Market Lett (2006) 17:311321 DOI 10.

1007/s11002-006-9309-7

Pay 80% versus get 20% off: The effect of novel discount presentation on consumers deal perceptions
Hyeong Min Kim Thomas Kramer

Springer Science + Business Media, LLC 2006

Abstract Consumers often undervalue price promotions because they discount the discounts. In this research, we examine the effect of using a novel type of discount presentation (e.g., Pay 60% of the regular price) on deal evaluations, and compare it to that of an equivalent discount presentation commonly used in the U.S. (e.g., Get 40% off the regular price). In three experiments we show that the former discount presentation results in higher perceived savings and higher purchase likelihood than the latter. Using process measures, we demonstrate that this effect is due to increased systematic processing induced by the novelty of the discount presentation, which improves calculation accuracy and hence decreases the underestimation of discounts. We also report a boundary condition of the effect of discount presentations on deal evaluations by showing that it is eliminated when consumers do not need to expend effort to accurately process price information. Keywords Discount presentation . Deal perception . Pricing . Systematic processing Price discounts are some of the most frequently used promotional tools by marketers. However, consumers often discount, or underestimate, the value of price promotions (Gupta and Cooper, 1992). Explanations for the discounting of discounts range from consumer skepticism (Obermiller and Spangenberg, 1998) to exaggerated discount claims (Urbany et al., 1988). However, more recent ndings show that deal perceptions are also determined by the degree to which consumers are able to calculate the discounts and nal purchase prices accurately (Estelami, 2003; Morwitz et al., 1998), which suggests that marketers may be able to enhance responses to discounts by improving calculation accuracy. That is, since calculation inaccuracies in the aggregate lead to the underestimation of discounts (Kim and Kramer, 2006), consumers are more
Both authors contributed equally and are listed in alphabetical order. H. M. Kim ( ) . T. Kramer Baruch College, CUNY, New York, NY 10010 e-mail: Hyeong Min Kim@baruch.cuny.edu Springer

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likely to appreciate a discounted offer following deeper (i.e., analytic or systematic; Chaiken, 1980; Petty et al., 1983) processing of price information that enables them to evaluate a price discount more accurately. It is thus important to investigate ways in which marketers can enhance the accuracy of consumers mental arithmetic to improve responses to price discounts. In this research, we propose a novel type of discount presentation that induces consumers to process price information more deeply. In particular, compare the following two presentation formats of an equivalent price discount: (1) Get 25% off the regular price, and (2) Pay 75% of the regular price. The former is widely used in the form of percentage-off deals (or cents-off deals for discounts expressed as dollar amounts) in the United States, whereas the normatively equivalent latter one is seldom used here by rms, even though this type of discount presentation is commonly used in other markets (e.g., Hong Kong). If either of these two types of discount presentation indeed more positively inuences deal perceptions as we hypothesize, rms may increase sales by utilizing discount presentation tactics as a way to inuence deal perceptions. Additionally, it is theoretically important to investigate the process by which a discount presentation inuences deal evaluations, because identifying such a process will provide more general implications that go beyond the scope of the current research. We therefore examine how the perceived novelty of discount presentation inuences evaluations of an offer.1 Specically, in three experiments we show that a novel discount presentation (operationalized as Pay x%) leads to higher purchase likelihood than the equivalent common discount presentation (operationalized as Get 100 x% off) because the former induces consumers to engage in deeper processing, offsetting their tendency to underestimate advertised discounts (Gupta and Cooper, 1992).2 Furthermore, we test and eliminate alternative explanations and provide evidence that novel discount presentation is necessary but not sufcient for better deal perception. Specically, novel presentation inuences purchase likelihood only when price information is relatively difcult to process. In the next sections, we review relevant research ndings and develop our hypotheses, followed by a discussion of three experiments testing our predictions.

