Reports

Working Paper

Divide and Prosper: Effects of Partitioned Prices on Consumers’ Price Recall and Demand

Vicki G. Morwitz, Eric A. Greenleaf, and Eric J. Johnson, 1997, 98-116

When charging consumers for goods or services, many companies divide the price into two components: a large base price and a comparatively small surcharge. They surmise that this price partitioning will increase consumers' demand for the product. However, little research has been done on how consumers react to partitioned prices and whether or not such pricing generates more demand than combined pricing.

Study

In this study, authors Morwitz, Greenleaf, and Johnson examine how consumers process partitioned prices and how partitioned pricing affects consumers' demand and their recalled prices.

Processing a partitioned price requires more cognitive effort than processing a combined price—effort that consumers may not be willing to expend. If consumers do not go to the trouble of calculating the total cost of the product, the authors theorize, they are likely to recall the total cost as less than it really is. This should lead to greater demand for the product when it has a partitioned price than when the same product has a single, all-inclusive price.

Furthermore, some partitioned-price strategies make calculation more difficult than others. The authors hypothesize that a surcharge presented as a percentage of the base price will lead to fewer attempts at calculation than will a surcharge presented as a dollar amount. Finally, the authors speculate that consumers' feelings for a product's brand name influence their recalled prices and their demand when looking at partitioned prices.

Results and Implications

Evidence from experiments reveals that partitioned prices do tend to increase consumers' product demand compared with all-inclusive, combined prices. The results also show that consumers recall significantly lower prices when exposed to partitioned prices than when exposed to combined prices. Less than one quarter (21.9 percent) of the subjects in one experiment tried to calculate the total cost represented by a partitioned price, while 23.2 percent of the subjects ignored the surcharge altogether. In an experiment using both percentage surcharges and dollar surcharges, only 9.6 percent of the subjects attempted to calculate the total cost of a product with a percentage surcharge, whereas 32.9 percent attempted calculation when the surcharge was given in dollars. Results also indicated that the increase in demand due to partitioned pricing increased with consumers' a priori likelihood of purchasing a given brand, as measured by their relative affect for the brand compared with an alternative.

Overall, the results suggest that partitioned pricing can be effective in increasing demand for a product. Further research might address how to design optimal partitioned-pricing strategies and how such strategies affect perceptions of fairness. In addition, public policy makers may consider policy guidelines for ethical use of partitioned pricing.

Vicki G. Morwitz is Associate Professor of Marketing and Eric A. Greenleaf is Associate Professor of Marketing at the Leonard N. Stern School of Business at New York University. Eric J. Johnson is the David W. Hauck Professor of Marketing, Operations and Information Management and Psychology at the Wharton School at the University of Pennsylvania.

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