Please note this is an earlier working paper version of the paper: Chatterjee, Patrali (2011), “Framing Online Promotions: Shipping Price Inflation and Deal Value Perceptions,” Journal of Product and Brand Management, 20 (1), 65-74.
The MS Word version of the final published paper was corrupt /destroyed during a computer virus attack on my computer. FRAMING ONLINE PROMOTIONS: SHIPPING PRICE INFLATION AND DEAL VALUE PERCEPTIONS
Patrali Chatterjee Associate Professor of Marketing School of Business Montclair State University Upper Montclair, New Jersey 07043 Tel: 973-655-7935 Fax: 973-655-7673
Email:
[email protected]
October 2010
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Electronic copy available at: http://ssrn.com/abstract=1861378
FRAMING ONLINE PROMOTIONS: SHIPPING PRICE INFLATION AND DEAL VALUE PERCEPTIONS
Abstract
Purpose: This research examines differences in perceived shipping charge inflation associated with online promotions presented as reducing base product price, reducing shipping surcharge, or reducing all-inclusive price and its impact on deal values for shipping charge sceptics and non-skeptics. Design/methodology/approach: Drawing from research on multi-component pricing and mental accounting, a laboratory experiment investigates if (a) shipping charge skeptics differ in their perceptions of shipping charge inflation for different presentations of online promotions from non-skeptics, and if (b) they differ in perceived deal value of economically equivalent promotions presented as reduced product price, reduced shipping charge promotion, or reduced all-inclusive price for high and low priced items with small or large shipping fees at retail websites. Findings: Analyses show that shipping charge sceptics differ from non-skeptics in their perceptions of shipping charge inflation and deal values for different online promotions only when surcharge is large relative to base price. Reduced price promotions are most attractive for high-priced items with low surcharge but least attractive for large surcharge sizes. For large surcharge sizes, shipping charge skeptics prefer reduced all-inclusive price promotions to reduced shipping promotions, while non-skeptics prefer reduced shipping promotions to reduced all-inclusive price promotions. Research limitations/implications: Results suggest that effectiveness of various promotion frames at online stores differs based on base price, surcharge size, and consumer skepticism of shipping charge. Robustness of the results obtained at different levels of discount sizes need investigation. Practical implications: Online retailers that have to charge high shipping fees can use promotions to shift the referent price component used by consumers to calculate savings and mitigate perceptions of shipping or base price inflation. For equivalent dollar savings, retailers can use reduced shipping charge promotions to communicate higher deal values to shipping charge non-skeptic consumers than reduced base price or reduced all-inclusive promotions. Originality/value: This research examines how consumer perceptions of deal value differ, even though objective savings and financial outlay is the same, when promotions are presented as reducing product price versus surcharge. Keywords: price frames, mental accounting, e-retail, partitioned pricing, surcharge Paper Category: Research paper 2
Electronic copy available at: http://ssrn.com/abstract=1861378
INTRODUCTION There is considerable published research documenting that different implementations or semantic presentation of the same retail price reduction can change consumers’ perception of a promotion offer (Sinha and Smith 2000, Gilbride, Guiltinan and Urbany 2008, and DelVecchio, Lakshmanan and Krishnan 2009). When prices have a single component, base price of the product, savings associated with sales promotions reduce the base price thus communicating superior transaction value to consumers. However, if the price of a product is made of multiple components, a retailer has the flexibility of presenting the promotional offer to reduce one or more price components (not just base product price). There are many examples of multi-component pricing in the marketplace: warranty and services associated with products, cell phone purchase along with activation fees, service charges, taxes etc. It is also of particular relevance to purchases in remote channels like catalogs or the Internet where consumers pay a base product price and a shipping surcharge (for product delivery). This research focuses on surcharge components that are mandatory (e.g., shipping charges for nondigital products purchased online that cannot be consumed otherwise) but not components that consumers can purchase separately (e.g., salesperson suggests optional replacement plan when consumers purchase household appliances), and are strategically managed by retailers (e.g., while sales tax is a mandatory surcharge, consumers perceive it to be outside the control of the retailer). In remote retail channels, shipping charge is a mandatory price component in addition to base product price when consumers purchase non-digital products. This offers retailers multiple possibilities of presenting the various components of price. It does not add any tangible value to the physical product but provides the means to transport the product to the customer (Schindler, Morrin and Bechwati, 2005).