1. Theory Consumers have to perform mental arithmetic to evaluate the nal price following a discount (e.g., regular price $99 $99 20% discount), but not all consumers are motivated to engage in these calculations (Morwitz et al., 1998). Therefore, the processing of price information that includes a discount is often subject to errors (Estelami, 2003). Although previous research has demonstrated consumers inaccurate processing of prices (e.g., Morwitz et al., 1998), not much attention has been paid to the identication of factors that may inuence the processing accuracy of prices other than the difculty of arithmetic operations required (Estelami, 2003). However,
1

Novelty is a broad concept. Any element of a deal presentation can be novel (e.g., novel pictures). However, this research only examines novelty that stems from different ways of framing a deal. In other markets where the pay presentation is a norm, the off presentation is considered novel as Study 2 shows. Thus, for brevity, discussion of this research centers on the U.S. market. Springer

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identication of such factors can provide marketing managers with tools to increase consumers deal perceptions. As we describe next, we propose that discount presentation inuences consumers depth of processing and subsequent accuracy in calculating discounts. 1.1. Discount presentation We dene discount presentation as the different but normatively equivalent description of discounts, such as getting 25% off the regular price (i.e., a common presentation) versus paying 75% of the regular price (i.e., a novel presentation). There is no shortage of evidence in the literature that individuals reactions to a decision task are inuenced by its description (see Levin et al. 1998 for a general review on framing, and Krishna et al., 2002 for a review of framing effects in pricing). In this research, we propose that perceived novelty drives the effects of discount presentation on deal perceptions, through its impact on depth of information processing. 1.2. Novelty Novel stimuli increase the likelihood that consumers will engage in more elaborative information processing. For example, Aaker and Williams (1998) found that the use of novel independent thoughts in an ad resulted in increased elaboration of ad messages for members of interdependent cultures. Since the degree of novelty of a stimulus inuences the depth of information processing, it is also likely to inuence deal perceptions through deeper (i.e., systematic) information processing. In particular, if less accurate processing following a common discount presentation leads consumers in the aggregate to underestimate a discount, as suggested by the literature, then deeper information processing following novel discount presentation may increase consumers accuracy in nal purchase price estimations. That is, consumers exposed to a novel discount presentation will underestimate discounts less and process price information more accurately due to fewer processing errors. Consequently, purchase likelihood will increase. We formally propose the following hypothesis. H1: Consumers purchase likelihood and perceived savings will be higher following novel (vs. common) discount presentation. 1.3. Depth of processing Following Morwitz et al. (1998), we use price recall to assess consumers depth of price information processing. In particular, we should observe more accurate price recall following the novel discount presentation due to deeper processing induced by it (Chaiken, 1980; Petty et al., 1983). Therefore, we hypothesize: H2: Consumers will more accurately recall prices following a novel (vs. common) discount presentation.
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1.4. Percentage versus dollar amount discounts Our hypothesis that increased processing due to a novel discount presentation results in more accurate deal perceptions suggests that the effects of novel presentation will be eliminated when a discount does not require deeper processing, such as when discounts are presented as dollar amounts (vs. percentages). Indeed, research shows that percentage-based deals are more difcult to process and thus elicit more inaccurate processing than dollar-based deals (Estelami, 2003). Therefore, the increased amount of processing of price information due to novel discount presentation will play a greater role when the discount is presented as a percentage versus a dollar amount. Since consumers clearly see the nal price in a novel dollar discount presentation (e.g., Pay $104.50 of the regular price), the degree of systematic information processing will inuence deal perceptions less than following a novel percentage presentation (e.g., Pay 40% of the regular price). Furthermore, a common percentage presentation (e.g., Get 45% off $190) will require more cognitive effort to evaluate the true price than a common dollar presentation (e.g., Get $85.50 off $190). Thus, novelty is necessary but not sufcient for better deal evaluation. Formally, we hypothesize the following: H3: The effects of novel discount presentation will be greater when the discount is presented as a percentage (vs. a dollar amount).

