Will you care when you pay more? The negative side of targeted promotions

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The negative side of targeted promotions

Dungchun Tsai

Department of Transportation and Communication Management/Institute of Telecommunications Management, National Cheng Kung University, Tainan, Taiwan, and

Hsiao-Ching Lee

Institute of International Business, National Cheng Kung University, Tainan, Taiwan Abstract

Purpose – The purpose of the paper is to examine perceptions of unfairness and accompanying cognitive and emotional outcomes exhibited by present versus prospective customers when faced with targeted promotions. The targeted promotions were designed to be alternatively advantageous or disadvantageous to the targeted group.

Design/methodology/approach – An experiment was conducted with a two (customers categories: present /prospective customer) £ two (inequality conditions: advantaged/disadvantaged condition) between-subject design. A total of 104 valid questionnaires were completed with a minimum of 24 participants per cell.

Findings – Present customers perceive higher unfairness than prospective customers when faced with disadvantaged conditions. However, perceived unfairness was not significantly different when faced with advantaged conditions. Further, perceived unfairness cognitively and affectively influences purchase intentions through perceived value and negative emotions.

Practical implications – Although prospective customers are price-sensitive, targeted promotions should favor present customers instead of prospective customers to lower the perceived price unfairness of present customers. In addition, when relatively low prices are necessary to attract prospective customers, firms should create a type of “segmentation fence”, where present customers are exposed as little as possible to special offers designed to attract prospective customers.

Originality/value – This research contributes to three streams of literature. The first is related to perceived reference price unfairness, focusing on self/ other comparisons (present versus prospective customers) rather than self/self comparisons. The second contribution is related to the outcomes of perceived price unfairness. The mediating effect of perceived value (i.e. cognitive outcomes) and negative emotions (i.e. affective outcomes) between perceived price unfairness and purchase intentions is examined concurrently. The third contribution is that this research raises echoes with the perspective of customer relationship management.

Keywords Promotional methods, Customer profiling, Customer behaviour, Prices Paper type Research paper

An executive summary for managers and executive readers can be found at the end of this article.

Introduction

Targeted promotion is the practice of offering different prices to present and prospective customers (Feinberg et al., 2002). It is a widespread practice in various industries. For example, airlines offer promotion programs that are more favorable to frequent-flyer members than to non-frequent flyers. Similarly, some magazines offer prospective subscribers a 20 percent discount on annual subscription rates, while present customers only get 10 percent off their subscription for renewing. Credit card banks offer gifts to prospective customers, but do not for present customers when they

renew their services. In these cases, some targeted promotions favor prospective customers, whereas others favor present customers.

The motivations of this research are two-fold. First, most previous research concerning targeted promotions has been from the firm’s perspective and has explored the competitive implications of targeted promotions and optimal targeting strategies (e.g. Shaffer and Zhang, 1995; Fruchter and Zhang, 2004). Little research has been conducted to discuss targeted promotions from the consumer’s perspective or to examine the consumers’ psychological reactions (i.e. perceived unfairness, perceived value, and emotional reactions) to targeted promotions. Second, much previous research has shown that price promotions are effective in encouraging customers to buy promoted products (e.g. Inman and McAlister, 1993; Grewal et al., 1998). However, targeted promotions, which differ from price promotions, provide promotions only for specific targeted customer segments. Although targeted customers are encouraged to buy a product because of such promotions, will non-targeted customers’

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1061-0421.htm

Journal of Product & Brand Management 16/7 (2007) 481 – 491

q Emerald Group Publishing Limited [ISSN 1061-0421] [DOI 10.1108/10610420710834931]

This work was supported by the National Science Council, Taiwan, ROC, under Grant NSC 94-2416-H-006-009.

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purchasing intentions be reduced by such promotions if they realize that they pay more money than targeted customers? That is, are there any possible negative reactions induced by targeted promotions? If the answer to this is yes, will the extent of such negative effect of targeting be different between targeted and non-targeted customers? These two questions are crucial when firms attempt to decide whether they should use targeted promotion and who should be targeted.

With the development of computers and computerized networks, the practice of targeted promotions has proliferated (Kivetz and Simonson, 2002). Both present and prospective customers can quickly compare the prices offered to them and to others. As a result, consumers will be more aware of and affected by such price differences (Feinberg et al., 2002). These price differences put targeted customers in an advantaged condition and non-targeted customers in a disadvantaged condition. Studies have shown that price differences induce perceived unfairness among consumers (Martins, 1995; Campbell, 1999; Xia et al., 2004), which in turn influences consumers’ value evaluation, emotions and behavior (Xia et al., 2004). Therefore, this study theoretically grounds itself on perceived unfairness to examine present and

prospective customers’ perceived unfairness under

advantaged inequality and disadvantaged inequality

conditions, respectively.