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Retailers can offer or change how promotional offers are presented in real-time to improve their positions on shopbots and compete on the basis of price. Various shopbots differ in how they order products in their listings, some use product price, whereas others use landed price (base product price plus shipping and handling). Studies have shown that when retailers offer shipping promotions, they achieve the highest customer satisfaction ratings and are the most influential aspect in one’s decision to make a purchase online (Vascellaro, 2006). While there is considerable research documenting that different implementations or framing of the same retail price reduction (cents off, % off, or discounted price) can change consumers’ perception of a promotion offer (DelVecchio, Lakshmanan, and Krishnan, 2009), research is lacking on consumer perception of different presentations of shipping promotions. Differences in the framing of base product price, shipping charges, and promotions can impact purchase incidence and lead to differences in retailer profitability and is the focus of this research. Consider a product with base price $20, shipping cost $4 (surcharge 20% of base price) and a $3 off promotion (discount size of 15% of base price). Consumers infer total price (base price – promotional savings + shipping) to calculate the total monetary outlay for the purchase of a product at an online store. A retailer can frame the final purchase price of $21 as one of the following ways – reduced base price promotion, reduced shipping promotion, or reduced all-inclusive price promotion as shown in Table 1. If the promotional discount equals or exceeds the shipping fee, the free shipping promotion and reduced shipping promotion would be the same. Since the financial outlay and dollar value of savings is the same for all promotion frames, rational analysis of costs in comparison to regular (unpromoted price) should not lead to any differences in deal values across consumers.
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__________________ Insert Table 1 here __________________ However, given that relative savings differ dramatically based on whether product price or shipping is used as the referent (see columns 3 and 4 in Table 1) regular price, multi-component pricing, price partitioning theory, and reference dependence theory would suggest that consumers will differ in their perceived deal value and inferences of shipping charge inflation for each promotion frame. Online retailers face the challenge of selecting promotion frames that maximize deal evaluations for high and low priced products and for high and low level of shipping charge relative to base product price. There is considerable research indicating that different presentations of promotions with the same product price reduction can change consumers’ perception of a promotion offer (Lichtenstein and Bearden 1989, Yadav and Monroe 1993, Sinha and Smith 2000). However, prior research has not examined if consumers differ in their perceptions of equivalent promotions presented as reduced product price promotions versus reduced surcharge promotions. Prior research on price framing has documented the deleterious impact of reduced price promotions on internal reference prices and product quality inferences (Grewal, Monroe, and Krishnan 1998). However it is unknown if those negative inferences persist for reduced shipping promotions. This paper examines if consumers differ in their perceptions of deal value and shipping charge perceptions for economically equivalent promotions presented as reducing shipping charges (reduced shipping promotions), or product price (reduced product price) or as reduced all-inclusive price and if these perceptions differ for large versus small shipping surcharge size for high and low priced products. This paper contributes to the literature on promotion framing by examining how consumers differ in their evaluations of promotions offered on product base price 5
versus shipping charges, since both can be strategically managed by retailers. Are economically equivalent reduced shipping promotions more or less attractive compared to reduced base price promotions? Given that costs of product delivery are high for retailers in some product categories, do consumers differ in their perceptions of shipping charge inflation across promotion formats for low-priced versus highpriced products? Further, this research contends that consumers differ in their framing of shipping promotions compared to monetary promotions based on the relative size of surcharge to base product price. As more retailers wield shipping charges and shipping promotions as a competitive tool to increase purchase incidence at their sites (Mangalindan 2006), examination of consumer responses to shipping promotions in relation to other commonly used promotion frames is warranted.
THEORETICAL BACKGROUND Presenting a price promotion in different ways is similar to the framing of purchase decisions provided the benefits received by consumers from the promotion are constant. Research on how consumers process and internalize the price stimulus in purchase situations has examined such issues as reference price, deal framing, price recall accuracy, encoding, and storage. One key generalization from this literature is that consumers are highly sensitive to context, including semantic cues in promotion offers. We draw upon prior research in partitioned or multi-component pricing and mental accounting that have implications on this research.