2. Study 1 2.1. Pretest To test whether the novel (e.g., Pay 80% of the regular price.) and common (e.g., Get 20% off the regular price.) presentations were perceived as hypothesized, we conducted a pretest. Eighty-nine students from an East coast university rated the novelty of the two discount presentations on a nine-point scale modied from Holbrook (1981), anchored by 1 = novel, unfamiliar, unusual, and 9 = not novel, familiar, usual. These items were averaged to form a novelty index ( = .89). As expected, a t-test revealed that the novel (vs. common) discount presentation was perceived to be more novel [Mnovel = 4.04 vs. Mcommon = 5.94, t(87) = 6.38, p < .01]. Next, another forty-nine subjects were asked to list the rst thought that came to mind following exposure to either the common or novel presentation. Thoughts were categorized as novelty-related, commonality-related, and other. Twenty-six (twenty-three) subjects exposed to the novel (common) presentation provided 21 novelty-related (16 commonality-related) thoughts ( 2 = 32.51, p < .01). Examples of novelty-related thoughts included, It is very unusual, and Why didnt they just use 20% off? Examples of commonalityrelated thoughts are People see this expression very often, and I see it often at department stores. Subjects exposed to the novel (common) presentation did not provide any commonality-related (novelty-related) thoughts. In summary, the results of the pretest provide evidence that the novel (vs. common) discount presentation was perceived as relatively more novel, as we had intended.
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2.2. Method The goal of Study 1 was to test whether a novel discount presentation positively inuences deal perceptions, which we operationalized as perceived savings and purchase likelihood, relative to a common presentation. Fifty-one students from an East coast university were randomly assigned to a one-factor, two-level (novel vs. common presentation) between-subjects design in small group sessions. Subjects were exposed to a SONY digital camera ad featuring, in addition to general information, a 20 percent discount. In the novel condition, the discount was presented as Pay 80% of the regular price, whereas in the common discount condition, it was presented as Get 20% off the regular price. We chose this discount percentage based on prior research showing that more than a 15 percent discount is needed to attract consumers attention (Gupta and Cooper, 1992). The regular price, also noted in the ad, was $239.95, a fair market price. After looking at the ad, subjects reported their responses to the discount ad on the following scales: (1) purchase likelihood (1 = not at all; 9 = very much) and (2) perceived savings (How much do you think you can save if you buy the SONY camera in the ad? 1 = not at all; 9 = very much). 2.3. Results and discussion As expected, t-tests revealed signicant differences between the novel and common discount presentations in purchase likelihood [Mnovel = 5.62 vs. Mcommon = 4.44; t(49) = 2.75, p < .01] and perceived savings [Mnovel = 5.73 vs. Mcommon = 4.80; t(49) = 2.25, p < .03]. That is, subjects were more likely to buy the camera, and expected to save more money, when the discount was presented in a novel (vs. common) frame. This provides support for Hypothesis 1 concerning the effect of novel discount presentation on deal perceptions. However, while the pretest showed that the two discount presentations differed in novelty as we had intended, we did not actually measure novelty in this study. Study 2 addresses this shortcoming and examines whether the differential effect of discount presentation is indeed due to novelty. In particular, one could argue that the two presentations also differ in their valence; with getting a discount being perceived as highlighting a relatively more positive action (getting) and paying a percentage of the regular price being perceived as highlighting a relatively more negative action (paying). Similarly, one could dene getting a discount as a gain and not paying the full price as a reduction of a loss (Kahneman and Tversky, 1979). Additionally, the next study directly tests whether novelty elicits more analytic processing, leading to less discounting of discounts, as predicted by Hypothesis 2.

