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Article Excerpt
Consumers aware of a new benefit will often experience uncertainty about its personal relevance or usage value. This paper shows that the decision to deliberate further to resolve this uncertainty and reach a polarized judgment of personal relevance critically depends on the posted price. In particular, a price above the consumer's initial willingness to pay might be thought provoking and enhance the perception of relevance with a certain probability. This behavioral mechanism is introduced formally and by way of an experiment with reference to the purchase of organic lettuce and fair-trade coffee. Accounting for the effect of price as a stimulus to think, a monopolistic firm should either over price ("transgressive pricing") or under price ("regressive pricing") in comparison to the consumer's willingness to pay. Under certain circumstances, the firm should also empower consumers with means that reduce the effort of deliberation.
Key words: production differentiation; marketing strategy; consumer behavior; pricing; cost of thinking; entry decision; consumer empowerment
1. Introduction
When a firm introduces a new benefit, consumers are often unsure whether or not they need it. Accounting for this uncertainty, the firm might offer an introductory discount or focus on a small group of more affluent or enthusiastic consumers. The alternative approach suggested in this paper is to induce consumers to think more thoroughly about the potential role of the new benefit in the context of their lives. The central claim is that overpricing--pricing above what they initially want to pay, but not too high--can motivate consumers to deliberate further and reach a more definite, polarized judgment about the personal value of a new benefit. With a certain probability, this more deliberate opinion will intensify desire and willingness to pay, justifying the posted price premium. This paper presents theoretical and experimental evidence of this price-induced behavioral mechanism and considers the circumstances under which a differentiated firm should rely on it.
Examples of new benefits might include design or aesthetic enhancements to utilitarian goods (e.g., artfully designed computers or kitchen tools), environmental and social responsibility attributes embedded in familiar products (e.g., organic vegetables, fair-trade coffee beans, gas-electric hybrid cars), and ordinary dimensions of added value (e.g., service level, size and weight, convenience, prestige) attached to products in categories in which these are not expected by consumers. Consumers accustomed to approaching a product category with a standard set of expectations will experience uncertainty with respect to the personal relevance of such added benefits. Incorporating such benefits is also usually accompanied by overpricing, even when consumers from all walks of life are targeted. This paper suggests that consumers in these circumstances will interpret price as a cue to entertain deeper thoughts about the unusual benefit dimension and that firms will construe the circumstances as an opportunity to target a possibly smaller but more deliberate and eager pool of consumers.
The theory advanced here derives from a simple model of behavior that incorporates consumer uncertainty about the relevance of a unique product feature. Initial willingness to pay is a function of the feature's expected usage value, while actual demand is also a function of the extent of consumer deliberation prior to purchase. Analysis reveals that consumers' motivation to think is determined by market prices in combination with other factors such as magnitude of the potential benefit, initial degree of uncertainty, and cost of thinking. Experimental evidence is presented that supports the notion that price can stimulate thinking as predicted by the analysis.
The remainder of the paper is organized as follows. Related literature is reviewed in [section] 2. Formal models of the consumer and differentiated firm are introduced in [section] 3. An examination of consumer behavior in [section] 4 demonstrates the existence of a range of thought-provoking prices that might cause buying behavior to deviate from initial willingness to pay. Section 5 reports experimental evidence on the existence of such prices. In [section] 6, optimal pricing in anticipation of the dual impact of price as incentive to buy and stimulus to think is established, revealing what will be called regressive and transgressive pricing strategies (pricing below or above initial willingness to pay, respectively). (1) Implications for market entry are also discussed, as consideration of transgressive pricing expands the domain in which entry should prove profitable. Section 7 extends the results by examining the value of consumer empowerment, that is, the profitability of transferring resources that facilitate consumer deliberation. Section 8 concludes.
2. Related Literature
Because it studies pricing from the perspectives of both consumers and firms, this paper draws on literatures in consumer behavior; and in pricing and advertising research.
Consumer Behavior
The consumer behavior literature on information processing and product categorization already posits the general idea that cognitive effort can be context dependent. Consumer behavior models inspired by the concept of bounded rationality assume that consumers select decision strategies and heuristics on the basis of a trade-off between accuracy and required cognitive effort, contingent on task environment or a decision maker's resources, or both (Huber 1980, Johnson and Payne 1985, Payne et al. 1993). Research along these lines has had many relevant ramifications, including studies of formal measurement of the cost of thinking (Shugan 1980), formation of consideration sets (Hauser and Wernerfelt 1990), and choice in ambiguous or emotionally charged contexts (Johnson 1986, Luce et al. 1997).
In the present paper, the contextual element that determines cognitive effort is the feature-price combination offered by the differentiated alternative. Research on the likelihood of elaboration in marketing environments (Celsi and Olson 1988, Gotlieb and Swan 1990, Petty and Cacioppo 1986) has hypothesized that price savings can result in higher involvement and greater motivation to process marketing messages. If this particular finding seems to contradict the idea that overpricing stimulates deliberation, recall that the reference point adopted in the present research is a consumer's initial willingness to pay, not the earlier (possibly unaffordable) price posted by the firm.
The presence of a range of thought-provoking prices is consistent with the finding by Carpenter et al. (1994) that incongruous (or even apparently meaningless) attributes can yield a positive demand effect as long as the attached price remains within a range, even if higher than expected. An inverse relationship between decision speed and price incongruity found in an experiment by Wathieu et al. (2004) is further evidence of a link between posted price and amount of deliberation. Growing evidence suggests more generally that prices trigger cognitive activity that might influence willingness to pay. Recent work by Shiv et al. (2005) demonstrates that the actual postpurchase efficacy of product attributes (e.g., the energy derived from an energy drink) tends to be reduced when a price discount is posted, due to unconscious effects. Bertini and Wathieu (2006) also find consumer attention toward various dimensions of an offer to be contingent on the format of the posted price (e.g., on whether fees are posted separately).
Previous research on product categorization was another source of inspiration for the present work. According to this research, incongruent attribute information prompts arousal and cognitive elaboration directed at making sense of the incongruency (Mandler 1982, Sujan and Bettman 1989). Specifically, research has shown that a product is evaluated more extensively when attributes are moderately incongruent with respect to existing knowledge structures than when its attributes are either congruent or extremely incongruent because the stimulus created by the contrast is optimized (Meyers-Levy and Tybout 1989). This literature, which identifies congruity as a driver of comprehension and classification of unique product features, has found application in various areas in marketing (e.g., Meyers-Levy et al. 1994, Ozanne et al. 1992, Stayman et al. 1992). Similarly, but more formally, the present paper finds, with respect to the situation of a consumer trying to clarify the relevance of what a firm has to offer, that a moderately incongruent price differential is more likely to induce deliberation. Detailed analysis reveals that price, benefit intensity, and effort of thinking complete the behavioral economics of thoughtful consideration.
This paper's formal approach supports analysis of the strategic implications of the categorization process from the standpoint of an opportunistic firm, a domain pioneered by Carpenter and Nakamoto (1990) and Ratneshwar and Shocker (1991).
Some previous studies have explicitly dismissed price from the list of attributes that can influence perceptions and product categorization, because of price's alleged objectivity (Johnson 1986). The present work disagrees, suggesting that price not only serves to discriminate between categories (e.g., houses are expensive, lettuce is cheap), but also stimulates recategorization (e.g., organic lettuce is more likely to be perceived as health food when a price premium is attached).
Pricing and Advertising
Price premiums have alternatively been interpreted as (a) a discriminating factor...
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