|
Dollars Off or Discount Percent:
The Effects of
Promotional Pricing on Longer Term Buyer Expectations
New
Studies Shed Light on ‘The Shadow Effect’
Pricing/Value Hangover
By Bill Wade
Three highly respected professors from Miami of Ohio and
Indiana University have just released studies of the ongoing effects of price
cutting on future price expectations... the dreaded “Shadow Effect” that
restricts the ability to rebuild price levels after a promotion (or sales
panic).
Especially at the
end of a sales year or quarter, suppliers need to stimulate sales and are
offering more and deeper price discounts to distributors than ever before... and
in many cases, distributors are passing them on to fleets.
Although offering
deep price promotions may increase selection of a particular brand at the time
of the promotion, such discounts may come with a heavy downside and baggage,
because they can reduce post promotion value recognition.
One reason for a negative effect on future sales is that
buyers may lower their expectations of future permanent prices, which in turn
may threaten future brand valuation when prices attempt to return to ‘normal’
levels.
Pennies vs.
Percent... What Works? What Sticks?
In their research, the authors examined how promotion
expression (‘percentage off ‘ versus ‘cents off’) moderates the
effect of promotion depth on post promotion price expectations and longer term
brand choice.
One of the research studies concentrated on whether
promotion description affects:
- Buyers’ price expectations (do they understand the
deal);
- The rate of brand choice at the time of the promotion
(did the deal work).
The results indicate that for promotions of high depth
(greater than 40%), a cents-off description leads to lower post promotion price
expectations than a percentage-off discount of equivalent value.
In other words, discounts (or price cuts) expressed in
clear monetary terms tend to stick longer than the promotion itself.
In addition to being associated with less downward price
expectations, the high-depth percentage-off discount resulted in the same
level of brand choice during the promotion as the high-depth cents-off
promotion...it worked just as well!
Percentages
Favor Brand Valuation in the Long Pull
A second study found that the effect of promotional
definition on price expectations carries through to brand choice after the
promotion is removed.
Specifically, repeat choice for a brand following its
use of a deep promotion was greater when the promotion was described in
percentage terms than when described in dollar terms.
As with price
expectations, post promotion brand choice did not differ as a function of
promotional description for low-depth (less than 15%) promotions.
Interestingly, the prime source of inaccuracies in price
perceptions stem from the difficulty of calculating the value of
percentage-based discounts.
Specifically, difficulty doing the arithmetic:
- Biases perceptions of prices from deep percentage-off
promotions upward;
- Makes buyers hesitant to weight the promoted price
when updating price expectations.
Both outcomes help insulate price expectations from
falling when consumers are exposed to a discounted price.
However, because computational difficulty drives the effect
due to expression of the deal, the effect disappears for percentage-off
discounts that are easy to compute... the easier it is to compute, the closer it
comes to the ‘cash effect’.
Thus, to best insulate post promotion share (while not
undermining sales when promoted), managers should use percentage-off discount
descriptions... while avoiding discount values that are simple to calculate.
In summary, these studies indicate that using a
percentage-off description to communicate a deep promotional price insulates
future brand share by buoying price expectations while not undermining choice
when the brand is promoted.
Additional studies indicate that discount description and
depth influence consumers' price expectations primarily by affecting their
perceptions of the promoted price and the weight they place on this price when
updating their price expectations.
Biographies of the Study
Authors:
Devon DelVecchio is Assistant Professor of Marketing in the Richard T. Farmer
School of Business at Miami University. H. Shanker Krishnan is Associate
Professor of Marketing in the Kelley School of Business at Indiana University.
Daniel C. Smith is the dean of and Claire W. Barker Chair in Marketing in the
Kelley School of Business at Indiana University.
|