3. Study 2 We include conditions in the current study in which the novel versus common discount presentations differ in their perceived novelty, controlling for other variables and potential confounds. Hong Kong (HK) provided an ideal market for this study, because in HK most price discounts are presented as Pay X% of the regular price. Thus,
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the novel discount presentation for US consumers actually represents the common discount presentation for HK consumers, and vice versa. If the results of Study 1 are driven by novelty as we hypothesize, then the results should reverse for the HK consumers. 3.1. Method Thirty-eight students from a university in the United States and thirty-six students from a university in Hong Kong participated in this study for partial course credit. Subjects were randomly assigned to a 2 (discount presentation: pay, get) 2 (market: US, HK) between-subjects design in small group sessions. An LG camera phone was selected as the product, with the average market price of $194.95 listed as the regular price. The discount was presented as either Pay 60% of the regular price or Get 40% off the regular price. The reason why we chose a 40% discount level is that we wanted to test a moderate discount level in Study 2. This is important because consumers process information more extensively for a moderate discount level than for a high or low discount level (Grewal et al., 1996). In other words, we wanted to test if the effect of discount presentation would be robust across different levels of discounts. After looking at a price discount ad, subjects were asked to provide responses on the same set of dependent measures as in Study 1; namely, purchase likelihood and perceived savings, as well as perceived novelty ( = .87). Finally, subjects were asked to recall the nal purchase price of the camera phone after the discount without turning back to the ad. 3.2. Results and discussion First, a 2 (discount presentation) 2 (market) ANOVA on the novelty index revealed that HK subjects viewed the Get X% off presentation as more novel than US subjects [MHK = 4.33 vs. MUS = 6.37; F(1, 70) = 26.26, p < .01]. In contrast, US subjects viewed the Pay X% of the regular price presentation as more novel than HK subjects [MUS = 4.28 vs. MHK = 5.88; F(1, 70) = 18.27, p < .01]. These results were qualied by a presentation market interaction [F(1, 70) = 44.37, p < .01]. These results served as a manipulation check. A 2 (discount presentation) 2 (market) ANOVA on purchase likelihood resulted in a signicant interaction [F(1, 70) = 12.58, p < .01]. Further analyses showed that when exposed to the Pay X% discount presentation, US subjects reported a higher purchase likelihood for the camera phone than did HK subjects [MUS = 6.00 vs. MHK = 4.70; F(1, 70) = 5.30, p < .02], whereas when exposed to the Get X% off presentation, HK subjects reported a higher purchase likelihood for the camera phone than did US subjects [MHK = 6.15 vs. MUS = 4.63; F(1, 70) = 7.32, p < .01]. The results of perceived savings revealed a similar interaction [F(1, 70) = 10.14, p < .01]. That is, when exposed to the Pay X% presentation, US subjects reported greater perceived savings than did the HK subjects [MUS = 6.37 vs. MHK = 5.18; F(1, 70) = 5.23, p < .03], whereas when exposed to the Get X% off presentation, HK subjects reported greater perceived savings than did the US subjects [MHK = 5.94 vs. MUS = 4.71; F(1, 70) = 4.93, p < .03].
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Market Lett (2006) 17:311321 Fig. 1 Comparison between US and HK subjects responses to different discount frames

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Recall accuracy was measured as percentage deviation (PD), dened as follows in accordance with previous research (Estelami and Lehman, 2001). PD = recalledprice actualprice actualprice

