Pricing & The Placebo Effect in Marketing

Presented By

John Dinsmore

dinsmojb@mail.uc.eduwww.JohnDinsmore.com

Overpricing & The Placebo Effect, John Dinsmore, Slide 2

OverviewBackground

• Placebo Effect in Marketing• Definition• Origins• Applications in Marketing—Literature Review

• Price Perception• Definition• Origins• Applications in Marketing—Literature

Overpricing & The Placebo Effect, John Dinsmore, Slide 3

Placebo Effect: Definition

“Consumers’ beliefs and expectations, shaped by experiences in their daily lives, often influence their

judgments of products and services.”

• Mediated by Expectancy • Conditioning Activates The Expectancies• Expectations—and conditioning that shapes those expectations—are like hypnosis

(Shiv et al., JMR, 2005)

Overpricing & The Placebo Effect, John Dinsmore, Slide 4

Placebo Effect: Response Expectancy

Irving Kirsch, American Psychologist, 1985• Expectancy is “the anticipation of nonvolitional, subjective and behavioral responses to particular situational cues.”

• Expectancies are self-confirming

Overpricing & The Placebo Effect, John Dinsmore, Slide 5

Placebo Effect: Expectancy & Experience• Experience is relative to the person’s prior expectations of what should occur (Bruner, Psychological Bulletin, 1957)

• The more ambiguous the experience, the greater the effect of expectancy (Kirsch, Applied & Preventive Psychology, 1997)

• A study—commissioned by pharmaceutical companies—found that antidepressants had a “clinically negligible advantage” over placebo.(Kirsch et al, Prevention & Treatment, 2002)

• It can also produce false memories (Loftus, American Psychologist, 1993)

Overpricing & The Placebo Effect, John Dinsmore, Slide 6

Placebo Effect: Manifestations

Physical Effects• Students given decaffeinated coffee (but told it was caffeinated) not only “felt” more alert, but experienced increases in pulse & blood pressure (Kirsch & Weixel, Behavioral Neuroscience, 1988)

• They have proved effective in the treatment in the treatment for pain, anxiety, drug withdrawal, sexual dysfunction, amnesia and more (Kirsch, Journal of Counseling Psychology, 1990)

Overpricing & The Placebo Effect, John Dinsmore, Slide 7

Placebo Effect: ManifestationsNeurological Effects• Science, 2/20/04: Wager et al. did fMRIs on Patients Administered Placebos in Advance of an Electric Shock

• They Found That Placebos (e.g. Expectancies): • “decreased brain activity in pain-sensitive brain regions”• “Increased activity during the anticipation of pain in the prefrontal cortex” indicating the expectation of pain relief• Resulted in patients reporting less pain than control group• Level of the placebo effect correlated with the intensity of the shock

Placebos/Expectancies Alter the Experience and Processing of Pain

Overpricing & The Placebo Effect, John Dinsmore, Slide 8

Price Perception: OverviewPrice premiums can be perceived as:

• A signal of quality or benefits derived from a product (Milgrom & Roberts, Journal of Political Economics, 1986)

• Form of expression by consumer (Belk, JCR, 1988) or expression of affluence (Bernheim, Journal of Political Economics, 1994)

Components of price (Jacoby & Olson, Advances in Consumer Research, 1977):

• Objective price (actual price)• Perceived Nonmonetary Price (price as encoded by consumer)• Sacrifice

Overpricing & The Placebo Effect, John Dinsmore, Slide 9

Price-Quality Perception: Overview• Study of Price-Quality perception began with Leavitt in 1954 in the Journal of Business

• Price used as indicator of quality when consumer has little experience with product (Stafford, JMR, 1969)

• Non-linear relationship based on reference prices and perceived value (Gabor & Grainger, Journal of Advertising Research, 1964 & Economica 1966)

• A number of contradictory findings in this area, with Ashkay Rao (1989) suggesting inconsistency was due to methodological error.

Overpricing & The Placebo Effect, John Dinsmore, Slide 10

Price-Quality Perception: Overview• Price-Quality Correlation is not universal and not always positive (Peterson & Wilson, Perceived Quality, 1985)

• The greater the price variation, the greater the reliance on price as a cue. (Peterson & Wilson, Perceived Quality, 1985)

• Relationship is dependent on both the product and the individual (Gerstner, JMR, 1985)

• Personal experience is a mediator in Price-Quality perception (Olson, Consumer and Industrial Buying Behavior, 1973)

• There is a “U-Shaped” relationship between familiarity and reliance on price as an indicator of quality. (Rao & Moore, JCR, 1988)

Overpricing & The Placebo Effect, John Dinsmore, Slide 11

Price-Quality Perception: Overview• People use price to judge quality more in expensive products (Olson, Consumer and Industrial Buying, 1977) and is not always the primary basis (Olson, APA, 1973)

• Price & Perceived Quality increases in the presence of brand information (Monroe & Krishnan, How Consumers View Stores and Merchandise, 1985)

• Brand is perceived as a stronger indicator of quality than price. (Mazursky & Jacoby 1985)

• The greater disparity in prices in a product category, the stronger the price-quality perception (Rao, JMR, 1989)

• Packaging is another significant influence on quality perception (Bonner & Nelson, Perceived Quality, 1985)

Overpricing & The Placebo Effect, John Dinsmore, Slide 12

Price Perception: Cognitive ProcessRange Theory (Janiszewski, JCR, 1999)

• People access previous price experiences to set a range of acceptable prices and by which to judge a current price

• Borrowed from Helson’s Adaption-Level Theory (Helsen, Adaption Level Theory, 1964) for judging things like weight, pain, volume, etc.

Norm Theory (Kahneman and Miller, Psychological Review, 1986)

• Each price evaluation evokes a set of “stored” prices

Consumers do not necessarily remember a specific price, but encode it in a way meaningful to them (Dickson & Sawyer, Marketing Science Institute, 1985)

Overpricing & The Placebo Effect, John Dinsmore, Slide 13

Price-Quality Perception: RelativityIf customers have an internal reference price for a product and the list price is

much higher than that, then they perceive the quality to be low (Peterson, JMR, 1970)

Subject Ratings of Fictitious Soft Drink Relative to Price

Reference Point

Reference Point

Overpricing & The Placebo Effect, John Dinsmore, Slide 14

Placebo Effect: Shiv Experiment One• TwinLab Ultra Fuel:

• Fictitious Energy Drink • Given to 38 Students Who Work Out 3X/Week

• One Group Told Drink Was $2.89• The Other Group Told Drink Was Normally $2.89 But Was Discounted to $.89

• Group Drinking Discount Drink Reported Worse Workout Experiences than Full-Price Group

• Lesser workout intensity (F=7.5, p<.01)• Higher fatigue (F=3.5, p<.10)• Qualitatively, not a single “discount” subject said their workout was affected