Imagine you are presented the same product with a price discount of 33.33% or a bonus pack quantity increase of 50%, which would you choose? If you’re like me your gut went with the 50%, but actually the two are economically equivalent – meaning they result in an identical price per unit. We are psychologically programmed to view discounts as a ‘reduction in loss’ and a bonus pack as a ‘gain.’
This is an example of Base Value Neglect (BVN) and stores can influence their sales by gaining a thorough understanding of this concept. In short, BVN occurs when consumers are unable to correctly process percentages. The paper by Chen et al. tessts and confirms a total of six hypotheses surrounding this theme in three different contexts ranging from field studies, surveys to lab experiments. Let us assume we are shop owners in order to illustrate the key insights of the paper.
Key Insight I
We want to promote toilet paper this week; an inexpensive and frequent purchase. In order to increase sales volume we should choose to offer a bonus pack rather than the equivalent discount offering. But we should be careful because this effect diminishes when the conversion becomes easier (e.g. offering 2 for 1 next to 50% off).
Key Insight II
Now in another section of the supermarket, chicken has unfortunately become more expensive giving us two options: increase the price for our packaged chicken or decrease the amount of chicken in the package and keep the price stable. Chen and his colleagues suggest we should do the latter, because a price increase is perceived as an increase in loss-whereas a quantity reduction is a pure loss.
Key Insight III
In the high-end wine aisle a promotion is taking place as well. While it is wiser to go for a bonus pack with the toilet paper (an inexpensive good), we should choose the discount for the wine because consumers prefer this for expensive products.
Clearly, the article has valuable insights for stores of all sizes. Managers must first understand the psychology of their shoppers alongside the general tendency to estimate percentages incorrectly. Then they have the ability to make informed choices as highlighted in the examples above.
A point of discussion not raised in the paper is the moral or ethical implication of promotion manipulation to increase sales. On the one hand it can be argued that the customer could be able to counter their Base Value Neglect – making it their weakness to deal with and the manager’s to take advantage of. On the other hand, if a manager changes promotions in such a way that they exploit Base Value Neglect this could have serious repercussions if discovered and result in distrust and loss in sales. In my opinion using the findings of the paper is perfectly legitimate as long the choices made are economically equivalent and result in the same per unit/kilo price.
Chen, H., Marmorstein, H., Tsiros, M., Rao, A.R. 2012, ‘When More is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts’ Jounral of Marketing, vol. 26, pp. 64-77.