Tuesday, January 27, 2015

Percentage Cost Discounts Always Beat Percentage Benefit Bonuses: Helping Consumers Evaluate Nominally Equivalent Percentage Changes

MOHAN Bhavya, CHANDON Pierre, RIIS Jason
Read the working paper
INSEAD Working Paper 2015/05/MKT revised version of 2014/52/MKT

Marketing offers that are framed as a “percentage change” in consumer cost vs. benefit can have highly non-linear impacts in terms of actual value for consumers. Even though two offers might appear identical, we show that consumers are better off choosing the offer framed as a percentage cost change over one framed as the opposite percentage benefit change, regardless of whether the net result is a gain (e.g., 50% less cost is better than 50% more benefit) or a loss (e.g., 50% less benefit is worse than 50% more cost) and regardless of whether costs or benefits are in the nominator or denominator of the standard rate (cost/benefit or benefit/cost). Three lab studies and one field experiment show that a majority of consumers (and particularly those with low numeracy) fail to accurately recognize the superiority of percentage cost changes over percentage benefit changes across various tasks and contexts. Even highly numerate consumers are prone to error. However, the provision of salient standard rates can reduce consumer error.