An executive summary for managers and executive readers can be found at the end of this article

Strategic implications of a multi-dimensional pricing environment

Hooman Estelami
Associate Professor of Marketing, Graduate School of Business, Fordham University, New York, NY, USA Keywords Pricing, Marketing communications, Advertising, Consumer behaviour Abstract A significant amount of research in pricing has focused on price as a unidimensional construct one consisting of a single number (e.g. $1.99). However, the evolving marketing environment, combined with notable growth in services and goods categories that require the communication of complex price information, has led to the use of multi-dimensional prices. Multi-dimensional prices consist of multiple numbers (e.g. $199 a month for 36 months) and as a result require the consumer to carry out specific mental computations to determine the cost of the offer. In this paper, empirical evidence on consumer difficulty in evaluating multi-dimensional prices is examined. Then the strategic impact of such difficulties for pricing managers as well as regulators is examined. The paper concludes with a discussion of the implications of multi-dimensional pricing on past research findings, and reflects on existing understanding of consumer response to price.

Pricing research

The traditional view in pricing research has been that prices are often communicated to consumers as one set of numbers (e.g. $1.99). Extensive research has been done to understand simple consumer reactions to price information. For example, research has examined how well consumers can remember prices (e.g. Dickson and Sawyer, 1990), consumers' attitudes toward product bundles (e.g. Yadav, 1994), consumer perceptions of price communications which include the product's past price or competing prices (e.g. Compeau and Grewal, 1998), and quality inferences made based on price (Rao and Monroe, 1989). In most of this research, price has been studied as a uni-dimensional construct. However, a growing volume of price offers presented in the marketplace are multi-dimensional in nature. These prices are communicated to consumers using more than one set of numbers, and therefore often require the consumer to carry out specific arithmetical tasks in order to estimate the net price to be paid. For example, a payment plan, such as a lease communicated as ``$249 a month for 24 months'', requires the consumer to conduct multiplication (i.e., $249624) in order to estimate the total cash payments. As will be discussed in this paper, a significant proportion of prices being communicated in the marketplace would involve similar or even higher levels of arithmetical complexity. Lack of recognition of the cognitive effects of these numerical tasks may have therefore limited our current understanding of consumers' reaction to price (Monroe, 2003; Monroe and Lee, 1999). In this paper we will examine the potential impact that multi-dimensional prices may have on consumers. Past pricing research will be reviewed to uncover empirical evidence on consumer difficulty in evaluating complex
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prices. We will then examine the strategic impact of such consumer difficulties on the pricing practices of price setters. Strategic implications on consumer protection policies and price deception analysis are also discussed. Moreover, the impact of a multi-dimensional price environment on existing research findings in pricing is discussed and future areas for research are identified. A price is multi-dimensional when it consists of more than a single set of numbers, and the consumer is required to combine the numeric information to compute its net cost (Estelami, 1996). As a result, multi-dimensional prices can be found in a variety of forms in the marketplace. While the level of cognitive difficulty may vary, multi-dimensional pricing always requires consumers to conduct some form of arithmetic in order to determine the product's net price. For example, even in a simple discount communicated as ``$139 original price, discounted by $20'', the consumer is required to conduct subtraction (i.e. $139-$20), and in a lease price such as ``$249 a month for 24 months'' the consumer is required to carry out multiplication (i.e. $249624). Complex prices More complex prices can easily result from simple changes in how a multidimensional price is presented. For example, a price communicated as ``$139 original price, 15 per cent off'' would require the consumer to carry out subtraction (1 0.15 = 0.85) as well as multiplication (i.e. $13960.85) to estimate the amount to pay. Alternatively, when surcharges are applied in a price, as in ``$139 plus 8 per cent sales tax'', or ``$139 price, plus $45 delivery charge'', the consumer may be required to carry out multiplication and addition tasks. Other price forms such as automobile leases (e.g. ``$249 a month for 24 months'') or packaged goods prices (e.g. ``$2.49 for 16-oz can of tuna'') may require the consumer to carry out multiplication or division. Higher levels of computational complexity may also arise from attaching additional price dimensions, for example, by adding a down-payment to an automobile lease price, or by communicating prices using difficult-toprocess forms (e.g. $196 vs $200). The common characteristic among all these multi-dimensional prices is that a consumer, trying to understand the offer being presented, would be required to carry out specific arithmetical tasks. While the required arithmetic can be carried out using a computer, calculator, or even penciland-paper, often such tools are unavailable to the unsuspecting consumer who is being selectively targeted through media advertising or sales efforts, especially in the early stages of the decision-making process. As a result, much of the computational effort would have to be carried out mentally, and this reliance on mental computations is likely to result in consumer inaccuracy as well as cognitive stress. Mental arithmetic Research in mental arithmetic has established that carrying out arithmetical tasks can result in significant increase in blood pressure and heighten physiological stress level (Turner and Caroll, 1985; Seraganian et al., 1985). This research stream has also established that increases in arithmetical task complexity have an exponential impact on physiological stress and that limitations in human short-term memory prohibit many of the basic tasks (e.g. multiplication, division) from being conveniently carried out by an average person (Dansereau and Gregg, 1966; Dehaene, 1992; Hitch, 1978). Interestingly, these basic cognitive limitations have only recently been recognized in pricing studies, and in the following two sections we will uncover empirical evidence from past studies hinting at the potential impact that multi-dimensional pricing may have on the consumer.
