The price tag is evolving.
It wasn't long ago that potential buyers had only to contemplate a single figure on a price tag—Mattress $799. But increasingly consumers are being presented with "partitioned" prices. Look at your monthly cable bill, where you might see a service fee plus a set-top box rental charge and a charge for the remote.
Do partitioned prices help the consumer make an informed decision or just add to his or her confusion? Do partitioned prices increase demand? Is an online grocer better off presenting a customer with a bill that says $96, delivery included; or a price that says Groceries $88, Delivery $8?
In a recent working paper titled "The Framing Effect of Price Format," HBS associate professor Luc Wathieu and coauthor Marco Bertini of the London Business School attempt to understand the consumer psychology behind partitioned prices and give marketing strategists data on when such exploded prices work best.
We asked Wathieu to discuss his research.
Sean Silverthorne: As you note in the paper, a number of recent studies have concluded that the way price information is presented (price framing) often influences perceptions of value. How does your research add to the previous work in this area?
Luc Wathieu: We are the first to propose that price format determines how deeply consumers will think about the offered benefits. We suggest that a "simple" all-inclusive price will lead buyers to focus on the main benefit offered, while partitioned price formats (main price + other charges) stimulate people to look into the details of what they get for their money. Thus, price framing can be used as a tool to induce consumers to acknowledge additional points of differentiation: a convenient shipping method or a useful service plan, for example. But to partition the price in the hope that consumers will be fooled and overlook small fees altogether can only backfire.
Previous work, in contrast, focused on the mistakes that people make when processing multiple prices for one transaction. For example, consumers might perceive something as cheap just because they focus on the main price component and mistakenly discount smaller fees. Alternatively, consumers might assume that something is discouragingly expensive just because it has several fees attached to it. Our research suggests that these illusory effects are only part of the story. We show that the impact of price partitioning on the perception of value depends on the desirability of all parts of the deal offered.
Q: The use of price partitioning in the market is on the increase. Why is this, and can you provide some examples?
A: Electronic commerce facilitates modularity and one can only expect to see fewer all-inclusive prices as a result. But the increasing practice of partitioning prices is noticeable even when the different elements of the offer are already gelled. That's what intrigued us most. Your cable monthly charge distinguishes the prices of the cable service, the HDTV box, and the remote. Your breakfast-included hotel bill still features separate prices for bed and for breakfast.
Partitioning should only be used by those sellers who want to sensitize people to a secondary benefit that might otherwise be taken for granted.
We wanted to know why this might make sense and when it would make sense or not. Marketers may be holding the naïve intuition that consumers will overlook smaller price parts and digest partitioned deals more easily. But our research shows to the contrary that partitioning will only work when the secondary part of the deal is attractive as well. In fact, partitioning should only be used by those sellers who want to sensitize people to a secondary benefit that might otherwise be taken for granted.
Q: In general, how do consumers react differently to an all-inclusive price versus a partitioned price?
A: What we posit is that people will tend to process as many product dimensions as the number of prices shown to them. All-inclusive pricing focuses consumers on the core component of the transaction. Partitioned pricing, in contrast, triggers separate processing of the offered benefits.
For example, if the price of an Apple computer, instead of being all-inclusive, was partitioned as "Hardware $1,500 + Software $500" consumers would investigate their feelings about both hardware performance and software desirability, and they might get discouraged in the process. Instead, Apple's all-inclusive price induces prospective users to form a holistic judgment of the Apple experience.
Q: A paradox you mention with partitioned prices is that while consumers are presented with more information on which to make a purchase decision, they sometimes give excess weight to secondary features broken out by price. Why is this so, and what can firms do to prevent it?
A: When you go buy a toy at the store, the only cost that stands out is the price you pay for the toy, not the coins you put in the parking meter near the store's window. If you buy toys online, you might wind up spending as much time considering the shipping deal as you consider the toy deal, due to price partitioning.
We believe that consumers tend to place undue weight on elements that are easier to evaluate and benchmark. Most frequently, secondary elements in an offer (e.g., delivery or service features) are much more "evaluable" because they are commonly encountered across many buying contexts. Companies that are not particularly competitive on the focal dimensions (the toy in my example) might benefit from this effect if they can feature good deals on secondary features. But companies whose main competitiveness lies with the quality of the core product dimensions (e.g., computer performance in the Apple example) should avoid price partitioning altogether.
Q: From the producers' point of view, are there some types of products or services that lend themselves to an all-inclusive price? Are there products best offered at a partitioned priced?
A: More than product categories, the key element to consider is the product life cycle and the stage at which you are in the differentiation game. When innovation and differentiation [highlight] new details that consumers have been taking for granted for a long time, you need to find ways to re-sensitize the market. Advertising is one way, but consumers may not be paying attention. Price partitioning can then become a key tactical element to re-engage consumer attention at the point-of-purchase.