When Budgeting Backfires: How Self-Imposed Price Restraints Can Increase Spending

Jeffrey S. Larson and Ryan Hamilton
Journal of Marketing Research (JMR)
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Executive Summary
A common bit of advice given to consumers who want to control their expenses is to decide how much they want to spend before they start shopping. That is, consumers are encouraged to set a price restraint—a self-imposed restriction on their allowed spending. Making a price restraint salient is almost universally encouraged as a method for reducing expenditures. Contrary to this prevailing wisdom, the authors demonstrate that making a purchase decision with a budget in mind can actually increase a consumer’s spending relative to a situation in which the consumer makes the purchase decision without a budget. This occurs because a salient price restraint reliably changes the consumer’s decision process such that the final decision is based on quality rather than price considerations. When making a product decision with a self-imposed price restraint, a consumer will first screen out alternatives that are outside this budget. This screening has two intermediate effects, both of which encourage the consumer to purchase a more expensive product. First, that products that pass the budgetary screen have already been deemed to be acceptably priced; thus, the consumer will make his or her final choice based on nonprice, quality information. As a result, the consumer will tend to choose a higher quality, and therefore a higher-priced, option. Second, focusing on a smaller subset of products will alter the consumer’s quality perceptions. Because the highest-quality products have been screened out by price, the relative quality differences among products that pass the budgetary screen will be perceived as larger. The highest-quality products within this subset will be perceived to have a higher quality, further encouraging choice of higher priced options.

To illustrate, consider a consumer who is purchasing a new cell phone. If the consumer has not set an explicit budget, he or she will make a choice by weighing the relative quality against the relative price of each option. For example, if the consumer finds an $80 cell phone and a $120 cell phone, he or she will consider whether the extra quality provided by the $120 is worth an extra $40. Conversely, if the same consumer has decided that he or she wants to spend about $100 on the new cell phone, he or she will only examine phones between, for example, $75 and $125. Now, when the consumer examines the $80 and $120 phone, both have already been deemed acceptably priced; thus, the extra quality gained by the $120 phone is likely to sway the consumer to purchase the more expensive phone. In addition, because the consumer has not examined the top-of-the-line $200 phone, he or she will perceive the $120 phone as having very high quality, further influencing the consumer to put down the extra $40.

Biography
Jeffrey S. Larson is Assistant Professor of Marketing in the Marriott School of Management at Brigham Young University, where he teaches market research and Internet marketing. He received is PhD in Marketing from the Wharton School of Business at the University of Pennsylvania. His research examines the influence of environmental factors on consumer decision making.

Ryan Hamilton is Assistant Professor of Marketing in the Goizueta Business School at Emory University. He holds a PhD in Marketing from Northwestern University, as well as a BS in Applied Physics from Brigham Young University. Professor Hamilton’s previous scholarly work has been published in Journal of Consumer Research, Journal of Marketing Research, Journal of Marketing, Management Science, and Organizational Behavior and Human Decision Processes. His research interests include consumer judgment and decision making, price image, and visual information processing.

Journal of Marketing Research, Volume 49, Number 2, April 2012
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Jeffrey S. Larson and Ryan Hamilton
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