How budget constraints impact consumers' response to discount presentation formats

Abstract

Purpose -This research aims to study how buyers' budget constraints influence buyers' perceptions of discounts presented in a dollars-off versus percentage-off format. A comparison of perceptions of discount format under budget constraints is missing from the past literature. The current research aims to fill this gap. Design/methodology/approach -The research is based on two experiments. In the first experiment, a study by Kahneman and Tversky is replicated and extended by including budget constraints. In the second experiment participants are given either a high or a low budget and then asked to compare objectively equivalent discounts that are presented in either dollars-off or percent-off terms. Participants' willingness to buy is recorded and used to gauge the efficacy of the discount formats under budget constraints. Findings -The research extends previous findings derived from the psychophysics of pricing. It demonstrates that, although it is believed that the attractiveness of an absolute discount is inversely proportional to the objective price, such evaluations are also influenced by the presence of budget information. Specifically, consumer budget interacts with discount formats such that the $-off versus percent-off discounts may not be appropriate for expensive or inexpensive products respectively, as shown in past research. Instead, the value of the discount in proportion to the available budget may play a significant role in deal evaluation. Therefore it is an important issue retailers should consider when deciding what discount presentation format to use. Originality/value -Although past research views price as a constraint, the findings indicate that price in itself may not be a constraint unless viewed within the context of a budget. Consumers implicitly make this comparison, but past research has not specifically tested for the effects of budgets and, instead, has relied on income as a proxy for a consumer's spending power. The results provide evidence that using income instead of budget may be an oversimplification.

Mental budgeting and the malleability of decision-making

“…According to the Mann-Whitney U test, the results show that ȥ=-5.40, p < 0.05; the second variant (M=37.04) has a lower score than the first variant (M=62.70). This finding was aligned with the prospect theory concept, that most individuals will accept the discount or price reduction at a high price (expensive) than at low price (cheap) (Scheer et al, 2010), even though the level of discount is only 33.3%. The results on the acceptance or rejection of the book discount are shown in Table 1.…”

“…Kahneman and Tversky (1984) state that individuals will discover the result of their choice in losses or gains. Other research has also found that people will use their perception of promotions or discounts in terms of loss or gain to decide to purchase the product and that sellers use this to create several types of promotion (Diamond & Campbell, 1989;Kazmi, 2015;Scheer et al, 2010). Individuals will perceive gain if the purchase price (price promotion) is lower than the reference price; otherwise, when the purchase price is higher than the reference price, they will perceive loss (Crompton, 2016).…”

“…The theory of mental budgeting states that individuals commonly make psychologically financial accounts in their brains and evaluate losses and gains from the cost and benefits they receive from some transactions (Diamond & Campbell, 1989;Heath & Soll, 1996;Shefrin & Thaler, 1988). Scheer, Shehryar, and Wood (2010) found when people make tight budgets and receive price reductions in monetary units, a high price is mostly more acceptable than a cheap one. Other research by Gupta and Cooper (1992) found that if the discount is at a threshold level of 15% of the purchase price, individuals will still have the intention to buy the goods; nevertheless, the saturation level of discount is shown to be 40% of the purchase price, making people have low purchase intentions.…”

“…They will cause the formation of habit or repetition in buying things because of the discount, not because of their function. Scheer et al (2010) found that when people undertake mental budgeting, they will prefer to accept a high price rather than a low one. This means individuals will calculate the number of gains to obtain higher "pleasure machines" as a form of satisfaction.…”

“…In fact, individuals will regret their consumption when they spend money on unnecessary items, especially when they use money already budgeted for other things (Levav & Mcgraw, 2009). However, the attractive offers that continually appear in college student life cannot be avoided, such as purchasing discounted item and choice justification (Cheema & Soman, 2006;Cheng & Cryder, 2018;Isabella et al, 2012;LaBarge & Stinson, 2014;Lee & Chen-Yu, 2018;Scheer et al, 2010). Indeed, mental budgeting sometimes influences reason-based choices, in which the reasons will justify the individual choices (Besharat, 2012).…”