Marketing management

Final exam

Session 8; Price perception biases

Price framing
Psychological pricing is defined as pricing that considers the psychology of prices not simply the
economics; the price is used to say something about the product. Price framing refers to how the
offer is communicated to the consumer. With no or minor changes to the actual price, retailers
can change consumers’ evaluations, and affect their choice, and post-purchase behaviors. For
example, Albert Heijn has started to mention price as price / 500G instead of price / KG because
it looks cheaper.

Left digit bias

Left digit bias refers to the fact that people are
likely to perceive an amount of 6,99€ as much less
than a price of 7,00€ because of the left digit.
Consumers tend to anchor their judgments of
numerical differences on left-most digits, and
research points out that this principle impacts both
price magnitude perceptions and purchase
intentions. Field data is available from supermarket
sales, demand on the stock market, willingness to
pay in the used car market, and ride-sharing data.

Truncation of cents is the reasoning that consumers want to reduce cognitive Effort and do not
read the cents endings. Left-to-right reading is an argument that states that People don’t round
prices, but read them one digit at a time, due to which left digits are processed first, and their
impact on judgment is stronger. The ‘99 ending as a signal argument’ states that Consumers
came to associate 99 endings with sales or low prices and any new price with 99 endings is seen
as a “bargain”.

Although left-digit pricing has proven its effectiveness in some scenarios, it does not always work:
• High involvement purchases: if you are highly involved in the product, it will not be
effective to use left-digit pricing.
• Strong price-quality inferences: if the quality is more important than the price, it will have
a negative effect to use left-digit pricing because it makes it look cheap.
• Status products/Veblen goods: very expensive products do not want to look cheap
• Sale status/reference price availability: left-digit pricing makes it seem like it is on sale
• Consumer characteristics: some consumer groups are not as much influenced by it
Left digit Bias and Sale Status
A research study was conducted to
determine whether or not, in the case of a
sale, there was a difference in price
perceptiveness if the regular price was
provided, both in the case of a 2,99$ sale
and a 3,00$ sale. In a study with N= 201, it
was concluded that, in the case of a 2,99$
sale, it was better if no regular price was
mentioned, and, in the case of a 3,00$
sale, it made almost no difference.

Consumer Characteristics and Left digit Bias

Another research study was performed to find out What types of consumers will be more likely
to compare product prices side by side, instead of comparing a given price on the shelf to the
price they paid earlier? The research concluded that people were more likely to compare prices
to past prices if they had much price knowledge, often bought the products, or were very brand
loyal. The reason that this is so important is due to the fact that net margins on consumer goods
are very small. For example, if net margins
are 9-10%, a price change from $2.00 to
$1.99 (i.e. by 0.5%) will actually cause a 6%
loss of profit, which means that the price
decrease would need to cause a 6% increase
in demand to make it profitable. Therefore,
knowing when left digit pricing works tells us
when the practice will help vs. hurt the
company’s profits.

Just below pricing The effectiveness of this tactic varies Using just below pricing in
affects perceptions depending on consumer characteristics, FMCG context can have
of value and choice. product characteristics and context. negative effects on profits
Numerosity heuristic
The numerosity heuristic means that we perceive the number of units as the dominant cue in
quantity judgments. In general, this heuristic is not that bad because it is in most cases quite a
good measurement. For example, two apples are more than one apple. In the example, people
are more likely to participate in the
lottery on the right (where the red ball is
the price) than on the left one. Even
though the probability of the left lottery
is better, people prefer their odds on the
right because there are more red balls.

Research also pointed out that people were willing to pay 14 USD (equal to 114 Hong Kong
dollars) and 272 Indian rupees (equal to 45 Hong Kong dollars) for the same scarf. Although they
knew the exchange rate, they were willing to pay more than double when paying with USD
because it seems less.

One of the proposed reasons for the numerosity heuristic is inattention. Consumers want to
reduce cognitive effort and do not read the units. Another reason was anchoring and adjustment
which means that people first assess value based on numbers and fail to sufficiently adjust for
units of measurement.

