Consumer Perceptions of Deals Biasing Effects of Varying Deal Prices

Some brands in the market opt to offer a single “deal” price (e.g., Pepsi brand soft drink at $1.09 every alternate week), whereas others opt to offer 2 or more deal prices (e.g., Coca-Cola brand soft drink at $0.99 in Week 1 and $1.19 in Week 3). It was hypothesized that offering multiple deal prices is likely to result in underestimation of deal frequency and average deal price, which will bias the price consumers are willing to pay for the brand. Results from 3 laboratory experiments, a longitudinal experiment, and a survey support the hypotheses. In addition, consumers are likely to be willing to pay more for the brand when it is offered at 2 deal prices with a small difference compared with a single deal price. Implications of these findings for consumer welfare and pricing policy are discussed. Marketers often offer different deal prices in the market (Raju, 1990). Deal price refers to the offer of a brand at a price that is lower than the regular price for the brand. In a recent survey of soft drink prices that we conducted for 12 weeks, we found varying numbers of deal prices. For example, at the same store, Dr. Pepper brand soft drink (regular price of $1.69) was offered at two deal prices with a relatively large difference ($0.99 and $1.49), Pepsi was offered at a single deal price ($0.99), and Coca-Cola was offered at two deal prices with a relatively small difference ($0.99 and $1.19). We believe that utilization of a multiple deal price strategy can affect the relative salience of deals. Specifically, we assume that the higher of two deal prices is less salient than the lower of two deal prices because consumers are likely to be motivated to save money. Given this perspective, research on estimation of event frequency suggests that some occurrences of the higher of two deal prices may not be recalled because of their diminished accessibility as compared with the lower of two deal prices (Blair & Burton, 1987). This is likely to result in underestimation of overall deal frequency when two deal prices are utilized compared with a single deal price. Studying perceptions of deal frequency and understanding how they are formed are important issues because they help us to gain insight into the processes by which consumers make purchase decisions such as the quantity to purchase on each deal and how much to pay for the brand. For example, if consumers believe that a brand is not offered on deal very often, they may purchase a larger quantity when it is on deal versus if they think that it is promoted very often. Furthermore, given their belief of a large interdeal time gap, they may not stockpile from deal to deal and may be willing to buy when the brand is not on deal thus paying greater than deal price for it. In addition, research on consumer perceptions of multiple deal prices can also reveal whether consumers make purchase decisions that are based on accurate knowledge of deals. Therefore, we study the effect of difference in deal prices on consumer perceptions of deals. Difference in deal prices refers to the magnitude of the difference between deal prices. We address the following question in this research: how does difference in deal prices affect (a) perceived deal frequency, (b) perceived average deal price, and (c) the price that consumers are willing to pay for the brand. First, we review the relevant literature and propose our hypotheses. Next, we discuss a laboratory experiment that tests the hypotheses. We then replicate this experiment using different levels of actual deal frequency. Following this, we report the results of a longitudinal experiment and a survey of supermarket shoppers that were conducted as tests of the external validity of the laboratory experiments. The final section of the article discusses the findings and implications of this research. Consumer Perceptions of Deal Frequency and Average Deal Price Because this is the first study to examine the effects of varying deal prices, we restrict ourselves to the case of two deal prices that occur equally often. In the final section, we elaborate on how our results would change if we were to look at more than two deal prices and if the deal prices occurred with unequal frequency. Effects of Varying Deal Prices on Perceptions of Deal Frequency Consumers may judge the number of deals in a time period by recalling and counting every occurrence of a deal or by estimating the number of deals using procedures such as retrieving a rate-of-occurrence of deals from memory (Blair & Burton, 1987; Burton & Blair, 1991; Ross, 1984; Schwarz, 1990). Consumers may also use a combination of the two strategies and adjust frequency estimates based on rates of occurrence using a recall and count strategy (Menon, 1993). Menon also suggested that regardless of the strategy used to make judgments, the ease with which an event can be recalled (i.e., its accessibility) is likely to affect the accuracy of frequency judgments. In the case of deal frequency judgments, if a pure recall and count strategy is used, then more accessible deals may be recalled, and less accessible deals may be omitted resulting in deal frequency underestimation. If an estimation strategy is used, then less accessible deals may not be used in computing heuristics such as rate of occurrence. This would lead to underestimation of deal frequency. If a combination of the two strategies is used, the bias remains the same. We discuss below the relative accessibility of different deals in the single vs. multiple deal price conditions and its effect on deal frequency judgments.