Information: Prices

Adapted from J. Scott ArmstrongUpdated January 2015

Prices-R17

Learning Diary

The lectures follow an experiential learning experience. To make this work properly:1.Obtain a learning diary (paper). A 10 x 13 bound diary is suggested.2.Keep it up to date.3.Take the learning diary with you to all class sessions.4.For self-learners, use the diary to track your learning progress for all of your learning activities.

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Objectives of this session

To understand and apply these principles and techniques (not to convince you). Ask for clarification as needed.

Set a goal for yourself on how many principles and techniques you plan to use by the end of this session. Even a goal of one will help you. Put this in your learning diary now.

Note: We will discuss only some of the slides. When you go through the lecture on your own, view it in “Slide Show” and follow the experiential procedures.

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Procedure

Focus on understanding.

Record questions in your learning diary that will help you to apply the techniques or principles, then, after you decide which ones you want to apply, try to answer these from the readings. If not clear, ask others for help.

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“The offering of a shilling, which appears to us to have plain and simple meaning, is, in reality, an argument to persuade one to do so and so.”

- Adam Smith

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State prices in terms that are meaningful and easy to understand (1.4.1)

Why? To develop good long-term relationships.How can you make prices easy to remember?

Example: $2,397Simplify:

Syllable reduction rule. Each syllable reduces recall by 20%. The example has ten syllables.

For oral presentation, use grouping, e.g. for $2,397 becomes 23-97, a reduction of 3 syllables, or “2-3-9-7” another reduction of 3 syllables.

Rounding: $2,400 (only two significant digits.)

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Should you follow common expectations with respect to pricing?

For what percentage of supermarket items does the large size cost more per ounce than the small size? Write your prediction in your learning diary.

About 20% -- but the range across brands is from 5% to 85% (Discussed in Persuasive Advertising p.43-44)

Is that a problem?

Does it show respect for the customer?

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Brands with % items with quantity surchargesPredict the % of brands still in business 30 years after this study

of their use of quantity surcharges and explain why in your learning diary. Then click for the answers.

In business 30 years later?

a) Five brands with over 60% ________

b) Eight brands with less than 10%             ________

Note: This is a non-experimental study with a small sample size (See Persuasive Advertising p.43-44 for evidence)

OneSeven

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A new pricing policyYou are a retailer. You learn about a new pricing policy

“P-plan” that you could implement at virtually no cost and the effects on long-term sales would be negligible. 1. Customers say they believe the P-plan is more honest.2. It would save time and reduce confusion for customers

and retail clerks. 3. It would improve your image as a quality retailer.

Would you adopt this new pricing policy?___ YES ____ NO ___NOT SURE

Write your answer and explanation in your learning diary.9Adprin.com

Use round prices (1.4.2)

This will build long-term relationships. A field experiment by Diller and Brielmaier (1995) found:

Of customers, 66% prefer even prices, and 13% prefer odd.

Odd prices take 1/3 time longer to think about, and even university students are led to substantial errors.

Round prices imply higher quality: Kmart uses odd prices on 99% of its items while Neiman Marcus uses it on 16%.

Can any of your company’s ads be improved?10Adprin.com

Evidence on odd prices

Catalogue experiments find higher sales for odd prices (short-term effect).

Experiment in German drug stores found increase of 5% for matched stores that used round prices compared with those that did not.

Odd prices waste a few hours per customer per year and harm decision-making. (See Persuasive Advertising p.44-45 for further discussion.)

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Should the Bose Wave Radio have a round price?

Write your answer and explain why in your learning diary.

When finished, click this slide for the evidence-based answer.

Yes, Bose is a high-quality product.

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Are people aware of prices?

Question asked after a customer placed an item in a supermarket cart: “Off the top of your head, without checking, what is the price of the {product name} you just chose?”

Percent correct? Write your prediction in your learning diary, then click.Fewer than half.

Implication for advertising? If it is a quality product, focus on quality.If price is your advantage, provide benchmarks.

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Show the price to be a good value against a reference price (1.4.3.)

In 1901, the Chicago Telephone Company advertised telephone service for 16 cents a day (the PAD approach).

Bernbach’s burning egg: “Why not get an extension phone in your kitchen? It costs less than an egg a day.”