This research contributes to three streams of literature. The first is related to perceived price unfairness. Most early research on price unfairness focused on self/self comparison (e.g. Kahneman et al., 1986b; Urbany et al., 1989; Campbell, 1999). That is, consumers compared the current mark-up price with previous price offers. The effects of the prices paid by others on the focal customers’ perceived unfairness, i.e. self/other comparisons, were neglected. In the last decade, some studies (e.g. Martins, 1995; Feinberg et al., 2002) tried to examine consumers’ perceived unfairness based on a self/ other comparison. However, no work has focused on both present and prospective customers’ comparisons. With the increasing use of computerized technologies for price segmentation, the segmentation tactics of classifying present customers and prospective customers are prevalent, especially for membership programs. Therefore, this research attempts to examine and compare present customers’ and prospective customers’ reactions to targeted promotions.

The second contribution is related to the outcomes of perceived price unfairness. Perceived price unfairness is considered as an important psychological factor in consumer behavior (Martins, 1995; Campbell, 1999; Xia et al., 2004). It influences consumers’ reactions to prices (Kahneman et al., 1986a, b). Much consumer research has been predominantly cognitive in nature, and the role of affect has received insufficient attention (Shiv and Fedorikhin, 1999). Research on the outcomes of perceived unfairness is no exception. Thus, this research will concurrently examine the mediating effect of perceived value (i.e. cognitive outcomes) and

negative emotions (i.e. affective outcomes) between

perceived price unfairness and purchase intentions.

The third contribution is that this research echoes the perspective of customer relationship management (CRM). CRM places emphasis on maintaining good relationships with customers. Gift-giving is one of the effective ways used in CRM. Targeted promotions can be viewed as gifts offered by firms to individual customers (e.g. B2C gift-giving). In the individual-to-individual gift-giving literature, Ruth et al.

(1999) indicated that the misuse of gift giving may result in negative consequences, such as a deteriorating relationship between the gift giver and the gift receiver. In the B2C situation, this research expects that the misuse of targeted promotions might cause a deterioration in customer relationships. Thus, it is important to design targeted promotions in order to send appropriate gifts to different customer segments. Traditionally, it is assumed that present customers are loyal and less price-sensitive than prospective customers (Nagle and Holden, 2002). Based on this rationale, the practice seems to reflect a strategy of targeting the more price-sensitive segment (i.e. prospective customers). This practice will be counter to the CRM viewpoint that retaining present customers is more profitable than soliciting new customers. Thus, this research attempts to resolve the questions of who (i.e. present or prospective customers) should be favored in order to attenuate the negative effects of targeted promotions.

The following section introduces the literature concerning targeted promotions and perceived unfairness, and then the research hypotheses are developed. The following section presents an experiment to examine the influences of customer categories and inequality conditions on perceived unfairness. Furthermore, we examine the influence of perceived unfairness on perceived value (i.e. cognitive outcomes) and negative emotions (affective outcomes) and, in turn, on purchase intentions. Finally, we discuss our empirical results and implications for practitioners and future researchers.

Literature review and development of

hypotheses

Targeted promotions

Feinberg et al. (2002) define targeted promotions as the practice of offering different prices to prospective and present customers. They further indicate that most previous research about targeted promotions typically assumes that consumers care only about the prices available to themselves. However, in reality, consumers may be aware of prices that are available to others, and such information may influence their purchase decisions. Thus, this research argues that present and prospective customers perceiving the inequality in targeted promotions may have different levels of perceived unfairness when facing the same magnitude of price difference.

In addition, although targeted promotions have been widely used, little research discusses the negative aspects of targeted promotions. Beginning with the case of Amazon.com in 2000, the negative effects of targeted promotions (i.e. the unfair issue) have gradually been noticed (Cox, 2001; Feinberg et al., 2002; Xia et al., 2004). Therefore, this research attempts to analyze the negative effects of targeted promotions through examining consumers’ perceived unfairness, perceived value and negative emotions.

Perceived unfairness

Based on Bolton et al. (2003) and Xia et al. (2004), we define unfairness as the extent to which an outcome and/or the process to reach an outcome are deemed unreasonable, unacceptable, or unjust. The most notable theories of outcome unfairness are the principle of dual entitlement (Kahneman et al., 1986b), the theory of distributive justice (Homans, 1961), and the equity theory (Adams, 1965). The principle of dual entitlement (Kahneman et al., 1986b)

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hand, when the targeted promotions favor present customers, both present and prospective customers show less unfair perceptions. Therefore, we suggest that managers should pay additional attention to present customers’

perceived unfairness in order to maintain good

relationships. However, when relatively low prices are necessary to attract prospective customers, we suggest that firms create a type of “segmentation fence”, where present customers are exposed as little as possible to special offers designed to attract prospective customers.

