- 05 Jul 2006
- Working Paper Summaries
The Framing Effect of Price Format
Executive Summary — How do consumers evaluate different pricing scenarios? This study looks at different pricing models to see which is more likely to result in positive customer perception. Specifically, the authors look at all-inclusive pricing (e.g., the price of a chair is $85.95 including shipping) versus partitioned pricing (e.g., the price of a chair is $81 and shipping is $4.95). When consumers are presented with a partitioned price, they place an exaggerated weight on their evaluation of each individual component. Key concepts include:
- Price format can be an effective way to shift attention from one type of component (e.g., the actual price of a chair) to another (e.g., a great deal on shipping).
- If a component might be seen as a negative (e.g., costly shipping), all-inclusive pricing could be best.
- Consumers may form an opinion about a firm based on the firm's price format. When there is one focal attribute, post an all-inclusive price. When products are commodities, consider partitioning prices.
Existing evidence suggests that preferences are affected by whether a price is presented as one all-inclusive expense or partitioned into a series of charges. To explain this phenomenon, we propose a simple psychological mechanism whereby price format determines how many product attributes are actively processed at the time of valuation. Three studies support the hypothesis that price partitioning acts as an incentive to process multiple product dimensions. This process sometimes leads to the paradoxical overweighting of minor (but easy to evaluate) attributes that would be overlooked under an all-inclusive price format. The effect of price partitioning on demand can be detrimental or beneficial, consistent with existing conflicting findings in the literature and with variance in practice. Beyond its predictive and prescriptive implications, this theory contributes to the general notion that pricing might affect as much as capture perceived value.