Partitioned Prices versus Bundled or All-Inclusive Prices Price partitioning involves separating the total cost (or bundled price) into a base price and one or more surcharges (Morwitz, Greenleaf, and Johnson, 1998).
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Prior research on consumer evaluation of multiple versus single prices suggest that consumers perceive multiple gains as more rewarding and multiple losses as more punishing than a single gain or a single loss of the same amount respectively. This is suggested by prospect theory (Kahneman and Tversky, 1979) and mental accounting theory (Thaler, 1985). Price components represent losses, thus suggesting that consumers prefer a single bundled price (loss) as less punishing than multiple or partitioned prices (losses). Researchers suggest two additional moderating factors, consumer’s knowledge of product prices and relative magnitudes of prices being evaluated (Majumdar and Jun, 1993). When one price component is significantly smaller than the other, the cognitive cost of integrating price components can be perceived to be larger than the benefit to be gained from the effort. Research in price partitioning suggests that consumers often ignore the surcharge while arriving at their purchase decision, when (a) the surcharge is small relative to the base price (Sheng, Bao and Pan, 2007) or (b) surcharge is effortful to process such as when the surcharge is presented as a percentage of the base price (Morwitz, Greenleaf and Johnson, 1998). When surcharge is perceptually large relative to the base price, prior research suggests that price components should be bundled or be presented as all-inclusive, so surcharge is not explicitly stated to mitigate perceptions of unfairness (Sheng, Bao and Pan, 2007).
Perception of Benefits from Base Product versus Surcharge Research on multi-component pricing suggests that surcharges presented separately from product price actually draw attention to product characteristics associated with it (e.g., the reliability of the product if the surcharge is for an extended warranty;
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Chakravarti et al. 2002). Further, there is an inverse relationship between perceived benefit and consumers’ price sensitivity, consumers prefer partitions in which they pay less for components that have low perceived benefits and more for components that have high perceived benefits (Hamilton and Srivastava, 2008). Extrapolating to the context of shipping charges in online retailing, if consumers perceive shipping charges to provide lower consumption benefit to that of the core product, they are likely to evaluate shipping price versus benefits separately from product price versus benefits in their evaluations of a deal. Though shipping and labor are both perceived as providing less benefit than the product (auto part), Hamilton and Srivastava (2008) found that participants preferred partitions in which shipping was 0% of the total price but not partitions in which labor was 0% of the total price. Since consumers are more likely to be exposed to free shipping offers (0% of the total price) rather than free labor on services, it indicates that preferences for partitions allocating no charge to the low-benefit component may depend on marketplace norms.
HYPOTHESIS The principal dependent variable in this study is perceived transaction value of the deal, which represents a consumer's evaluation of the financial terms of the deal per se and is equal to internal reference price (from memory or based on normal prices charged) minus the purchase price, while controlling for the acquisition value of the offer (Thaler, 1985 and Yadav and Monroe, 1993). One major difference of this research from previous studies is that it examines the effect of different promotional representations on deal value perceptions where underlying financial outlay and objective savings is the same. Previous articles have focused on the main effects of
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semantic cues (other than reduced shipping promotions) and magnitude of surcharge relative to base price on preferences for partitioned or bundled price components. This research posits that in addition to magnitude of surcharge relative to base price, the magnitude of base price itself, and individual differences in valuation of shipping benefits will moderate the relationship of promotion frame on deal evaluations as we discuss next.
