BY STEVE RUDOLPH
Akshay Rao, Professor, Department of Marketing,
General Mills Chair in Marketing
What’s better, 50 percent more of something or a 33 percent reduction in price? The deals are actually the same, but to most consumers the bonus pack is seen as better.
In a paper published in the July’s Journal of Marketing, Professor Akshay Rao found consumers faced with fractions are making costly mistakes.
“The idea behind base value neglect is that people focus on the magnitude of percentages as if they were absolute numbers,” says Rao, the General Mills Chair in Marketing at the Carlson School. “When two percentages are being compared, people ignore the base and make a mathematical error.”
Those errors can lead to big gains for savvy retailers.
“We observed a dramatic difference in unit sales when we had a quantity increase relative to the price decrease— 73 percent more sales, in fact, when we had the quantity increase,” says Rao, describing one experiment conducted in an actual retail store.
Rao also found the preference for quantity over price also works in the opposite direction. Faced with the choice of paying more for something or paying the same but taking less, consumers took the latter as they perceived their loss to be less.
Research has Sustainability Implications
While retailers and marketers are likely to benefit from Rao’s findings, public policy officials will also take note. According to Rao, base value neglect extends to any setting comparing numerical information and could help spur the adoption of green products and services.
“How do we get people to recognize the advantages of an automobile that delivers better gas mileage? How do we get them to use less of something that consumes a lot of energy? You always have a choice when you’re presenting numerical information on how you frame it. To convince people, pick the number that is the largest gain,” he says.
“When More Is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts” was led by Texas A&M University associate professor Haipeng (Allan) Chen. Chen is a Carlson School PhD alum and former advisee of Rao’s.