Price recall accuracy has been used as a measure of the depth of processing (Morwitz et al., 1998). We found support for H2, which states that consumers will more accurately recall prices following a novel (vs. common) discount presentation. In particular, we found a signicant interaction of discount presentation market [F(1, 70) = 8.69, p < .01] on recall accuracy. Further analysis revealed that, as Fig. 1 shows, when exposed to the Pay X% presentation, US subjects had more accurate price recall than HK subjects [MUS = .04 vs. MHK = .17; F(1, 70) = 4.00, p < .05], whereas following the Get X% off discount presentation, HK subjects had more accurate price recall than US subjects [MHK = .01 vs. MUS = .14; F(1, 70) = 4.69, p < .03]. The above results suggest that the effect of the discount presentation is mediated by perceived novelty to a different extent depending on the particular country market of Hong Kong versus the United States (i.e., moderated mediation). Thus, we conducted an analysis of moderated mediation following Baron and Kenny (1986). First, to nd support for moderation, the following regression model was run: purchase likelihood = a + b1 (discount presentation: dummy coded as 1 = off, 2 = get) + b2 (novelty) + b3 (country: dummy coded as 1 = US, 2 = HK) + b4 (discount presentation country), where b2 was expected to be signicant while b4 was not. As expected, b2 was signicant ( = .68, t = 5.78, p < .01), while b4 ( p = .81) was not. This result shows that novelty induced by the discount presentation was used to varying extents as a function of the country market, allowing us to test mediation separately between US and HK. In the US condition, the discount presentation was a signicant predictor of purchase likelihood ( = .36, t = 2.29, p < .01), and so was novelty ( = .64, t = 5.01, p < .01). Also, the discount presentation was a signicant predictor of novelty ( = .63, t = 4.90, p < .01). However, when both the discount presentation and novelty were entered into the regression, only novelty remained a signicant predictor of purchase likelihood ( = .69, t = 4.16, p < .01, while the discount presentation did not ( p = .63). The HK condition revealed a similar result. That is, the discount presentation was a signicant predictor of purchase likelihood ( = .43, t = 2.60, p < .01), and so was novelty ( = .67, t = 5.26, p < .01). Also, the discount presentation
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was a signicant predictor of novelty ( = .62, t = 4.63, p < .01). However, when both the discount presentation and novelty were entered into the regression, only novelty remained a signicant predictor of purchase likelihood ( = .66, t = 3.99, p < .01, while the discount presentation did not ( p = .91). Therefore, we found full mediation for both the Hong Kong and United States subjects. Overall, Study 2 supported Hypothesis 2, reconrmed Hypothesis 1, and eliminated alternative explanations of the effect. That is, price recall accuracy was greater following the novel (vs. common) discount presentation, suggesting that the novelty of the discount presentation elicited deeper processing. Lastly, we found support for moderated mediation of perceived novelty. Next, Study 3 seeks to show a boundary condition for the effect of novel discount presentation on deal perceptions by testing if the type of discount presentation (dollar vs. percentage) moderates the effect of discount presentation, as predicted by Hypothesis 3.

4. Study 3 If our theorizing that a novel presentation leads to better deal perceptions due to deeper information processing (i.e., more accurate processing) is correct, then the effect of discount presentation should disappear when a discount is expressed as a dollar (vs. percentage) amount because such a discount is relatively easier to process than a discount expressed as a percentage as used in Study 1 and Study 2 (Estelami, 2003). 4.1. Method Eighty-two students from an East coast university were randomly assigned to a 2 (discount presentation: novel, common) 2 (discount term: percentage, dollar) betweensubjects design in small group sessions. The product and the regular price were the same as those in Study 2. The discount level, however, was 60% to cover a higher area in the discount level spectrum (Gupta and Cooper, 1992). In the percentage condition, the discount was presented as Pay 40% of the regular price vs. Get 60% off the regular price. In the dollar condition, the percentage was replaced by a corresponding dollar amount (e.g., Pay $77.98 of the regular price vs. Get $116.97 off the regular price). After looking at a price discount ad, subjects were asked to provide responses on the same measures as in Study 2: purchase likelihood, perceived savings, and perceived novelty of the discount presentation ( = .88). Price recall data was also collected as in Study 2. 4.2. Results and discussion As intended, a 2 (presentation) 2 (term) ANOVA on novelty revealed only a significant effect of presentation [F(1, 78) = 34.79, p < .01]. H3 predicted that the effects of discount presentation would be greater when the discount is presented as a percentage (vs. a dollar amount). This was supported by a signicant interaction of discount presentation discount terms [F(1, 78) = 4.02, p < .05]. That is, in the percentage condition, the novel (vs. common) discount presentation led to higher purchase
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likelihood [Mnovel = 6.95 vs. Mcommon = 5.32; F(1, 78) = 8.28, p < .01], whereas no difference was observed in the dollar condition [Mnovel = 6.17 vs. Mcommon = 6.10, F < 1]. The results of ANOVAs on savings and price recall were highly similar to that of purchase likelihood and will not be discussed in detail. That is, novel discount presentation inuenced savings ( p < .07) and price recall ( p < .05) only in the percentage discount conditions. Therefore, Study 3 found a boundary condition of the effect of the discount presentation, showing that deeper processing induced by novel discount presentation inuences deal perception only when such processing is needed to accurately ascertain a price discount, such as when the discount is presented as a percentage. The effect of novel discount presentation is eliminated when mental arithmetic is less likely to be required for accurate discount calculations, such as when the discount is presented as a dollar amount.

