This is the author s version of a work that was submitted/accepted for publication in the following source:

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1 This is the author s version of a work that was submitted/accepted for publication in the following source: Pontes, Nicolas (2014) Increasing attractiveness of high-end products. In CLAV Congresso Latino-Americano de Varejo, October 2014, São Paulo, Brazil. (Unpublished) This file was downloaded from: c Copyright 2014 The Author Notice: Changes introduced as a result of publishing processes such as copy-editing and formatting may not be reflected in this document. For a definitive version of this work, please refer to the published source:

2 Increasing attractiveness of high-end products Introduction The use of an established brand name to introduce new products in the same category as the parent brand is a common strategy firms use to attract more customers and satisfy their desire for variety (Lancaster, 1990; Quelch and Kenny, 1994). An important decision brand managers have to make when positioning their products in a retail setting is to whether price new line extensions at parity or let products vary in the price/quality spectrum. Horizontal line extensions, typically priced at parity, often relate to flavor, color, or aroma variations (e.g., Red Bull Zero) and are considered to be broadly of equivalent quality (Draganska and Jain, 2005b; Nijssen, 1999). On the other hand, vertical line extensions are discriminated in terms of price (e.g., Nikon D3200 to D7100), catering for individual consumer differences in willingness to pay for quality (Moorthy, 1984). The advantages of using a vertical extension strategy are many. For instance, by adding downscale products, brands may attract customers who may not be able to afford current brand offerings, increasing usage rate and creating new sources of customer-based brand equity. Conversely, upscale products enables the brand to access potential or current consumers who are looking for more features, greater prestige, or higher quality brands (Kirmani, Sood, and Bridges, 1999), extracting more consumer surplus and enjoying much higher margins associated with high-end markets (Aaker, 1997). Two approaches to the vertical line extension research stream have been advanced in the literature. One stream of research focused on extension feedback effects on the parent brand investigating how the introduction of vertical line extensions affects parent brand value (Randall, Ulrich, and Reibstein, 1998), parent brand attitude and prestige (Heath, DelVecchio, and McCarthy, 2011; Kirmani et al., 1999), retail price image (Hamilton and Chernev, 2010), and firm profitability (Bayus and Putsis, 1999; Draganska and Jain, 2005a, 2005b; Kadiyali, Vilcassim, and Chintagunta, 1999; Putsis and Bayus, 2001). A second line of research has focused on the factors that determine vertical extension success. This body of research has demonstrated that extension success is a function of consumer ownership status (Kirmani et al., 1999), parent brand concept (dall'olmo Riley, Pina, and Bravo, 2012; Kim, Lavack, and Smith, 2001), and extension direction (Lei, de Ruyter, and Wetzels, 2008). Despite the growing interest in vertical line extension issues, there has been little research investigating how product-line length affects extension favorability. Therefore, this paper investigates the framing effect that a product line price structure has on consumer judgments of vertical extensions and, in particular, of upscale extensions. A basic proposition of this research is that the parent brand price range affects the perceived or psychological distance between extension and parent brand, influencing extension favorability ratings. This assumption is consistent with the range principle of social judgment theories (Parducci, 1965, Sherif et al., 1958, Volkmann, 1951), which asserts that the evaluation of a target is relative to the end points that anchor the subjective range such that the perceived difference between two stimulus values is smaller when they are evaluated in the context of a wide than a narrow range. Drawing on this literature, this research proposes that price consistency between upscale extension and parent brand is a function of product-line length. Specifically, it is predicted that positioning an upscale extension in the context of a wide product-line will lead to higher consistency perceptions between the parent brand and a new upscale extension than an equivalent upscale extension positioned in the context of a narrow parent brand product-line. This prediction is tested in two experiments described in more detail in the following sections. 1

