The art and science of promotional pricing

June 01, 2016

Normal rules of economic behavior would dictate that free upgrades to a particular product would move it out the door in record numbers. Somewhat counterintuitively, new research from Professor Wen Mao reveals that a token upgrade fee, even no more than a penny, is often more attractive to consumers than a freebie.

In his article "Sometimes 'Fee' Is Better Than 'Free': Token Promotional Pricing and Consumer Reactions to Price Promotion Offering Product Upgrades," which is forthcoming in the June 2016 issue of the Journal of Retailing, Professor Mao, as associate professor of marketing at China's Southwestern University of Finance and Economics, describes study results that argue that a small, non-zero price provides consumers with a meaningful benchmark to evaluate the upgrade against its token price, whereas in the case of a free upgrade, that comparative evaluation is absent. He posits that the opportunity to make such a comparative evaluation boosts the perceived attractiveness of the upgrade.

In one study, participants were presented with a choice between a digital camera with a free upgraded memory card and one with the upgrade offered for a token additional price. Counterintuitively, more chose the minimally more expensive upgrade. Similarly, participants in a second study chose to upgrade the size of vegetable juice more often when it cost a token fee to do so, rather than when the larger size was available at the original base price.

The core argument is that a consumer's deal evaluation, by its very nature, is relative and comparative, comprising an assessment of the attractiveness of the upgrade against pertinent background information, the author writes. The lesson for managers is that in a conditional price promotion offering product upgrades, charging a token price for the upgrade rather than offering it for free can lead to more positive deal evaluation and greater product sales. In line with that, consumers may find McDonald's breakfast more attractive when its free coffee is instead one cent. Similarly, consumers may be more likely to buy Windows XP if a future system upgrade costs $1 rather than nothing.

As Professor Mao concludes, "Free is certainly good, but in conditional price promotion offering product upgrades, a small fee may even be better."
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Journal of Retailing at New York University

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