When consumers taste cheap wine and rate it highly because they believe it is expensive, is it because prejudice has blinded them to the actual taste, or has prejudice actually changed their brain function, causing them to experience the cheap wine in the same physical way as the expensive wine? Research in the Journal of Marketing Research has shown that preconceived beliefs may create a placebo effect so strong that the actual chemistry of the brain changes.
“Studies have shown that people enjoy identical products such as wine or chocolate more if they have a higher price tag,” write authors Hilke Plassmann (INSEAD) and Bernd Weber (University of Bonn). “However, almost no research has examined the neural and psychological processes required for such marketing placebo effects to occur.”
Participants in one of the studies were told they would consume five wines ($90, $45, $35, $10, $5) while their brains were scanned using an MRI. In reality, subjects consumed only three different wines with two different prices. Another experiment used labels to generate positive (“organic”) or negative (“light”) expectations of the pleasantness of a milkshake. Some consumed identical milkshakes but thought they would be either organic or regular; others consumed identical milkshakes but thought they would be either light or regular.
Participants showed significant effect of price and taste prejudices, both in how they rated the taste as well as in their measurable brain activity. The MRI readings related in part to specific areas of the brain that differ from person to person. These differences are also associated with known differences in personality traits. The authors were able to further determine that people who were strong reward-seekers or who were low in physical self-awareness were also more susceptible to having their experience shaped by prejudices about the product.
“Understanding the underlying mechanisms of this placebo effect provides marketers with powerful tools. Marketing actions can change the very biological processes underlying a purchasing decision, making the effect very powerful indeed,” the authors conclude.
When trying to identify “good” customers, managers often ignore those who return products, or might even consider those customers non-ideal, decreasing the resources devoted to them. In the long term, however, satisfactory product return experiences can actually create a valuable long-term customer whose contributions far outweigh the associated costs, according to a new study in the Journal of Marketing Research.
“Product returns are no small part of the firm-customer exchange process, currently costing firms about $100 billion annually,” write authors J. Andrew Petersen (University of North Carolina) and V. Kumar (Georgia State University). “However, these same returns create long-term value because customers who feel there is little risk in making the wrong purchase keep coming back.”
To determine the extent to which product returns could benefit a firm, the authors conducted a large-scale field experiment with 26,000 customers over six months from an online retailer. Customers were divided into five groups: a control group that received no marketing effort whatsoever, several groups that received traditional approaches to product-returning customers, and finally the model group, which factored in both the consumer’s positive attitude toward returns, as well as the cost to the company of those returns. The study directed these five marketing strategies toward customers for three months, and then observed the customers for an additional three months.
The results showed that the maximum profit during the field experiment was achieved, hands down, in the model group. When managers took into consideration not only the cost of the return process but the positive effect of returns on customers, and targeted marketing accordingly, they brought in $1.8 million compared to the control group’s $1.22 million. By paying attention to the product returns instead of ignoring them or swallowing them whole as a necessary cost, managers were able to strategize ways to reduce the cost of the return process overall.
“Retailers who do not consider product returns in their measure of customer value (even simply as a cost that needs to be managed) are missing out on profits they could be obtaining by understanding and allocating resources to product-returning customers. Paying attention to these customers pays off,” the authors conclude.
When consumer budgets grow or shrink, how do spending habits change? A common view is that people with a budget will spend their money on the same number of products, even when their previous budget was lower or higher. But in order to keep their favourite items, consumers whose budgets have shrunk to a particular amount will opt for less variety than someone whose budget has increased to that same amount, according to a new study in the Journal of Marketing Research.
“We call this the budget contraction effect,” write authors Kurt A. Carlson (Georgetown University), Jared Wolfe (Long Island University), Simon J. Blanchard (Georgetown University), Joel C. Huber (Duke University), and Dan Ariely (Duke University). “Instead of spreading losses evenly across many items, consumers prefer to focus a shrinking budget on a narrower set of preferred products.”
Study participants were asked to imagine that they had won a shopping spree at Costco. They were to distribute spending across nine different products: muffins, bread, M&Ms, Power Bars, apple sauce, ravioli, two kinds of pizza, and cheesecake. They began with a $40 budget and wrote down how much of each product they would buy. They repeated the process with an $80 shopping spree, and finally a $120 spree. The conditions were the same for people in the contracting budget study, except that the first budget was $120, the second was $80, and the final budget was $40.
The authors found that consumers whose budget had shrunk significantly reduced the variety of products they chose to buy, preferring to eliminate some items altogether in order to maintain favourite items at a level they had become used to under the higher budget. This tendency applied not only to grocery items, but to investment and travel decisions as well.
“It is vital to understand the budget contraction effect. During economic downturns, consumers with falling budgets may be tempted to move their money into a smaller number of investments, creating a more risky portfolio. Familiarizing people with the budget contraction effect could help them avoid such dangers and develop a better understanding of how to deal with harsh economic circumstances,” conclude the authors.