Role of Promotion Framing in Presence of Surcharge Many online retailers offer promotions to increase purchase incidence. A typical promotion offered on product price represents a small gain relative to a larger loss (i.e., price paid), or a mixed loss (Thaler, 1985). Research on price perception suggests that reference states or prices influence deal evaluations and consumers evaluate proportional (or relative) deviations rather than objective (or raw) deviations from reference states (Heath, Chatterjee and France, 1995). Consumer’s perception of deal value will depend on whether the promotion is presented as reducing product price (similar to past research), or reducing shipping charges (which has not been investigated in prior research) or reducing total price. We posit that a promotion can make the price component associated with it salient, and induce perception of savings with respect to that component rather than the other. Reduced price promotions reduce the total cost of acquiring a product as well as the base price of the product. Prior research indicates that reduced price promotions that are available to all buyers lead to negative quality inferences, lower internal reference price and increase regular price inflation perceptions (Chen, Monroe and Lou, 1998). In contrast, reduced shipping promotions reduce the total cost of acquiring a product without reducing the base price of the product, but it is not known
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if they lead to perceptions of regular shipping price inflation. Even if reduced shipping promotions are available to all buyers, we do not expect them to lead to negative quality inferences or internal reference price. When prices are presented as all-inclusive, consumers don’t know the prices of individual components. Reduced all-inclusive promotions reduce total price but do not indicate which or any price component was reduced. In real life situations, consumers will rely on memory, use information accessible at point of sale, or search for product and/or shipping costs for same or related products (Johnson and Levin, 1985). Shipping charges as a price component are perceived to be a disutility by consumers since they increase the cost of acquiring the product but do not add to the core value of the product (Schindler, Morrin, and Bechawati, 2005). Reluctance in accepting shipping and handling fees may be due to a perception that the fees may contribute to the firm’s profit rather than just cover the incurred cost (Xia, Monroe, and Cox, 2004). When surcharge is large relative to base price and prices are partitioned consumers are more likely to be skeptical of the retailers’ pricing tactics and ascribe unfair profit motives to the retailer leading to inferences of price inflation when prices are partitioned (Sheng, Bao and Pan, 2007). This does not occur when price components are bundled. Commercial reports suggest that online retailers offer shipping promotions to partially offset the pain of shipping surcharges on products associated with high transportation costs (Mangalindan, 2006). However, if they lead to suspicions that retailers inflate regular shipping charges before offering shipping promotions to preserve their profit margins, it will lower effectiveness of shipping promotions, similar to price discounts (Chen, Monroe, and Lou 1998). Since most comparison shopping websites order retailers on the basis of product price, retailers may avoid
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inflating product price for competitive reasons and instead choosing to inflate shipping charges. Hence, H1. Consumers will perceive higher likelihood of regular shipping charge inflation for reduced shipping promotions followed by (a) reduced all-inclusive promotions and (b) least for reduced price promotion when presented with large surcharge size relative to base price.
Role of Shipping Charge Skepticism Individual differences in valuation of benefits from shipping services will interact with perceptions of shipping charge inflation from reduced price, shipping, and allinclusive promotions. Consumer skepticism regarding shipping charges is defined as the degree to which consumers tend to believe that shipping charges are used as a means to enhance sellers’ revenues and profits rather than simply as a means for getting the product to the consumer. Shipping charge skeptics do not believe that having products shipped to their door is a service worth paying for and that shipping provides no consumption benefit (Schindler, Morrin, and Bechawati, 2005). In contrast, shipping charge non-skeptics believe shipping provides a benefit which may be lower compared to that of the core product (Schindler, Morrin, and Bechawati, 2005). Shipping-charge skeptics tend to view shipping charges as unfair sources of profit for direct marketers and will like reduced shipping promotions less when shipping charges are made salient via a partitioning strategy. Compared to reference (regular or unpromoted) prices that state shipping charges, skeptics will prefer reduced all-inclusive promotions which explicitly state savings but hide shipping charges to reduced price and shipping promotions
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Most consumers do not know the true cost of shipping a product even after completing their purchase of a product with an all-inclusive price. However, consumers realize that shipping charges have to be incurred by the retailer even when no shipping charges are specified in reduced all-inclusive promotions. While reduced all-inclusive promotions might be the answer to reduce perceived shipping charge inflation for skeptics, non-skeptic consumers may suspect that it is easier for retailers to inflate all-inclusive prices to mask absorption of shipping costs, especially when regular or reference prices indicate large surcharge size. Non-skeptics tend to interpret shipping charges as just covering the seller’s costs of getting the ordered items to the consumer’s doorstep. They will feel less pain of paying the shipping charge when they can more accurately assess the offer’s value, and thus would prefer an reduced base or shipping promotion over a reduced all-inclusive price promotion, hence, H2. For large surcharge size, the difference in perceptions of shipping charge inflation for skeptics versus non-skeptics will be higher for reduced shipping promotion compared to (a) reduced all-inclusive promotion and (b) reduced base price promotion in comparison to regular price.