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Multi-dimensional prices Consumer ability to evaluate complex price stimuli mostly has been indirectly questioned in past research. Research relating to consumers' limited ability to compute unit prices, their mis-perceptions of elaborate price presentations, and preference changes resulting from semantic changes in price presentation can be cited. Early evidence can be found in the unitpricing literature. When determining unit prices, consumers have to divide the package price by the package size to determine the price per unit. The works of Russo (1977) and Capon and Kuhn (1982) provide clear evidence for consumer limitations in conducting this basic task. Russo (1977), studying consumers' utilization of unit price information in field settings, found that consumers rarely compute unit prices in their mind. Moreover, unless unit prices are made explicitly available to consumers in an easy-toprocess format, they are unlikely to utilize them accurately in their purchase decisions. ``Best buy'' Capon and Kuhn (1982) have also shown that, when a product is offered in various package sizes and price levels, consumers may have difficulty identifying the ``best buy''. Moreover, their study showed that the level of consumer accuracy in estimating unit prices is independent of education level and socio-economic status. Other related evidence can be found in the retail practice of quantity surcharges, which occurs when a large package of a brand is more expensively priced (on a per unit basis) than a smaller package of the same brand (Nason and Della Bitta, 1983; Sprott et al., 2000; Widrick, 1979). Inability to recognize and respond to this tactic suggests that consumers may have difficulty conducting the computations required to realize that they may be paying a higher per-unit price for the larger size packages. Research on the semantics of price mostly concurs with the above evidence. Price semantics relate to variations in how the price is expressed, rather than the objective value of the offered price. For example, in communicating a discount applied to a regular price, one could choose to express the discount as the dollar value of the savings, or as a percentage off. Research in price semantics has shown that communicating objectively equivalent prices using different semantics may result in varying levels of consumer preferences (Berkowitz and Walton, 1981). Moreover, these preferences may be further affected by the use of comparison prices such as competitors' prices or past prices for the same product (Barnes, 1975; Blair and Landon, 1981). Sinha and Smith (2000) have also shown that consumers' perceptions of promotions may be influenced by simple variations in presentation tactics such as the framing of a promotion as ``buy one, get one free,'' versus ``buy two, get 50 percent off'', both of which are objectively equivalent. The emerging indirect evidence therefore seems to suggest that consumers may have difficulty evaluating prices which have been manipulated in their semantics, complexity, and information presentation. In recent years several researchers have examined how consumer reactions to price might be influenced by complexities introduced through the communication of multiple price dimensions. This research will be reviewed below to uncover potential effects of price multi-dimensionality on consumers' ability to process price information. Moreover, the order of magnitude of these popular pricing tactics will be discussed.
