Price framing: When to use dollar off or percentage off

In a few weeks, Christmas will once again be just around the corner. Retail is in the midst of preparing for those festivities and will soon be looking to boost its turnover with attractive special offers. But how do consumers react to sales products for which a particular sum or particular percentage is deducted? Shih-Fen Chen (Kansas State University, Kent Monroe (University of Illinois at Urbana-Campaign), and Yung-Chien Lou (National Chengchi University) conducted an experiment with about 120 students how customers perceive such price framing promotions. Their study was published in the Journal of Retailing in 1998.

Price framing: When to use dollar off or percentage off

The festive period is just around the corner and many retailers are pondering how the sale of special offers can be increased.

The researchers conducted their experiments with about 120 students each and let them evaluate different price framing offers, also noting down their probands’ perceptions. They found that for higher priced goods, absolute discounts are perceived to be more attractive than discounts in the same amount, but expressed in percentages.

Price framing: Do pricing formats affect purchasing intent?

For low-priced goods they found the opposite effect. Percentages are perceived as more attractive than absolute amounts, which, in this case, would be relatively small. Another study from Philip Gendall and colleagues from Massey University/New Zealand confirmed the work of Chen and co-workers, while founding less robust results for low-priced goods.  However, latter researchers did not find any effect on these price format variants on the intention to purchase the product. So while an offer was perceived as attractive under some conditions, further aspects had to actually trigger the decision to buy.

Chen and co-workers also found that coupon promotions are less likely to impact the consumers’ reference price of the promoted products in comparison to using a price promotion without a coupon, as the customers don’t link it to a permanent price reduction. They also expect to a lower degree that the product had been marked up prior to the coupon-based price promotion as if no coupon was used.

Vouchers give your customers a sense of exclusitivity

In addition, the researchers found that if the same product is price-promoted with and without coupons, the customers show higher level of intention to purchase the coupon-promoted product. Hence, in this context, consumers perceive a higher transaction value in coupon promotions, and, as Chen and colleagues argue, coupons provide a window of exclusivity to the consumer.
The researchers’ findings have, in our view, interesting implications for price promotions for online retailer and manufacturers. They not only provide guidance for the use of percentage or absolute value discounts, but also for using coupons in promotional activities that may go hand in hand with price adjustments.

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