The limitations and suggestions for future research follow. In our research, we examined targeted promotions that offered both present customer and prospective customer discounts (i.e. 20 percent off or 10 percent off). Another form of targeted promotions, whereas one segment is offered a discount and the other is not, also needs to be examined. Future research can be designed with experiments that contain different levels of discount relative to the base price (i.e. no discount condition) to examine how the price discount levels mitigate consumers’ perceived unfairness[3]. In addition, other variables, such as the inferred motives (Campbell, 1999), trust between buyers and sellers (Xia et al., 2004), and social norms (Maxwell, 1995), are possible moderators that influence perceived unfairness. Thus, future research could study those moderating effects in order to

better understand the perceived unfairness held by

consumers. Finally, additional research is needed to explore other consequences of perceived unfairness, such as no action, negative word of mouth, or switch behavior, and researchers can further examine what other antecedents will influence perceived unfairness. These investigations will improve our understanding of perceived unfairness and provide more useful suggestions for marketers to practice targeted promotions.

Notes

1 The authors are particularly grateful to the anonymous reviewer who suggested that we employed the equality/ equality condition to check the manipulation.

2 NT$ means New Taiwan Dollars. The exchange rate of new Taiwan dollars to US dollars is approximately 33 to 1. 3 We thank the anonymous reviewer who provided this

suggestion for future research.

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Corresponding author

Dungchun Tsai can be contacted at: tsai46@mail.

ncku.edu.tw

Executive summary and implications for

managers and executives

This summary has been provided to allow managers and executives a rapid appreciation of the content of the article. Those with a particular interest in the topic covered may then read the article

in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.

It must be something fundamental in human nature; we don’t seem very good at treasuring what we have. The new always seems more exciting than the old. In marketing the case is

proven for valuing existing customers, monitoring

satisfaction, seeking loyalty, persuading them to spend more and recommend the firm to family and friends.

It is something of a paradox then that prospective customers are still often offered the best deals. The credit card industry, for example, seems to have fostered an environment of customers switching. In many societies the utility companies have done the same – for electricity, gas and water. In the telecommunications sector competition can be

fierce, with results-driven telesales representatives

bombarding prospective customers with ever better offers for calls and broadband access and the like.

There will be few managers who haven’t ploughed on in pursuit of their own prejudices even when faced with evidence to the contrary. However, when the case for focusing on existing customers is so roundly proven, it does seem perverse that the adrenaline-fuelled pursuit of sales prospects should so often fly in the face of basic common sense.

Research by Dungchun Tsai and Hsiao-Ching Lee of the National Cheng Kung University in Tainan, Taiwan is something of a salutary reminder to marketing managers. Building customer satisfaction among existing customers may lack glamour and excitement, but it works. In the Tsai and Lee study a very clear message emerges – don’t offer promotional benefits to prospective customers that are better than those offered to existing ones. It doesn’t seem like a controversial finding, yet it is a golden rule that so many find very hard to embrace as a central pillar of strategy.

Your sensitive customer base

The hard reality of business in this first decade of the twenty-first century is that customers are alert to the failings of the firms currently receiving their hard earned cash. They have never been so informed. They have learned hard lessons from past experience. They are applying these lessons to what they see around them. They are sensitive to being done wrong and they are unforgiving when it happens. This is what makes any move that disadvantages them so potentially disastrous. Yet companies do it, they even set out to do it.

The Tsai and Lee study tested out in an academic study the categories of present and prospective customers under

promotional conditions of being advantaged and

disadvantaged. Their findings revealed that the category that is most sensitive to feelings of disadvantage is the current customer group. Emotions do come into it. They are, in effect, expecting better of the company they are dealing with. Prospective customers, by way of contrast, are less sensitive to being unfairly treated. Indeed why should they care as much? They have little or no stake in the relationship.

That, faced with the same degree of disadvantage, current customers will glean that there is a higher level of unfairness than prospective ones should be a wake up call to every marketer taking current customers for granted. Their actions, rather than mere words, are being watched. Their values are

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being played out among the discounts and the incentives being touted in the marketplace.

What to do

Academic studies can seem utopian to marketers working at the coalface. Yet anyone with a degree of emotional intelligence will find that Tsai and Lee’s findings correlate with feedback from the marketplace. Customers phoning hotlines, sending e-mails, writing letters will be saying similar things, albeit often with a more blunt turn of phrase. Their work follows in a tradition of research and practice that seeks to understand and solidify customer relationships.

There may be a reality that requires low prices to attract new customers, however. In some market sectors there would seem to be inevitability to it. Given this the notion of a “segmentation fence” should be seriously considered. That is, can an offer be made to prospective customers that does not impinge on what might be expected by existing ones. It may

seem like an abstract concept, but it is one well worth fleshing out.

Yet for most circumstances the golden rule of not disadvantaging current customers applies. In fact, more than this, it is well worth properly working through a customer relationship strategy and following through on it day in and day out. Aficionados of Jim Collins’s book Good to Great will have grasped its central message that those companies that consistently outperform the stock market are those that seek to do the right thing day after day. They don’t seek to grab headlines with eye-catching new initiatives.

The same discipline is needed here. In the words of the song, “If you can’t love the one you want, love the one you’re with.”.

(A pre´cis of the article “Will you care when you pay more? The negative side of targeted promotions”. Supplied by Marketing Consultants for Emerald.)

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