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7/15/2005 12:09:00 AM

Lower-priced brands should be careful before they dare to compare

"Just as good, but cheaper than the national name brand!"  Faced with such a comparison strategy, consumers may become more cautious and likely to buy the less risky name brand, a new study shows.  Ironically, left to their own  judgment, consumers are more likely to pick the lower-priced generic or store brand, a Rice researcher says.

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Consumers are routinely bombarded with thousands of promotional messages, making it difficult for marketers to distinguish their product from others. When they try to influence consumers by encouraging them to specifically compare competing offers, new studies show they are undermining their own sales efforts.  

"As soon as you explicitly encourage consumers to make any kind of comparison between one product and another instead of relying on their intelligence and judgment, they're likely to be more cautious in their purchase," says Paul Dholakia, an assistant professor of management at the Jesse H. Jones Graduate School of Management.

"Generally letting consumers decide for themselves is a more effective approach."

According to Dholakia, encouraging comparison-shopping is most often used to promote lower-priced, lower quality brands or new products seeking greater visibility among consumers. As an example, stores often post signs on their shelves encouraging consumers to compare store brand prices with corresponding leading national brands' prices.

"If left to decide for themselves, consumers are just as likely to note the price differences and possibly choose the lower-priced generic brands," Dholakia explains.

"But, if they are directed to make comparisons between a well-known brand versus a store brand, they will be more cautious and purchase the less risky, nationally known brand."

In a report published in the spring issue of Marketing Science , "The Effect of Explicit Reference Points on Consumer Choice and Online Bidding Behavior," Dholakia and Itamar Simonson with Stanford University's Graduate School of Business analyze the purchase behavior of consumers who are urged to make comparisons between different options versus those left to draw their own conclusions. The researchers conducted studies using both online auction bidders and laboratory subjects.

Dholakia, who has conducted a number of studies involving online auctions, believes their findings have far-reaching implications for sellers and buyers who use this virtual marketplace.   Just as consumers spontaneously notice the different quality and price of brands shelved near one another, the researchers confirmed that online auction bidders are influenced by the starting prices of similar nearby listings, and that these prices affect their willingness to bid and the final auction prices.   For example, an item listed next to a similar higher starting price auction is more likely to be sold at a higher final price than if that item is adjacent to a lower starting price auction. Psychologists refer to this phenomenon as the "anchoring effect."

"We found, however, if online buyers are explicitly urged to compare the price of one listing to other adjacent listings, they become much more cautious in their bidding and the anchoring effect is diminished," Dholakia explains.

"More cautious bidders will tend to control their bidding behavior by making fewer offers and submitting them late in the auction."

The end results, adds Dholakia, are fewer bids and lower final prices.

When comparison marketing is used in stores, the results are similar. Shoppers who are encouraged to compare brands become averse to taking risks in their choice of products and are unlikely to buy the private, lesser-known label even if it's less expensive.

"Instead, they are likely to choose the less risky name-brand option," Dholakia says.  

"This simply points out   that marketers need to carefully consider the conditions under which it is more effective to use comparison promotions and when it is risky to do so."

In their field experiment, Dholakia and Simonson listed one auction with a single CD at $1.99 and identical sets of CDs under a number of different conditions on e-Bay. A single CD priced at $1.99 was flanked by two CD auctions, each with a starting price of $0.99. In another instance, the same $1.99 CD was flanked by two identical CDs each starting at $6.99. The titles and descriptions of all three CDs within one auction included explicit comparison instructions, but were omitted in the others.

When the single CD was listed near two more expensive CDs without any encouragement to compare prices, the single CD sold at a higher price.   When the explicit instructions were included in the single CD description, bidders exhibited much more cautious behavior and final prices were lower.

The researchers verified their findings in a laboratory choice experiment, in which student participants were offered three types of choice sets that included a safer, less risky option than the others. Some of the participants were explicitly told to compare the options, and others were left to make comparisons on their own.

In addition to his work regarding online auctions, Dholakia has done extensive studies on customer communities and other relational marketing programs, most recently, involving brand communities and their potential for long-term profits.

His research is forthcoming or has been published in a number of journals, including the Journal of Marketing Research , Marketing Science , Management Science , the Journal of Consumer Research , the Journal of Marketing and Harvard Business Review .

A graduate of the University of Bombay where he received a bachelor's degree in industrial engineering, Dholakia earned his master's degree in operations research from Ohio State University and a master's in psychology and Ph.D. in marketing from the University of Michigan.

For more information on this research, contact Dholakia at dholakia@rice.edu or B.J. Almond in the Office of News and Media Relations at balmond@rice.edu.