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Price semantics

Pennies-a-day pricing Pennies-a-day pricing occurs when prices are framed in terms of the much smaller daily amounts rather than a large lump-sum dollar amount. A typical example is where a charity organization asks for donations, but quotes the required donation in terms of pennies-a-day (e.g. ``Support a starving thirdworld child for 50 cents a day'') and then compares that amount with some small expenditure such as the cost of a cup of coffee. In doing so, the communicated price is more difficult for the consumer to evaluate since the net annual dollar transaction is not expressed. As a result, the consumer would have to carry out mental multiplication (i.e. 50 cents a day6365 days) in order to determine the total cash layout, a task which many consumers may choose not to carry out. Gourville (1998) demonstrates that, in spite of objectively large annual dollar amounts associated with some transactions, pennies-a-day pricing can significantly reduce consumers' price sensitivity. Simplification process While Gourville does not probe the computational aspect of pennies-a-day pricing, he suggests that, when prices are presented to consumers in complex forms, a simplification process may take over. Based on the concept of cognitive categorization of stimuli (Mervis and Rosch, 1981) and mental accounting (Thaler, 1985), Gourville establishes that the simplification process involves the comparison of some price dimensions (e.g. 50 cents a day) with typical mental accounts (e.g. daily ongoing expenses). Since consumers tend to be less price-sensitive to small daily expenses than to large one-time cash layouts, Gourville's work demonstrates that pennies-aday pricing can significantly reduce consumers' price sensitivity. Partitioned pricing In a partitioned price, the seller communicates the price in separate components (e.g. ``$499 washer + $50 installation fee''), rather than a lumpsum amount (e.g. ``$549 washer, installation included''). Examples of partitioned prices occur when the sales tax is charged separately, or when the prices of a mail order catalog exclude the cost of shipping and handling. Similar to pennies-a-day prices, by communicating prices in a partitioned format the consumer is required to carry out specific mental computations (e.g. addition, multiplication, etc.) in order to determine the cost of the presented offer. In addition, similar to pennies-a-day pricing, partitioned prices typically result in decreased price sensitivity and higher levels of consumer spending. Cognitive simplification In explaining the effects of partitioned prices, Morwitz et al. (1998) speculate that cognitive simplification strategies may be responsible. When faced with partitioned prices, consumers may choose not to undertake cognitively demanding computational tasks, and instead rely on simplifying heuristics (Kahneman and Tversky, 1979). These simplifying heuristics may, for example, force the consumer to focus on individual dimensions of the price (e.g. cost of the mail-order product) and ignore other relevant, but less salient price dimensions (e.g. cost of shipping and handling). As such, the consumer may place little or no weight on price dimensions that are perceived to be less relevant. Partitioned pricing typically results in consumers being unable to rationally integrate the presented price information and may cause systematic biases in consumer price perceptions. The order of magnitude of the effect of pennies-a-day pricing is evident in the work of Morwitz et al. (1998). In one experimental condition involving an auction, partitioned prices were used whereby the buyer's premium (auction fee) is charged separately. Subjects in this condition on average
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bid over 10 percent higher prices than subjects in the condition where the auction fee was included in the bid price of the item. In another experiment involving a mail-order price of a telephone, both partitioned prices (i.e. ``$69.95 telephone, $12.95 shipping and handling'') and non-partitioned prices (i.e. ``$82.90 telephone, shipping and handling included'') were presented to different groups of consumers, who were then asked to recall the price at a subsequent point in time. It was found that the partitioned price was recalled by consumers as being significantly cheaper (i.e. average recalled price of $78.27) than the non-partitioned price (average recalled price of $82.90). The authors also found that, when the shipping and handling cost is communicated in a more complex form, as a percentage (rather than an absolute dollar amount), consumers are one-third as likely to carry out mental computations. Examples Multi-dimensional pricing Multi-dimensional pricing occurs when a price is communicated to the consumer using more than just a single number (Estelami, 1996, 1997). Examples are automobile leases such as ``$249 a month for 24 months'', telephone service contracts such as ``$29.99 monthly fee, for 200 minutes of call time,'' and retail discounts such as ``$129 regular price, discounted by 25 percent''. In evaluating the cost associated with such offers, the consumer has to take into consideration not only the raw dollar amounts (e.g. $249, $29.99, $129), but also other dimensions of the price (e.g. number of monthly payments, amount of call time allowed, percentage discount). Therefore, to determine the net price, arithmetical operations such as the multiplication of the monthly amount by the number of months, or the subtraction of the discount from the regular price would need to be carried out. As such, multi-dimensional prices encompass a large array of price presentation options, including pennies-a-day pricing and partitioned pricing, all of which require the consumer to carry out specific computations prior to judging the price. It has been established that multi-dimensional pricing introduces considerable cognitive effort into the consumer decision-making process (Estelami, 1999). Considering the limited capacity of human short-term memory, use of multiple dimensions in a price, requiring mental computations, typically results in an overload in the use of short-term memory, due to the required mental arithmetic. This overload results in both inaccuracy and cognitive stress in the judgment and decision-making process (Dehaene, 1992; Hitch, 1978). Consider, for example, the influence of an 8 percent sales tax on a $199 item. In order to evaluate this, the consumer would have to mentally compute the sales tax (i.e. $19960.08), store this amount and all the intermediate steps of this computation in short-term memory, and then add it to the item price of $199. Other multi-dimensional prices involving multiplication (e.g. ``$249 a month for 24 months''), division (e.g. ``$2.49 for 16-oz can of tuna''), and subtraction (e.g. ``$139 a month, discounted by 15 per cent'') would require much heavier use of short-term memory in their computations (Groen and Parkman, 1972; Hitch, 1978). Research on multi-dimensional pricing has established that the use of multi-dimensional prices typically discourages consumers from combining the price dimensions presented to them (Estelami, 1996). As a result, consumers typically focus on individual price dimensions (e.g. monthly payments), ignoring how the total price needs to be computed (e.g. multiplication of monthly payments by the number of payments).
