JCPenney CEO Ron Johnson has told investors that its original pricing strategy failed because it was too complicated for consumers. For discounting to work, it has to be simple.And now there’s more research that supports that theory. In a new paper in the Journal Of Marketing, “When More Is Less: The Impact Of Base Value Neglect On Consumer Preferences For Bonus Packs Over Price Discounts,” Carlson School of Management Professor Akshay Rao looks at how consumers view “mark downs” versus “buy one, get one free” types of deals.
Rao and his team conducted an experiment where they asked a U.S. retailer to promote Fruits & Passion hand lotion —which is normally $13.50 — by offering “50% more free” for a time period, and then at a 35% discount, which is a slightly better deal. The retailer ran each promotion every other week for 16 weeks.
The store was able to sell 75 per cent more when the product was marked as “50% more free.”
Photo: Wikimedia Commons
They also performed another experiment, this time asking customers to fill out a survey based on which promotions they would prefer, and the participants again said they’d rather get something “for free” — even if the other promotion is a better deal.
Essentially, “consumers are inclined to perceive add-ons such as bonus packs as gains but view price discounts as reductions in losses. Consequently, bonus packs are preferred to price discounts because in most instances, a gain in quantity is preferred to a reduction in monetary loss as a result of the shape of prospect theory’s value function.”
What it comes down to is that consumers don’t want to take time to figure out a product’s “base value.” They don’t want to think too hard about their purchase; they’ll just go with what sounds like a better deal.
It’s also important to note that this sort of thinking goes for cheaper, everyday products. According to the researchers, “a preference for bonus packs over price discounts for the less expensive bread and bath tissue was reversed for the more expensive detergent and sliced cheese.”
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