Impact of Base Product Price Level and Relative Surcharge Size Consumers perceive lower consumption benefits from shipping charges than from the base product (Schindler, Morrin, and Bechawati, 2005, Hamilton and Srivastava, 2008). This finds support in reports of backlash in response to the proliferation of surcharges by online firms and reports of shipping charges being the primary cause of shopping cart abandonment online (Keogh, 2006). Prior research on multi-component pricing suggests that when prices are partitioned, consumers are likely to evaluate each price component separately in relation to the consumption
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benefit provided by each (Chakravarti et al. 2002). If the price of one product component (e.g., shipping) is small relative to the price of other components (e.g., base product price), consumers may be relatively insensitive to the price of the lowerprice component (Monroe, 1990), especially if it is perceived to provide lower benefit than the large price component. Price partitioning theory suggests that a surcharge is relatively low consumers are likely to ignore shipping surcharge (Morwitz, Greenleaf, and Johnson, 1998) and evaluate deal value on the basis of recalled price for reduced price promotions (base product price - promotional savings) and shipping promotions (base product price). Darke, Freedman and Chaiken (1995) suggest that for lowpriced products consumers are more likely to use simple heuristics and are unlikely to integrate promotional savings (especially for low discount sizes) since there is little benefit from extensive processing. Hence, we do not specify any hypothesis for small surcharge size. If the low-benefit price component (e.g., shipping) is proportionally larger (large surcharge size) to the high-benefit price component (e.g., base product price), consumers will place undue importance on the low-benefit component (Hamilton and Srivastava, 2008). Further, the effect of promotion frame and surcharge size relative to base price on deal evaluations is moderated by the base price of the product. Darke, Freedman and Chaiken (1995) suggest that for low-priced products consumers are more likely to use simple heuristics and are unlikely to process the multiple price components (surcharge and promotional savings) extensively since they expect to derive little benefit from further processing. However for high-priced products, consumers will extensively process price and promotion information since it involves a larger monetary outlay and the benefits from extensive processing are higher than the costs of a wrong choice. Consumers will have the incentive to integrate the
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promotional savings since the additional money saved from price reductions in highpriced products offer greater latitude to spend it for some other purpose than lowpriced products. Consumers are likely to perceive a higher transaction value from price promotions for higher-priced products than low-priced products, hence deal value for reduced price promotion (base product price - promotional savings) will be higher than reduced shipping promotion (base product price). For large shipping surcharge, consumers perceive relatively higher monetary sacrifice due to the shipping price component ($10 S/H : $20 base price or $50 S/H : $100 base price, in our experimental design Table 2) which offers lower consumption benefit than the core product. Perceptions of disutility associated with shipping fees will dominate consumer perceptions of deal value and consumers are unlikely to ignore them even for low-priced items. The persuasion knowledge model suggests that consumers try to defend themselves by being vigilant (Friestad and Wright, 1994), hence consumers will extensively process information for both high- and lowpriced products. Predictions from multi-component pricing research suggest that consumers will prefer partitions in which the price of the low benefit component is lower (Chakravarti et al. 2002). When consumers compare regular prices with reduced shipping promotions ($7 S/H : $20 base price or $35 S/H : $100 base price), the monetary sacrifice for shipping (the lowest benefit component) is lowered by 30% [(10-7)/10 or ((50-35)/50)]. Not only do reduced base price promotions not reduce the relative monetary sacrifice for shipping, they increase the proportion of price accounted for shipping to 58% ($10 S/H: $17 base price, $50 S/H : $85 base price) compared to that of regular price 50% ($10 S/H : $20 base price, $50 S/H : $100 base price). Prior research shows consumers are more sensitive to changes in surcharges
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than to changes in base prices (Smith and Brynjolfsson, 2001), hence we expect deal values for reduced shipping promotions will be higher than reduced price promotions in the presence of high surcharge for all consumers. Skeptic consumers prefer a single all-inclusive price as less punishing than partitioned prices and are less likely to have perceptions of regular shipping price inflation. For economically-equivalent promotions, promotional savings an allinclusive price represent small gains from promotional savings segregated from a larger loss the regular all-inclusive price. The silver-lining effect (Thaler, 1985) suggests that reduced all-inclusive promotion should be preferred to a reduced base price promotion or reduced shipping price promotion for skeptic consumers. Nonskeptic consumers associate all-inclusive promotions with higher perceived shipping price inflation relative to reduced shipping promotion, hence we hypothesize, H3. When surcharge is large relative to base price, perceived deal values for high and low priced items will be: (a) Highest for all-inclusive price promotions, followed by reduced shipping promotions, and then reduced base price promotions for (shipping) skeptic customers; (b) Highest for reduced shipping promotions, followed by all-inclusive price promotions, and then reduced base price promotions for (shipping) non-skeptic customers.
