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Executive Summary
How does the effectiveness of sales promotions vary with base prices? For example, do people perceive a $10 promotion as more appealing for a $20 product or for a $60 product? The authors employ a combination of analytical modeling and laboratory experimentation to delineate the conditions under which people show a relative-thinking effect (i.e., they perceive a $10 saving as more appealing for a price of $20 than for a price of $60) and the conditions in which people show the reverse effect (i.e., they perceive a $10 saving as less appealing for a price of $20 than for a price of $60). The authors show that deviation from the reference price (i.e., the expected price) determines when relative thinking holds and when it is reversed. Specifically, the relative-thinking effect holds when the actual price is the same as the reference price, it reverses when the actual price deviates from the reference price, but it emerges again when deviation from the reference price becomes extreme.

Implications arise for several managerial decisions. Consider the allocation of a sales promotion budget aimed at increasing store traffic. Because the same dollar discount would have a greater relative impact on cheap products than on expensive ones, intuition suggests that the budget would be better spent on the former. Indeed, that is what store managers do when they have heavily discounted “loss leaders” to tempt customers into the store, who may then consider the more expensive “big ticket” items. The authors argue that this strategy of offering promotions on low-priced items is indeed appropriate in some instances, such as when base prices of products are the same as consumers’ expectations. However, the opposite strategy might be more appropriate if prices are somewhat different from expectations. Specifically, if the store is selling some products at higher-than-expected prices and some at lower-than-expected prices, it might make sense to offer promotions on the former, even if they are priced higher than the latter. However, note that these recommendations vary with market segments. For example, low-income people are likely to perceive a deviation from expected price differently from high-income people. Consequently, the two segments are likely to respond differently to the same sales promotion.

The results also offer implications for the framing of promotions. Consider the manager of a car dealership who is decided to offer a fixed monetary discount. Should the manager frame this discount in dollars terms ($X off) or percentage terms (Y% off)? The results suggest that if the base price of the cars is higher than the price consumers expect to pay for that class of cars, the discount should be presented in terms of absolute dollar savings ($X off). However, if the base price of the cars is lower than the expected price, the discount will have a greater impact if relative thinking is encouraged using a percentage format (Y% off).

Biography
Ritesh Saini recently joined the University of Texas at Arlington as Assistant Professor of Marketing. His academic credentials include a PhD in Marketing (University of Pennsylvania), and postgraduation work in Management (IIM, Ahmedabad). His research explores consumer psychology in the areas of retailing, pricing, and consumer search. His conceptual focus is behavioral decision theory and behavioral economics. His work has been published in Management Science, Journal of Consumer Research, and Journal of Retailing. He was previously on the faculty of George Mason University. Before joining academics, he worked in the advertising industry in India.

Raghunath Singh Rao is Assistant Professor of Marketing in the McCombs School of Business at the University of Texas at Austin. He previously taught at University of Minnesota, where he received a master’s degree in Applied Economics and a PhD in Business Administration. His areas of research include issues in durable goods markets, competitive strategy, and consumers’ bounded rationality. He uses game theory, secondary data, and lab experiments to study these topics, and his work has been published in Journal of Marketing and is forthcoming in Marketing Science.

Ashwani Monga is Assistant Professor of Marketing in the Moore School of Business at the University of South Carolina. He has a doctoral degree in Business (University of Minnesota), a master’s degree in Business (Indian Institute of Management, Ahmedabad), and a bachelor’s degree in Dairy Technology (National Dairy Research Institute, Karnal). He conducts research is in the area of consumer judgment and decision making and is particularly interested in understanding how consumers perceive and value time. In addition to Journal of Marketing, he has published in Journal of Consumer Research, Journal of Consumer Psychology, Journal of Marketing Research, Journal of Retailing, and Organizational Behavior and Human Decision Processes.

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