Executive Summary
Firms often use a pricing strategy in which the total price of a product and/or service is partitioned into two or more mandatory components. For example, many online booksellers quote the price of a book and shipping charges separately even though the buyer must pay for both rather than quoting a single, nonpartitioned price. Although standard economic theory predicts that there should be no difference in demand as long as the total price to consumers is identical, recent research shows that consumers react differently to partitioned and nonpartitioned prices.
In contrast to previous research comparing consumers’ reactions to partitioned and nonpartitioned pricing, this article examines how partitioning the total price differently across the components affects consumer preferences. The authors propose that when prices are partitioned, consumers tend to evaluate the perceived benefit of each component. If they are less price sensitive toward components that offer greater consumption benefit, consumers may prefer partitions of the same total price in which they pay less for low perceived benefit components and more for high perceived benefit components.
In four studies using different partitioned components, the authors show that consumers systematically prefer partitions that allocate a larger proportion of the total price to high-benefit components. Empirically validating the proposed inverse relationship between perceived benefit and price sensitivity, Study 1 shows that consumers are more sensitive to changes in prices of low-benefit components than to changes in the prices of high-benefit components. Study 2 demonstrates that if the total price is held constant, consumers prefer partitions in which they pay less for a low-perceived-benefit component (e.g., shipping, labor) and more for a high-perceived-benefit component (e.g., an auto part). Notably, Study 2 also underscores the importance of the nature of the components and consumers’ beliefs about marketplace norms; specifically, consumers react more favorably to free shipping of an auto part than to free labor to install the auto part.
To rule out differences among components unrelated to differences in perceived benefits, Studies 3 and 4 manipulate the perceived benefit of the components while holding the two partitioned components constant. Study 3 demonstrates that consumers are willing to pay more for labor when they care about craftsmanship and more for a surge protector when they are concerned about power problems. Study 4 manipulates consumption goals and shows that preferences for partitions vary as a function of perceived benefit of the components. Study 4 also rules out alternative explanations based on price–quality inferences, perceived price fairness, and reference dependence.
The results suggest that though low-perceived-benefit components should be priced relatively low or integrated with other price components, high-perceived-benefit components should be partitioned from the total price to increase the attractiveness of the offer. Moreover, when using partitioned pricing, firms may be able to increase the attractiveness of their pricing by enhancing the perceived benefits of the individual components, as in Study 3, or by emphasizing a particular goal, as in Study 4.
Biography
Rebecca W. Hamilton is an Associate Professor of Marketing in the Robert H. Smith School of Business at the University of Maryland. She has been on the faculty at Maryland since 2000, when she received her PhD from Massachusetts Institute of Technology’s Sloan School of Management. Professor Hamilton’s research focuses on consumer decision making and the effects of consumers’ information-processing strategies on their attitudes and choices. Her research has been published in journals such as Journal of Consumer Research, Journal of Marketing Research, and Harvard Business Review. Her dissertation received an honorable mention in the Association for Consumer Research’s Ferber Award competition, and she was recognized as an MSI Young Scholar in 2007. She currently serves on the editorial review board of Journal of Consumer Research. Professor Hamilton teaches consumer behavior and brand management to undergraduate, MBA, and doctoral students.
Joydeep Srivastava is Associate Professor of Marketing in the Robert H. Smith School of Business at the University of Maryland. He has a PhD in Marketing from the University of Arizona. Before the University of Maryland, he was on the faculty in the Haas School of Business at the University of California, Berkeley. His research interests include managerial and consumer decision making, bargaining and auctions, marketing distribution channels, pricing, and behavioral (experimental) economics. His research has been published in leading academic journals, such as the Journal of Consumer Research, Journal of Marketing Research, Organizational Behavior and Human Decision Processes, Marketing Science, Journal of Consumer Psychology, Journal of Retailing, and Marketing Letters. He is one of a handful of young marketing academics to be recognized as scholars most likely to be the future leaders in marketing by the Marketing Science Institute in 2001.
Journal of Marketing Research, Volume 45, Number 4, August 2008
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