3 Experiment 1 The goal of this experiment was to test empirically the proposition that consumers rely on the parent brand s width of prices rather than on the average price when making judgments of vertical extensions. A hundred and one people were recruited to participate in an online survey on consumer perceptions of new products. The evaluation task involved digital cameras, a category where brands vary naturally in portfolio size. Participants were randomly assigned to the conditions one of the two conditions of price range (wide from $89 to $259) vs. Narrow from $159 to $179). Although the price range varied, the parent brand average price was kept fixed across conditions. Participants were given a scenario in which they were asked to consider that a digital camera brand was introducing a new upscale (priced at $299) product. Extension information provided was limited to a brief description and price information. All manipulations worked as intended. Results reveal that participants perceptions of price range were lower in the narrow (MN = 3.66) condition than in the wide condition (MW = 4.70; F(1, 98) = 25.55, p <.0001). Consistent with our predictions, participants evaluations of favourability (MN = 4.18 vs. MW = 4.78; F(1, 98) = 5.88, p <.05), liking (MN = 4.52 vs. MW = 5.02; F(1, 98) = 4.88, p <.05), attractiveness (MN = 4.58 vs. MW = 5.30; F(1, 98) = 10.19, p <.01), and willingness to buy (MN = 3.98 vs. MW = 4.86; F(1, 98) = 8.28, p <.01) were significantly lower in the narrow price range compared to the wide price range, providing support for the proposed hypothesis. Although results show a range effect, this experiment allowed room for a potential alternative explanation. It could still be argued that participant s perceptions of price distance between parent brand and its extension was caused by absolute price differences. The absolute difference between the upper end of the wide price range and its extension was $40 while the absolute difference was much larger in the narrow condition, $110. If the findings of this study could be attributed to absolute differences between end prices and the extension rather than to the parent brand s price range width, upper end prices would have been used as a single anchor to judge prices of the extensions. Thus, experiment 2 is designed to rule out this alternative explanation providing a more stringent test of the proposed theory. Experiment 2 In this experiment, upper end prices were kept constant, such that a narrow price range had a higher price average than the wide price range but absolute differences between extension and current parent brand offering was the same across conditions. In addition, this experiment uses a different product and a well-known brand in order to expand our findings to another product category and to a more realistic setting. Forty-two respondents were randomly assigned to one of the two conditions of price range (wide vs. narrow). A similar scenario to experiment 1 was given to participants that considered a brand in the wrist watch category. Figure 1 illustrates the manipulation scenarios of this experiment. Figure 1 Manipulation of constant end-prices 2

4 Results and Discussion This research argues that consumer s perception of price distance is a function of the parent brand price range when consumers judge new product line extensions, namely upscale extensions. In support, results from experiment 2 show a pattern similar to that reported in experiment 1. Participants evaluations of favourability (MN = 2.36 vs. MW = 4.33; F(1, 41) = 26.81, p <.001), liking (MN = 3.45 vs. MW = 4.92; F(1, 41) = 13.65, p <.01), attractiveness (MN = 3.96 vs. MW = 5.30; F(1, 41) = 8.33, p <.01), and willingness to buy (MN = 2.14 vs. MW = 3.71; F(1, 41) = 8.51, p <.01) were significantly lower in the narrow price range compared to the wide price range. The data provided in this study reveal that consumers do not summarize parent brand price information into a single anchor but rather on its price range to make judgments about the new product. Extensions of wide price ranges are evaluated more favourably than those of narrow ranges. This is consistent with range-frequency theory prediction. Conclusion The purpose of this research was to improve the understanding of how the parent brand price structure affects judgments of upscale extensions. Contrary to conventional wisdom results from our two experiments show that parent brands with lower price averages can lead to better evaluations of upscale extensions. Findings from this research enhance our understanding of how consumers use the parent brand s price range as reference when making judgments of vertical extensions. The research presented in this article also offers important insights for marketing managers that want to leverage their product line by introducing vertical extensions. On the basis of these findings, it is proposed that managers can opt to change prices not only in the upper end of the product portfolio but also at the lower end. By reducing lower end prices, consumer perceptions of the brand range becomes broader making a higher priced, more distant, upscale extension seem less extreme hence more favourably evaluated and acceptable. References Aaker, D. A. (1997). Should You Take Your Brand to Where the Action Is? Harvard Business Review, 75(5), Bayus, B. L., and Putsis, W. P. (1999). Product proliferation: An empirical analysis of product line determinants and market outcomes. Marketing Science, 18(2), dall'olmo Riley, F., Pina, J. M., and Bravo, R. (2012). Downscale extensions: Consumer evaluation and feedback effects. Journal of Business Research. Draganska, M., and Jain, D. C. (2005a). Consumer Preferences and Product-Line Pricing Strategies: An Empirical Analysis. Marketing Science, 25(2), Draganska, M., and Jain, D. C. (2005b). Product-line length as a competitive tool. Journal of Economics & Management Strategy, 14(1), Hamilton, R., and Chernev, A. (2010). The Impact of Product Line Extensions and Consumer Goals on the Formation of Price Image. Journal of Marketing Research, 47(1),

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