EXPERIMENTAL CONTEXT Design and Procedure: The data for the empirical study were obtained from a controlled experiment involving undergraduate students at a Northeastern U. S. university. The three treatment factors (base product price, shipping charge size relative to base product price, and promotion frame) were manipulated across these subjects. To maintain task interest and involvement, students considered the purchase
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of a fictitious brand of notebook bag at two fictitious retailers to control for the possible confounding effects due to brand or retailer reputation. The choice of notebook bags is motivated by the fact that students are familiar with purchase of notebook bags and the product prices range from $15 to $525 at several online boutique and office supply retailers (there is a wide variation in shipping charges). Research assistants conducted a survey of notebook bags offered by retailers to guide selection of stimuli. Based on a pretest with 30 students not in the final sample, two notebook bags were selected as stimuli, one priced at $20 (low base price) and the other executive version priced at $100 (high base price). Further, survey of shipping charges by online retailers indicated that standard shipping charges vary from 15% to 50% of base price of items on average. The practice of using order value to determine shipping charges is well-established in the direct marketing industry (DMA 2004, p. 75). Academic researchers have chosen 18.5% and 23.1% of base price as shipping costs (Morwitz, Greenleaf, and Johnson, 1998; Schindler, Morrin, and Bechawati, 2005), we choose 20% which is within this range as well as credible based on a survey of offers for notebook bags at various retail websites. Promotion discount size was maintained at 15% of base price. Other researchers have selected 10% (Hardesty and Bearden 2003) to 16.7% (Grewal et al., 1996) of base price as low promotion level in their research. To avoid potential confounding effects from perceptions of price inflation due to high discount size (Chen, Monroe, and Lou, 1998) we consider only moderate and small discount sizes since the focus of this research is on shipping price inflation and not perceived inflation due to promotion or discount levels. Twenty-four versions of the experimental website were created and hosted locally with consistent site appearance and design across conditions (see Table 2).
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Pre- and post experiment questionnaires were integrated so responses could be electronically recorded. On submitting their preliminary questionnaire the experimental website was displayed. All subjects read the same cover story on the computer screen. Subjects were provided with the empirical scenario that " you are selected to represent your school at a prestigious National Collegiate Case Competition. You need to buy a notebook bag for the presentation and see the following offer for an online retailer. Please click next to view the offers.” This was followed by information on a particular product item and its regular price, e.g., “Brand A notebook bag. Regular Price: $20.00, Shipping: $4.00." Subsequently, “Advertised Deal:” presented one of the three deal types [reduced price promotion, reduced shipping promotion and reduced all-inclusive price promotion] as the focal deal. __________________ Insert Table 2 here __________________
We used a 2x2x3x2 between-subject design to examine the effect of base price level of product (2 conditions – high, low), shipping charge size (2 conditions – small, large), promotion-type (3 conditions –reduced price promotion, reduced shipping promotion, reduced all-inclusive price) x regular price order (first, second). This ensures that subjects have a cognitive anchor in evaluating the deal value of the focal promotion. Participants were 234 male and 262 female undergraduate students in two north-eastern universities. Eleven subjects did not complete their questionnaires and their responses were not considered for analysis, leaving us with 485 usable questionnaires with 20 or 21 subjects in each cell. Subjects were randomly allocated to one of the 24 conditions, with approximately twenty subjects in each cell. 17
Respondents answered the pre-experiment survey, viewed experimental stimuli and then clicked on “go to next step” to answer the post-experiment questionnaire. Subjects provided responses for dependent measures, price perception measures, shipping charge manipulation check measures, and several measures assessing potential alternative explanations for our results. All respondents were thanked for their participation and debriefed. Measures Dependent Variables: Perceived value of deal was measured using a three-item, seven-point semantic differential scale, bad deal- good deal, worthless-valuable, and unattractive to me- attractive to me with promoted prices as focal deal and regular price referent (=0.89, p
