Given the slow economy and consumers' increased price sensitivity, retailers are especially interested in appearing as a value leader. One popular strategy for securing a reputation for low cost is to carry a handful of items at rock bottom prices and some well-known retail consultants actually recommend this strategy. According to Ryan Hamilton, assistant professor of marketing at Emory University's Goizueta Business School, the hope is that even more than serving as a draw for especially price sensitive customers, these cheaper offerings will provide a halo effect that paints the whole store as a low-priced leader.
In a research paper titled The Impact of Product Line Extensions and Consumer Goals on the Formation of Price Image, Hamilton and co-author Alexander Chernev, an associate professor of marketing at Northwestern University's Kellogg School of Management, explore the effect of downscale and upscale product line extensions, offering additional reflections on the impact of a customer's decision to browse or buy on price image. The research paper refers to recent examples of product extensions, including discount electronics retailer Best Buy's launch of the more expensive Magnolia home theater line and retailer JC Penney's rollout of the high-end Sephora cosmetics brand.
But the paper adds, Downscale extensions are even more common, with many retailers extending their product lines with low-priced offerings, often in the form of private labels. Conventional wisdom suggests that upscale extensions increase price image and downscale extensions decrease price image. However, the authors contend that companies all too often do not accomplish their goal with a vertical product launch, and sometimes the effort can backfire on the merchant.
To test their assertion, Hamilton and Chernev polled students from a large Midwestern university, using computer-based shopping studies. The first experiment tested the impact of upscale (more expensive) and downscale (cheaper) product line extensions on price image by first exposing participants to a set of four brand-name DVD players. According to the paper, Product line extensions were manipulated by including one DVD player in each set that was either high-priced or low-priced. Some participants were asked to simply consider the options available (i.e., a browsing mode) and others were asked to select one of the DVD players (i.e., a buying mode).
After viewing the prices of the items, the participants were shown a recently released DVD priced at $16.99. The participants then had to choose whether they would buy the movie or opt to go to other stores to seek out a better price. The authors reason, If, based on the DVD player price information, they formed a high-price image of the store, they would be more likely to defer purchase, reasoning that they would be more likely to find a better price elsewhere.
Indeed, when the study participants were given a set of items with an upscale or more expensive product extension, 72.2 percent of the individuals who were merely browsing opted to delay the purchase of the movie. When the sampling of DVD players included a downscale product line extension, a mere 44.4 percent of the study participants who were browsing deferred purchase. The paper notes that the pattern of purchase deferral was reversed when participants had a buying goal. When the set included a more expensive or upscale extension, 52.9 percent deferred purchase, compared to 75.0 percent who chose to defer when the set included a downscale or cheaper item.
For the second experiment, eighty students completed a web-based study on consumer preferences. Each participant viewed a variety of teas in three different categories, including green, black, and herbal. In one condition, participants were shown only moderately priced options. In two other conditions, either very high-priced teas (upscale condition) or very low-priced teas (downscale condition) were added to the core set.
Participants who were told to make a selection-those buying and not merely browsing-were instructed to look for a moderately priced tea in the selection given. After viewing the items, the study participants ranked the price image of the store selling the teas. The paper notes, As a second measure of price image, participants also were asked about their price expectations at this store. A high-price image will lead consumers to expect the price of an unobserved item to be high and vice versa for a low-price image.
As predicted, the individuals with a browsing goal noted a higher price image for a store with upscale product line extensions versus the store with downscale extensions. However, a buying goal led to a lower price image of a merchant with upscale or more expensive extensions than that of a store with downscale or cheaper product additions. The paper notes, Taken together, the results of the first two experiments show that, contrary to the conventional wisdom, upscale extensions can lead to lower price images and downscale extensions can lead to higher price images.
In the third experiment, participants completed an online study on consumer decision-making. One set of participants was instructed to think about saving money, while another group was directed to merely look for the best quality item (spending mode). Participants were shown three pairs of fictitious stores, each in a different retail category. In a saving mode, the individuals who were browsing were more likely to opt for the store identified as the cheaper or more downscale option than the study participants looking to buy. For those in the spending mode, the browsing participants were less likely to pick the downscale store than participants out to buy an item.
The researchers found that for participants in a saving mode, who chose the store they thought had a lower price image, the preference for returning to the downscale store for additional purchases was stronger among those with a browsing goal (66.7 percent) than among those with a buying goal (50.6 percent). The pattern was reversed for participants in a spending mode, with the students selecting the store they thought had a higher price image. In this case, 43.4 percent of the participants with a buying goal opted for the downscale store, as compared with only 27.5 percent of the participants with a browsing goal.
In the fourth experiment, participants viewed two fictitious hardware stores with the prices revealed on three or four items in each of four product categories, including bolt cutters, handsaws, faucets, and staple guns. One store included upscale extensions, while the other store carried downscale product extensions.
The authors also used visual arrangements to try to manipulate the choices of the study participants. Across conditions, the featured item was either one of the moderately priced options or the vertical extension. After viewing all of the products, participants were then asked which store they thought had lower prices on other unobserved items.
For the arrangements with a broad price focus, 87.2 percent of the participants chose the downscale or cheaper store. But in the two narrow-focus conditions, the price image depended on which option was perceptually focal. When one of the moderately priced options in each set was focal, only 73.3 percent of participants chose the downscale store. When the vertical extension was perceptually focal, 88.2 percent of participants chose the downscale store. Overall, participants were less likely to choose the downscale store when they had a narrow focus on a moderately priced item than when they viewed an arrangement with a broad focus.
For the fifth and final study, participants selected from two virtual grocery stores selling laundry detergent, tuna, maple syrup, ketchup, apple juice, frozen pizza, pasta sauce, rice, and cat food. The participants were shown pictures of three, four, or five branded packages arranged as if they were on store shelves, with the price displayed prominently below each item (36 prices in total).
The first store pictured was an upscale store, and the second store shown was identified as the downscale store. Each category of items included products of similar price, except for one of the items, which was priced at the higher end of the range for the upscale store or priced at the lower end of the range for the downscale store. For example, the pasta sauce pictured for the upscale store included Barilla ($3.59), Prego ($3.36), Ragu ($3.42), and Isola ($7.12). The paper notes, The downscale store carried the first three brands at the same prices, but replaced the upscale extension with a downscale extension, Hunt's ($1.39).
After going through the various store offerings, participants were told to select the store they thought had lower prices on items for which they had not yet seen prices. Among participants with a browsing goal, 79.3 percent chose the downscale store, compared with only 48.5 percent of participants with a buying goal.
The research concludes with the authors noting that when consumers have a browsing goal, an upscale extension will tend to increase the overall price image, whereas a downscale extension will decrease it. However, the consumers with a buying goal were much more likely to compare and contrast the price of the item under consideration with other similar products.
Hamilton notes that the research provides key insight for merchants. He says that even the most successful retailers can sometimes meet with failure when rolling out a product line, especially when they ignore price image and the customer's shopping goals. He uses Wal-Mart and their ill-fated upscale clothing line as an example. He adds that companies, such as Wal-Mart, put considerable effort into becoming the favored location for discount-minded shoppers. Alternately, luxury stores also spend time and money to develop a loyal customer following interested in their upscale products. Tampering with a price image can often be a big mistake, he notes.
Hamilton adds that product line extensions should be well thought out beforehand, or customers will simply not be receptive to the new offering. And, depending on the significance of the new product rollout, the damage could be much more long term, impacting the merchant's finely honed price image.