Drip Pricing Effectiveness: Case of StubHub

A 2015 StubHub experiment ran between August 19-
31. During this experiment, half of the consumers
were shown total ticket prices upfront (upfront fee).
Half of the consumers were initially shown ticket
prices without fees (back end fee condition). Fees
were added at the checkout page, much like sales
taxes at the register of a store.

There were some interesting conclusions. Total revenues

increased by about 20%. At least 28% of the revenue bump was
caused by upgrades to higher quality products in the back-end
fee condition. There were greater dropout rates at the
checkout in the back-end fee condition. Revenues are affected
more in markets with infrequent purchases and purchasers
that were not familiar yet. The experiment was least successful
for those customers with high experience but even they
increased revenue by 15%.

Companies can choose Companies can choose People quite often This tendency appears
which units to use (per how to display fees ignore units and to be mitigated among
KG vs. per 0,5KG) (upfront vs. back-end) additional fees experienced consumers.
Compromise and decoy effects
The compromise effect refers to an increase in
the choice share of a focal option after it
becomes intermediate following the addition
of a new extreme option to a set. By adding a
more expensive option, the old most
expensive option now becomes the middle
option which makes it more interesting.
Possible mechanisms behind this compromise
effect are relative thinking and trade-off
aversion. Relative thinking refers to the fact
that price evaluations are relative and once an extreme high-priced option is added, the focal
option price seems lower. Trade-off aversion refers to the case in which people are not certain if
they value price or quality more and going for the middle option suggests they value both.

The compromise is different from the

decoy effect in that the decoy effect adds
a terrible third option whilst the
compromising effect adds a real third
option where both quality and price are
higher. The compromise, in this case, is not
a scam, whilst the decoy option is.

Changes in product line Adding a more extreme Adding a similar but clearly inferior
affect perceptions of both option can increase the option can increase the share of the
price and value levels. share of the middle option. similar but better option.

Session 9; Communication basics and advertising

Communication Goals
The specific blend of communications tools that the company
uses to communicate customer value and build customer
relationships. Awareness is about making consumers aware
that the offering exists. Interest refers to stimulating interest in
the offering. The Desire phase is about creating or
strengthening customer’s preferences by enhancing the
offering’s attractiveness. Action is about triggering purchasing
or other action(s), e.g. contacting the company for information.
Well-known types of communication goals are monetary goals and strategic goals. Benchmarks
are both quantitively benchmarks and temporal benchmarks. Quantitative benchmarks are for
example “What counts as doing well?” and temporal benchmarks are, for example, Short term
vs. long-term goals, and “and over what period do we want to reach the predetermined goals?”

Examples are: “Create a top of mind awareness about the product among 50% of California
residents in three months” and “Increase the frequency of Master Card usage occasions by 20%
in 6 months.”

Communication decisions
Important elements in the development of the message are
Product and service information, Brand, and Price. Not every
advertisement focuses on all three of these. Other important
elements in developing the message are incentives and
availability. Another key communicating decision is of course
selecting the media. One can choose from both inbound and
outbound media in their marketing efforts. Inbound media refers
to marketing media where you try to be visible in order to have people contact you instead of
the other way around. Examples of this are via Online search (SEO), Personal interaction, Phone
communication, Online interactive forums, Mail, and email. Outbound marketing is about
attempting to persuade prospects by reaching them, such as through Advertising, Public
relations, Social media (I personally believe social media can be used for inbound marketing as
well), Direct marketing, Personal selling, Event sponsorship, Product placement, Product
samples, and free trials.

Advertising
Advertising is probably one of the best-known outbound marketing efforts and is defined as
communication where the company develops the message and absorbs all the costs. There are a
lot of different advertising channels and approaches, such as a broad reach advertising campaigns
with the goal to increase awareness. Reach is the size of the audience that was exposed to the
ad at least once (absolute or percentage) and an Impression is a single exposure of an
advertisement to one person. Positive inference making refers to the principle that people are
more likely to assume that a company, and its products or services, are good if the company is
big and spends a lot on marketing. It is about the connection between size, Popularity, and
Success.

