Persuasive Advertising - J. Scott Armstrong [30]
Offers with product-satisfaction guarantees are especially persuasive when the customers are not knowledgeable about the product or brand.
Risk makes most people uncomfortable. Consider the choices posed in the lead-in to this principle. When students at various U.S. universities were asked which of the options they would take, approximately half chose $500. Given that the expected value of the second offer is $150,000, the desire to avoid risk is apparently very high among people (Frederick 2005).
One way to reduce risk is to include an insurance policy in the product’s purchase price. This could eliminate costly litigation and lead to substantial cost savings for both the seller and the buyer. Of course, this requires the seller to calculate the expected cost of the guarantee. Rosenbluth, a travel agency, failed to do this in 2001 when it offered guarantees on its Biztravel.com website. One ad offered, “$25 for flights arriving 30 minutes late, $50 for one hour late, $100 for two hours late, or for cancelled flights, or for lost luggage—and more.” While Rosenbluth did not properly calculate the costs and benefits, its customers did. This insurance policy was good for customers, but it led to huge losses for Rosenbluth. Biztravel died quickly.
Advertised guarantees can be especially useful for products that might pose dangers to users. U.S. courts often do not recognize contracts in cases that involve injury from the use of products. Instead, they rely on tort law and seek a remedy from those who can pay. This adds enormously to the costs of risk-prone products, such as ladders, football helmets, and vaccines.
Consider how an advertised guarantee would work. Assume that you fell off a ladder and broke your arm. You are told that you are entitled to the advertised guarantee amount—say $5,000. You are also told that you can reject the $5,000 and have the right to sue, which implies the need to find a lawyer to gain some unknown amount of money to be decided at some unknown future time with an unknown likelihood of winning. What would you do? According to Huber (1988), including insurance policies in the purchase price (he calls them “quasi-contracts”) could produce substantial savings on lawyers’ fees and court costs, leading to gains for both sellers and claimants. In the few cases where quasi-contracts have been tried, Huber found that nearly all those injured took the immediate, risk-free payoff.
Evidence on the effects of product satisfaction guarantees
In a small-scale lab experiment, mock ads for bicycles contained either a two-year or a 20-year warranty. They were randomly assigned and shown to 175 people with roughly equal numbers of experts and non-experts. Not surprisingly, the ads with the longer warranty period led to higher quality ratings for the bicycles (Blair and Innis 1996).
1.4. Price
The offering of a shilling, which appears to us to have plain and simple
meaning, is, in reality, an argument to persuade one to do so and so.
Adam Smith
The way a price is advertised could affect a customer’s likelihood of purchase, satisfaction with the transaction, ability to make an informed decision, and enjoyment when using the product. Price advertising could also affect how competitors respond.
Advertised prices are less important for products where quality is difficult to judge, such as hedonic products (those bought for enjoyment) and products designed to show off a customer’s good taste (e.g., designer labels, works of art).
Other factors, such as the difficulty of specifying the requirements of the product or service, also play a role. For example, advertising agencies seldom advertise their own prices. In 1988, a Philadelphia agency, HEC, created a lot of attention when it advertised fixed prices for various types of advertising projects (e.g., “a 30-second TV commercial for $15,320, a black-and-white print ad for $5,535, or a 10-second radio ad for $415”). This strategy had a short life.
1.4.1. State prices in terms that are meaningful and