically, consumers bias new information they encounter about brands in favor of their leading or preferred option. This bias causes consumers to see the brand they eventually select as more superior to its competitors than it actually is. Prior research has revealed that consumers distort a variety of different types of product information, but until now it was unclear if consumers distort price.

FINDINGS

Professor Kurt Carlson of Georgetown University and colleagues (Meg Meloy from Penn State and Danny Lichtenstein from University of Colorado) ran two studies to examine this issue. In their first study,  consumers read information about two brands of backpacks, reported the brand they were leaning toward, and then learned about the prices of the two backpacks. Those who had an emerging preference for the slightly less expensive backpack saw the price information as favoring their preferred brand of backpack. In contrast, consumers who were leaning toward the brand that was slightly more expensive saw the same price information as favoring their preferred brand of backpack. In other words, the price difference was interpreted differently by consumers depending on which backpack they favored. Those leaning toward the more expensive backpack saw the price premium as a reflection of higher quality, whereas those leaning toward the cheaper backpack saw it as a good deal.

In a second study, Carlson and colleagues extended their research in a new choice domain (i.e., hotel brands). They also explored whether distortion would occur for price differences induced through a price promotion and if the magnitude of the price promotion mattered. As in the first study, consumers read information about the two brands of hotels, reported their emerging preference, and then learned the prices of the two hotels. The price information also included the fact that one of the hotels was offering either a 10% or a 25% discount.

The study revealed that consumers distorted the price information when the price difference involved a small (10%) discount. Specifically, those leaning toward the discounted hotel brand saw the discount as favoring their hotel, while those leaning toward the hotel not discounted saw the price premium as favoring their preferred (i.e., more expensive) hotel. However, a different pattern emerged from consumers who encountered a large price difference induced by a large (25%) discount. All consumers saw it as favoring the cheaper brand regardless of which way they were leaning before they encountered it.

The researchers also examined the inferences consumers drew based on price promotions. When the discount was small, those favoring the discounted hotel viewed it as higher quality than those who were leaning toward the other hotel. But when the discount was large, there was no difference in quality inferences across those who were initially leaning for or against the discounting hotel. Carlson and colleagues propose that large price discounts causes a sudden shift of preferences toward the discounted brand, thereby eliminating any benefit from distorting the price premium to favor the more expensive brand. Put differently, consumers do not have a motive to see the price discount as a reflection of poor quality (see the figure).

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IMPLICATIONS & CONCLUSIONS

Increasingly, consumers gather product information from a variety of sources such as word of mouth, direct encounters, brand marketing, and reviews. This exposure allows consumers to develop preferred options prior to encountering prices. The findings of this research indicate that the merit of a price advantage depends on which way a consumer is leaning when the price difference is encountered. If the price difference is small it will only benefit the discounting brand in the minds of consumers who are already leaning toward the discounting brand. This means that while small discounts might compel those who like a brand to buy it, they will not persuade consumers to change their brand preferences. In contrast, large discounts and big price differences operate entirely differently. They are too large to ignore and so cause consumers to switch preferences before they bother to consider drawing any price-quality inferences. The implication here is that large price discounts can actually change consumers’ perceptions of the genuine value of switching brands.

These findings suggest that marketers should develop an awareness of how their product compares to competitors in pre-price exposure evaluations. Marketers of products which stack up well to competitors can feel comfortable maximizing profit by pricing their brand slightly higher than competitors. Consumers who already prefer a specific brand will justify the higher price as a signal of quality. Marketers of products that do not compare well to competitors in pre-price exposure evaluation need to position their product significantly cheaper than competitor products. This will induce consumers’ perception of price in its “negative role” as a detractor of scarce resources and encourage the choice that sacrifices fewer resources.

Kurt Carlson

Director of the Georgetown Institute for Consumer Research and Professor of Marketing, McDonough School of Business

Professor Carlson teaches courses on marketing research, consumer behavior, and marketing management. He is also the director of the Georgetown McDonough Behavioral Research Lab. He received his bachelor’s and master’s degrees from the University of Wisconsin and his Ph.D. in marketing from Cornell University. Prior to joining Georgetown, Carlson was on the faculty of the Fuqua School of Business at Duke University from 2001 to 2009.

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