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Evidence on reference prices

Direct mail experiment to 968 households. Item with a reference price for a “sale”

- seemed more believable, and - purchases were 6.5% higher.

PAD increases sales for magazines by 10% to 40% (various industry studies).

(See Persuasive Advertising p.45-47 for further evidence.)

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Volkswagen: Mr. Jones and Mr. Krempler (60 seconds)

Show the price to be a good value against the reference price (Principle 1.4.3.)

This ad complies with the principle.

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Charity donation case

120 subjects were asked to donate to a charity through payroll deductions.

Half were asked to donate $0.85 per day, and 52% donated.

The other half were asked to donate $300 for the year. What percent donated? Write your prediction in your learning diary and explain why, then click for the answer.

(Gourville 1998)

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30%

If quality is not a key selling point, consider advertising price reductions (1.4.4)

Advertise only meaningful reductions. Ads for negligible price reductions increase sales, but they are unethical and often illegal. (See Persuasive Advertising p. 47-48 for discussion.)

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Consider partitioned prices when the add-on prices seem fair and are small relative to the base

price. (1.4.5.)

Example: “$30 plus $10” instead of “$40”

Conditions for add-ons:1) traditional (e.g., shipping or taxes)2) based on seller’s costs (e.g., fuel charges)3) small (and convenient)4) clearly stated

Large add-ons can be a problem: Air New Zealand was fined in 2006 because the add-on was considered misleading.

Does your company (your ad) violate this principle?

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Going to the football game on Saturday?

Mr. A bought his ticket a year ago.Mr. B bought his ticket on Friday before the game (for the

same price).There is a snowstorm on the game day.Who is most likely to go:___ Mr. A or ___ Mr. B?Write your prediction in your diary andexplain why.

Then see the next slide.

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Evidence on linking payment to consumption

Mr. B, because the payment is more closely linked to the consumption. Because his purchase was recent, the cost looms larger in his mind (Thaler 1980 in Persuasive Advertising  p 49).

In a lab experiment, 80 subjects were asked to imagine that they had pre-purchased four days’ worth of lift tickets at a ski resort. One group had a four-day pass and the other had four one-day passes. The group that had the unbundled tickets were more likely to say they would go skiing despite bad conditions (Soman & Gourville 2001).

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Debit or credit card?

Debit cards usually do not offer frequent flyer points, and they remove money from your account when purchases are made, rather than at the end of the month as with credit cards.

So why is it that in Europe, in 2006, consumers spent more than three times as much on Visa Debit Cards as on Visa Credit Cards?

People prefer to avoid bad part -- paying. Credit cards are less painful than cash, but you face a debt. Not so with debit cards. So, what to do. . .

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State that the price can be prepaid if it might reduce uncertainty for customers or enhance

anticipation. (1.4.8) Controversial among economists however, typical practice, a field

study, and a laboratory study support this principle.

People often prefer to remove uncertainty about the price.

So they pay much more for flat fees for internet, phone, and health clubs than had they paid per use.

One review was titled: “Paying Too Much and Being Happy About It.”

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Evidence on reducing uncertainty (1.4.8)

Here is an example of a lab experiment:Which message would get the highest response?

___a) a $1,600 premium with a promise of a $600 rebate for safe driving, or ___b) an otherwise equivalent policy for $1,000 with the possibility of having to pay up to $600 for an accident?Write your predictions in your learning diary, then click for the answer.

68% said they would purchase “a,” while only 44% said they would purchase “b.” (See Persuasive Advertising p. 51 for evidence.)

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So how would you advertise expensive men’s shirts?

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Using high costs to justify high prices

Using high costs to justify high pricesSuppose you received an ad for an attractive shirt, stating that it took 8.5 hours to make that shirt by hand. Assuming identical pricing, would you be more likely to purchase this shirt or an identical looking shirt in an ad stating, “Thanks to modern technology, this shirt was made in 37 minutes?”

“The value of a commodity is the amount of labor it has within it.”  - Karl Marx

Use high costs to justify high prices (1.4.9)

Supported by 7 experimental studies

How would you advertise mens’ shirts?

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1.4.9. – Use high costs to justify high prices

The ad claimed that the shirts were made by “dedicated craftsmen, who have been at it man and boy for one hundred and fifteen years.”

