Proportional Price Evaluations

Buyers tend to evaluate price differences proportionally rather than in absolute terms. For example, one research study asked customers if they would leave a store and go to one nearby to save $5 on a purchase. Of respondents who were told that the price in the first store was $15, some 68 percent said they would go to the other store to buy the product for $10. Of respondents who were told that the price in the first store was $125, only 29 percent would switch stores to buy the product for $120. Similar studies have replicated this effect, including research with business managers as respondents. When the $5 difference was proportionally more — 33 percent of the lower price — it was more motivating than when it was proportionally a small part, 4 percent of the higher price.

Psychologists call the tendency to evaluate price differences proportionately the Weber-Fechner effect. It has clear implications for price communication. For example, auto companies increased the motivational power of their rebate promotions when they offered the option of free financing instead of a fixed-dollar rebate only. Despite the fact that the present value of the interest saved was no more, and often less, than the value of the fixed-dollar rebate, free financing proved more popular. Why? Because eliminating 100 percent of the financing cost motivated consumers more than a 5 percent discount on a $20,000 car. Similarly, hotel chains have found it more effective to offer “free breakfast” or “free Internet access” with their rooms rather than offer a slightly lower price.

An important implication of the Weber-Fechner effect is that price change perceptions depend on the percentage, not the absolute difference, and that there are thresholds above and below a product's price at which price changes are noticed or ignored. A series of smaller price increases below the upper threshold is more successful than one large increase. Conversely, buyers respond more to one large price cut below the lower threshold than to a series of smaller, successive discounts. For example, one full-service brokerage house raised its commissions every six months over a three-year period with little resistance from customers. Seeing this success, its competitor tried to match these increases in one large step and received intense criticism.

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