The multi-sensory experience is about adding sensory

experiences to make a product, or its ad, more appealing. In a
research study, an experiment was conducted to find out if
people were more likely to buy a pie based on the left or the
right ad. The conclusion was that right-handed people were
more likely to buy the right pie whilst left-handed people were
more interested in the left. The argumentation for this was that people are more appealed if they
can imagine the consumption of it. This is referred to as mental stimulation.
Enhancing visuals is another proven technique for improved advertising effectiveness. Research
pointed out that adding more steps will
help to better imagine the progression
than just a before and after picture. The
same principle applies, for example, to
teeth-whiting and anti-hair-loss products.

Airbrushing is another widely used technique for increasing

the effectiveness of an ad. A reason for using it is that Ads,
although deceptive, can boost the desirability and sales of
our product, and our main goal, as a company, is to increase
the sales and, eventually, shareholder value. Reasons
against it are, for example, that Deceptive advertising can
alienate customers or that it Can trigger consumer activism, affecting the company's image.
Activism can then trigger regulation changes.

Another technique for improving the advertising experience is Engaging the Senses. Things we
own (or think we own) are valued more. Perceived ownership goes up with Touch (Actual or
imagined). The same applies to scents. Scent enhances memory for associated information and
it creates richer associations with the brand and Serves as an additional cue. A con to engaging
senses is the difficulty in estimating advertising effectiveness because of the effects of time,
effects of competition, and effects of the product itself. John Wanamaker said: “Half the money
I spend on advertising is wasted; the trouble is I don’t know which half.”

Awareness-related effects Interest-related effects Preference-related effects

• Advertising reach
• Message comprehension
• Changes in unaided brand recall
• Changes in top of mind awareness
• Changes in brand recognition
• Online search • Changes in brand associations
• Banner click through • Changes in brand attitudes
• Store visits (online/ offline) • Changes in choice share
• Online word of mouth

How do we assess ad spending?

Advertising elasticity calculates the percentage increase in sales or market share for a 1%
increase in advertising. The problem is that there is no one method for assessing advertising
elasticity because there is a multitude of other factors impacting advertising effectiveness.
Monetary spending, Share in the market, and Gross rating points (Reach × Mean frequency) are
some of the factors that could impact the effectiveness of ads.
This makes it hard to compare different ad performances in
different time periods. There is also a big difference in advertising
effectiveness through different life cycle stages. Companies in the
growth stage perform much better than in the mature stage. This
can be explained by the fact that you first convince the easy
prospects in the first stages because you start at point zero where
nobody knows about the existence of your brand yet.
Pros of advertising are that there is a Broad reach, there is positive inference making with Size,
Popularity, and Success, and you can make use of the multi-sensory experience. Cons of
advertising are that there is Difficulty in estimating advertising effectiveness because of effects
of time, effects of competition, and effects of the product itself, there are high expenditures, and
there is limited persuasiveness.

Public relations
Public relations refers to communication
activities focused on maintaining a positive
corporate image among various stakeholders
such as press relations, employee relations,
investor relations, and relations with donors
and NGOs.

In the case of Tylenol in 1982, seven people die after taking cyanide-laced capsules of Extra
Strength Tylenol. Johnson & Johnson could choose to take their hands off but they decided to
take full responsibility and take a proactive approach. They established a 1 800 hotline for
Consumers, a Toll-free line for news organizations to receive pre-taped daily messages with
updated statements about the crisis, they used a national alert, gave regular press conferences,
and did CEO participation in TV shows. After all, they came out on top and improved their brand
name through the scandal.

The pros of public relations are that they create engagement and have potentially high
effectiveness. Cons of public relations are the coordination issues, such as Separate
departments, different audiences, and different performance metrics.