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Posted by on in Rajan Sambandam
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Price is Right? Placebo Effects in Marketing

It is no secret that consumers often perceive a price-quality relationship, attributing higher quality to products for which they pay more. A large body of pricing research supports the existence of this phenomenon and it is not hard to find personal examples. But what happens when price is compared to objective quality as measured by say, Consumer Reports? Strangely, the relationship between price and quality almost completely disappears. Why? New research points to a placebo action in marketing whereby self-fulfilling expectations could lead lower priced products to perform worse. In other words the quality you get may be related to what you pay because you (unconsciously, it appears) deem it so.

Traditionally, placebos are non-medicines that have an effect, usually because patients believe that they are getting the real thing. To read more about the effects of medical placebos click here. Researchers often use them in experiments to disguise the actual treatment. So when a drug is being tested, some of the participants will be given the actual drug while the others will be given a placebo, often in the form of a sugar pill that looks just like the real drug. In a double-blind study, neither the participants nor the administrators will know who is getting what. Placebos have been found to be effective in up to a third of situations and hence a drug needs to show itself to be more effective than a placebo before it is generally approved. Here are some more stories on placebos for children and how half of doctors routinely prescribe placebos.

In this study, researchers set out to examine if there is a marketing placebo action. That is, would beliefs and expectations about marketing action have an impact on consumption experience? What is interesting about this study is that it is not just subjective experience that is being studied, but objective experience too. Experiments were conducted where participants were given an energy drink called Sobe Adrenaline Rush (a drink that claims on its package to increase mental acuity). Then their performance on a puzzle solving task was evaluated to measure the effectiveness of the drink. By systematically varying the conditions under which the experiments were conducted, the researchers were able to test various hypotheses.

In the first experiment, one group of respondents was (incidentally) made aware that the drink was purchased at its regular price of $1.89. A second group was informed that the drink was purchased at an institutional discount price of $0.89. This apparently tiny manipulation was sufficient - the group consuming the "discounted" drink ended up solving less puzzles than the group consuming the regular price drink! They also performed worse than a control group that did not consume the drink at all.

Other than price, another condition was also manipulated in the experiment, namely the participants' belief about the strength of the drink (as placebos are thought to work because patients believe in them). One group was exposed to two questions at the end of the experiment that purported to measure the participants' belief about how good Sobe is for concentration and improvement of mental performance. In other words, participants' attention was inconspicuously, but consciously, drawn to the linkage between the drink and its effect. When this happened the placebo effect was even stronger than before, showing that placebos work better when expectations of performance are stronger.

Are placebo effects happening unconsciously? Is it possible that if the participants' attention was consciously drawn to the fact that they were consuming a discounted product the placebo effect would disappear? This was tested in a second experiment and the results showed that this indeed happens. When consciously made aware of the discounted price, it no longer influenced their performance on the puzzles. This leads to the conclusion that the placebo effects are real and are happening unconsciously.

Finally, a third experiment showed that presenting strong advertising claims about the effectiveness of SoBe showed a clear increase in the number of puzzles solved in both the regular price and the discounted price conditions. The authors suggest that, as with medical placebos, this could raise ethical problems in the form of products that are falsely advertised as being effective ending up actually being so because consumers believe the claim. You could argue that these experiments, while interesting, are still essentially lab results. In the real world where people are constantly bombarded with large numbers of stimuli of varying intensities, will these kinds of effects actually occur especially over a longer term? As it turns out the answer could be, tentatively, yes. In a small preliminary test, the authors find that over a period of a semester, students who bought discounted cold medications, in fact, reported less effectiveness. So, does that mean medical products should never be discounted?

In fact, this research raises several policy issues (and avenues for future research) about what a product should and should not say about its effectiveness, how it should be priced, and the impact on consumers. Of course, practically it may not be possible to understand all of these effects or find ways to deal with every one of them. We may just have to accept this is how things are for now. So be it.

This research was conducted by Baba Shiv, Professor of Marketing at Stanford University, Ziv Carmon, Professor of Marketing at INSEAD and Dan Ariely, the James B. Duke Professor of Behavioral Economics at Duke University, and was published in the Journal of Consumer Research.

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