16 November 2010
Consumers' brains muddled by zero
by Kate Melville
Why does a one percent credit card interest rate appear more attractive to consumers than a zero percent rate? A new study in the Journal of Consumer Research finds that consumers are often flummoxed when it comes to the concept of zero.
"A reasonable assumption is that a product will be more attractive when it offers more of a good thing, such as free pictures [with a digital camera purchase], or less of a bad thing, like interest rates on a credit card," writes author Mauricio Palmeira, from Monash University in Australia. But instead, Palmeira found that consumer comparison methods tend to get confused when one of the comparison terms has a zero value.
Palmeira notes that consumers tend to be more sensitive to relative rather than absolute differences, which is why a one percent interest rate looks good, since its interest rate is 20 times less than 20 percent. But what if consumers compare a 20 percent interest rate to a zero percent rate?
"Whereas a 20 percent interest rate may look very large compared to one percent, it may not look as large compared to zero percent. Zero eliminates the reference point we use to assess the size of things," Palmeira explains.
"This leads to a counterintuitive situation, in which a credit card can increase its likelihood of being selected when it has a small but non-zero interest rate," writes Palmeira. "The same is true of other attributes that consumers want to minimize, like interest rates and fat content."
The study suggests the inverse is also true. For example, if a digital camera offers a promotion that adds 200 free pictures, a competitor may be better off offering nothing, rather than a lesser number of free pictures. "This is because 200 will look larger compared to 10 or 20 than compared to zero," Palmeira writes.
Source: Journal of Consumer Research