Sales soared.

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When quality is high, do not emphasize price (1.4.10.)

Evidence-based findings:

1) An increase in price advertising leads customers to focus on prices

2) Price advertising leads to lower prices.

3) Non-price advertising leads customers to show less concern about prices – and presumably more about quality.

Apply this to sales of an expensive brand of automobiles.

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1.4.10 When quality is high, do not emphasize price- Volvo auto bargains –violates

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Use high prices to connote high quality (1.4.11)

Conditions: Especially relevant when trying to impress others with high quality and where quality is hard to judge even after use.

Examples:

Universities: Bennington, MIT, Harvard

Johnson’s car wax had many benefits. Tests on different prices found that the claims were not believed when the price was low, so they went to market at a higher price.

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1.4.11 – Use high prices to connote high quality – Stella Artois (beer)- supports

Stella Artois advertises, “Reassuringly expensive” and “Perfection has its price” to convey high quality. 32Adprin.com

1.4.11 - Use high prices to connote high quality – Wild Turkey - Complies

This principle is relevant when quality is important yet hard to judge even after product use.- Discussed in Persuasive Advertising, p. 53

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For inexpensive products, state price discounts as percentage saved; for expensive products,

state price discounts as money saved – or both (1.4.12).

To be safe, advertise percentage savings and the dollar savings. Example: Amazon.com provides the list price, sale price, and total savings in dollar and percentage terms.

Laboratory experiment found intentions to buy higher when price savings was presented in many ways (Della Brita, et al 1981).

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Mouthwash case

You are introducing a new brand of mouthwash in a discount store. Would you advertise ______ a low introductory price or ______ sell it at its listed price?Why? Write your thoughts in your learning diary.

When people made their original purchases of this credence product at stores with the low price, they might conclude that they purchased it only for the price, not because it was good quality. (Doob 1969. See Persuasive Advertising p. 55-56 for additional evidence.)

Minimize price information for new products (1.4.13.)

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Minimize price information for new products

Example from Hyundai complies with the principle.

Does your company follow this principle?

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Wristwatch case

Which offer would have the highest sales, given that prices are the same:

__ a) a wristwatch, or __ b) the same wristwatch that also shows time on both East Coast and West Coast of the U.S. ?

Why? Write write your predictions and explanations in your learning diary, then click.

Intentions for this high-involvement product were46% for “a” and “30% for “b.”

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Consider bundling prices of features or complementary products or services if they

are desirable to nearly all customers. (1.4.14)

Intentions to purchase 17% higher in lab experiments on durable goods.

Car purchase intentions up 10% in a field experiment when prices were bundled. (See Persuasive Advertising p. 57 for evidence.)

Suggest an application . . For your project?Adprin.com

Carpet cleaning caseSears Carpet Cleaning

$14 a room 2 rooms: $28! 6 rooms: only $84!

Persuasive ad?

Multi-unit pricing raised purchase amounts by 32% over baseline pricing (Wansink, Kent and Hoch’s four 1998 field experiments of point-of-purchase ads in supermarkets). This works for low-involvement goods, but carpet cleaning is high-involvement purchase.

Advertise multi-unit purchases for frequently purchased low-involvement products if it is also in the consumers’ interest (1.4.15) 39Adprin.com

Ideas for Applications

To learn the principles, start to design an ad for your organization using the pricing principles in the checklist for creating ads.

If you are not currently working for an organization, pick something to advertise, perhaps a charity.

If you are in a class, design an ad for yourself as the owner of small advertising agency (commonly called a “house ad”).

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Other ideas for Application

1. Analyze an ad from your organization.2. Support your decisions by reference to the original research studies.3. Use the end-of-chapter checklist.

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Techniques

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Follow-up: Complete prior to next session

1. ___ Go through this lecture on your own (It is on the Educational Materials page)

2.___Study Persuasive Advertising pages 41-58 and record your reading time in your learning diary. Highlight techniques and principles that you want to apply in yellow.

3.___ Complete the End of Chapter Questions for “Information” and check your answers against PA.

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Advice on learning

One study found that fewer than 10% of students were successful in applying new knowledge.•This went to 20% if they actively applied what they were taught during a class session.•It went to 90% when they worked with a learning partner and coached each other.

Select techniques to apply

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