Price discounts are by far the most common form of sales promotion employed by marketers, and their use has steadily increased in recent years. Existing studies suggest that framing an offer as a discount produces a reliable positive effect on consumer perceptions of value. However, price discounts have also received their share of criticism. Some suggest consumers are skeptical of sale prices, in that they view the lower selling price, rather than the initial price, as the “true price” of the item. Discounts have also been said to undermine perceptions of product quality. Empirical evidence supports this view as well in that some studies have shown discounts can lead to negative quality inferences and decrease repurchase behavior. Moreover, the price-quality literature suggests that discounts are most likely to induce negative quality inferences when no additional assurance of product quality is provided. Some experts advocate alternative pricing/promotion strategies. For instance, it has been suggested that every-day-low-price claims (EDLPs) provide a straightforward means of conveying value to consumers, and are less likely to undermine product quality. Another alternative is to offer premiums or free gifts, and anecdotal evidence suggests consumers often view such offers as highly valuable.

We used a series of experimental studies to examine when discounts are vulnerable to negative quality inferences, as well as whether EDLPs or free gift offers are useful alternatives to discounts. Transaction utility theory (TUT) suggests that discounts can increase the value of an offer by increasing both acquisition utility (getting the same economic benefits at a lower cost) and transaction utility (the psychological benefit associated with receiving a price offer below the expected price for a given item). However, the negative quality inferences induced by discounted prices threaten to undermine both sources of value. Acquisition utility is undermined by the fact that price-quality inferences cause consumers to infer they are actually being offered a lower quality item at a lower price, rather than the same quality at a lower price. Negative quality inferences also threaten to undermine transaction utility because consumers may adjust their reference price to match the lower quality implied by the lower selling price, rather than using the higher initial price of the item as the reference price.

As predicted, negative quality inferences were shown to limit the extent to which discount frames increased perceptions of deal value (all experiments). Positive discount effects were observed only when additional quality assurances were provided, and not when consumers were less certain about product quality (Experiment 1). In fact, discount framing proved to be somewhat more vulnerable to negative quality inferences than we had expected. The initial price claim provided little help in maintaining perceptions of quality (Expperiments 2 & 3). Furthermore, price expectations suggested that consumers largely disregarded the initial reference price claim. These findings were generally consistent with the view that consumers often consider the discounted price, rather than the initial price claim, to be the ‘true” price of the item. Overall, when no quality assurances were provided, negative quality inferences undermined the value of the discount by attenuating both acquisition utility and transaction utility. These findings provide evidence that price-quality inferences can moderate the otherwise robust framing effects of price discounts.

Our studies also examined alternative strategies that might be used when negative quality inferences were likely to occur. Prices lowered in the form of EDLPs proved to be highly vulnerable to negative quality inferences (Experiment 2). This finding clearly contradicts previous speculation that EDLPs should be better at communicating value to consumers than discounts. In contrast, free gift frames were more effective in increasing deal value (Experiment 3). When a free gift offer was made, consumers based their quality judgments on the full price of the item without accounting for the value of the gift, which maintained perceptions of quality, and led to higher perceptions of deal value. These findings imply that marketers should consider using free gift offers, rather than discounts or EDLPs, when negative price-quality inferences are likely to occur. Alternatively, marketers could provide additional quality assurances when offering discounted prices or EDLPs.

The results generally fit an attribute framing mechanism. This occurs when superficial variations in the description of an offer lead consumers to make positive or negative inferences about the product as a whole. In the present context, consumers used the prices suggested by the different promotional offers to infer different levels of product quality. Discounts and EDLPs focused consumers on the lower selling price, which led them to infer the quality of the product was also lower. In contrast, when the offer was framed as a free gift, consumers focused on the overall price to infer the quality of the target product. The outcome was that an offer objectively worth $20 had more positive effects on perceptions of quality and deal value when it was made in the form of a free gift, than when it was framed as an EDLP, or a discount. Direct evidence for this mechanism was provided in Experiment 3.

Finally, Experiment 3 also provided evidence for a confirmation bias in quality judgments. A repeated measure of quality perceptions for the target product was included, where these perceptions were assessed both immediately after reading an ad that described the offer, and again after subjects had a chance to test the product (a pair of headphones). The results showed that the initial effects of sales promotion on perceptions of quality after seeing the ad were further exaggerated by product testing. The pattern of results is consistent with the idea that initial expectations of product quality created by the ad biased further evaluations of quality in a self-fulfilling direction. This study is the first to demonstrate a confirmation bias for the effects of sales promotion on consumer perception, and it suggests that even small advertising effects can ultimately lead to larger effects on consumer perceptions in the long run.