5. General discussion This research showed that consumers deal evaluation is inuenced by how discounts are presented. We proposed a new price discount presentation manipulation and showed that, by inuencing depth of processing price information, novelty associated with a particular discount frame had a considerable impact on purchase intention and perceived savings. Our nding that inaccurate processing of discount information leads to an underestimation of discounts provides new insights into why consumers tend to undervalue discount deals, in addition to previously identied consumer skepticism (Gupta and Cooper, 1992). In particular, research has shown that skepticism is the main reason why consumers discount discounts (Liefeld and Heslop, 1985). We show in this research that lack of deeper processing also accounts for this effect. However, some boundary conditions for the discount framing should be noted. First, skeptical consumers tend to disbelieve ad claims. Thus, they may be less inuenced by a discount presentation and consequently discount discounts. In contrast, less skeptical consumers, when exposed to a novel discount presentation, may perceive the deal as even better. This argument is in line with the persuasion knowledge model (Friestad and Wright, 1994). Consumers with high persuasion knowledge (e.g., familiarity with marketing tactics) should be less inuenced by a discount presentation, whereas consumers with low persuasion knowledge (e.g., nave consumers) should be more affected by a discount presentation. Second, the general frequency of discounting for a certain store or in a certain category may pose another boundary condition of discount presentation effect (Krishna et al., 2002). In particular, even common presentations may elicit deeper processing and deal perception when employed by rms that very rarely discount their merchandise. In this case, the discount itself may be perceived as novel, regardless of its presentation. Future research should examine other boundary conditions. Implications for rms are obvious. Firms need to design price presentations that consumers will not view as usual or common. Usual, familiar price presentation may elicit discounting of price discounts and thus lower purchase intention (Krishna et al., 2002; Liefeld and Heslop, 1985). Thus, rms need a novel or unique strategy to catch consumers attention and increase deeper processing. Incidentally, we need to point
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out a caveat for rms. If all rms started using the same novel discount presentation, it would stop being novel over time and lose its effectiveness. However, there are other ways in which discounts can be presented in a novel manner. For example, using surprising colors or fonts are also likely to foster deeper processing and hence reduce the underestimation of discounts. In addition, our ndings also suggest that price communication decisions should be strategically made. For motivated consumers, rms do not need to rely on novel discount presentation because they are more likely to elaborate anyway. Thus, the use of dollar-based discounts may be benecial to rms so as not to unnecessarily overload consumers cognitive resources. In contrast, for less motivated consumers, rms may want to take advantage of novel-percentage discount presentation to induce them to more accurately process price information. Lastly, the relationship between our nding and potential alternative explanations should be discussed. First, money spent (i.e., payment) is generally more salient than money saved (Das, 1992; Thaler, 1999). Thus, the Pay X% discount frame may lead to a higher level of salience than the common frame, drawing more attention from consumers. Although plausible, this explanation is not fully supported in this research because the HK subjects engaged in deeper processing when evaluating the Get X% off frame than when evaluating the Pay X% frame. Second, discount credibility may have played a role in Study 3 which used a 60% discount level. One may argue that, for such a high discount level, credibility is greater when the payment amount is clearly presented as in the novel dollar discount frame. If so, credibility differences across discount frames might have inuenced subjects responses, although a large discount amount more than compensates for the negative effect of its low credibility (Krishna et al., 2002). This is an interesting issue that warrants attention from future research. However, the explanation based on novelty provides a parsimonious and consistent mechanism of our ndings.

Acknowledgments The authors thank Utpal Dholakia, Dhruv Grewal, David Luna and Sankar Sen for their helpful comments on earlier drafts of this paper, and especially Jae H. Pae for data collection in Hong Kong.

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