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Decision-making process

Complicating multi-dimensional prices by adding additional price dimensions to the price (e.g. by adding a down-payment to an automobile lease) further discourages rational integration of price dimensions (Estelami, 1997). In addition, the arithmetical operation required for evaluating a multidimensional price as well as the numerical simplicity of the individual price dimensions can significantly influence the consumer's price evaluation effort (Estelami, 1999). Price effects The order of magnitude of multi-dimensional price effects on the consumer is quite notable. For example, in a study of the length of time required to evaluate multi-dimensional prices, it was found that use of multidimensional prices involving multiplication lengthens response times by four times over prices involving addition (Estelami, 1999). Similarly, the response time for multi-dimensional prices utilizing ``round'' price dimensions (e.g. ``$200 a month'') was one third of the response time required for prices not utilizing them (e.g. $167, $195). This effect is attributed to the significant decrease in the number of mental transformations and computations needed to be stored in short-term memory associated with round numbers. The accumulating research evidence suggests that price multi-dimensionality may influence an array of consumer responses. Therefore, in this section will examine the implications of multi-dimensional pricing on three specific areas. First, we will examine strategic issues that arise for price setters, as a result of price multi-dimensionality. We will then examine regulatory implications for consumer protection entities, interested in enabling a more coherent consumer understanding of prices in the marketplace. We will then conclude with implications of price multi-dimensionality on pricing research. Fundamental issues Strategic implications for price setters Several fundamental issues arise from a practical perspective, when dealing with multi-dimensional prices. Practitioners currently using, or considering the use of, multi-dimensional prices need not only to consider these issues, but also to empirically examine any potential effects of multi-dimensional prices, based on objective consumer data. The issues of practical concern to price setters include:
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Determining which price dimension is the most important to the buyer: When utilizing multi-dimensional prices, as evidenced by the work of Morwitz et al. (1998) and Estelami (1997), consumers tend to focus on individual price dimensions in order to determine the offer value. For example, in evaluating an automobile lease, the consumer may place disproportionate weight on the monthly payments and pay very little attention to the number of payments. Considering the variety of multidimensional prices present in various markets, sellers need to establish which particular price dimension is of most salience in a consumer's decision process. Such a determination can only be made based on empirical data, collected either through qualitative methods such as focus groups, or quantitatively through surveys or conjoint analysis. However, the resulting knowledge will help price setters optimally present the prices in such a way as to draw the most favorable consumer reactions. Determining the proportion of buyers who can compute the multi-dimensional price: As a price setter, knowledge of the extent of consumers' ability to evaluate a multi-dimensional price is critical. If the
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majority of buyers are unable or unwilling to carry out the required arithmetic in a multi-dimensional price, they may choose to focus on a single price dimension. This enables the price setter to tactically present the price in the most favorable fashion. On the other hand, if the majority of buyers are willing and able to undertake the required computations, such a tactical move would be of little consequence. Establishing the extent of consumer ability to evaluate a multi-dimensional price offer is primarily an empirical question which could only be determined through consumer research. Moreover, it is likely that product category involvement as well as consumer involvement in the category will moderate this, as higher levels of involvement are likely to be associated with increased cognitive activity, and a higher likelihood for the consumer to engage in elaborate processing of price information. Strategic positioning
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Price simplification for strategic positioning: Evidence from consumer surveys suggests that consumers in general prefer simpler price communications to more elaborate ones. For example, a 1995 survey of telephone subscribers indicated that consumers find the variety of long-distance calling plans offered by phone companies confusing, and many prefer to see simpler prices (Services Marketing Today, 1995). In recent years, a strategic component of many firms in this industry has become price simplification through flat-rate plans and all-inclusive prices which do not require separate local and long-distance charges. Excessive use of complex multi-dimensional prices may potentially be considered by some consumers as deceptive and may therefore cause negative attributions to be made about the seller. An accurate understanding of consumer opinions of multi-dimensional prices used in a category is critical for developing successful pricing strategies. In such a context, simplification of prices as a positioning and strategic marketing option should be carefully examined. Examine inferences buyers draw from each price dimension: Complicating price through the use of multiple dimensions may lead consumers to question the seller's intent. Moreover, even in situations where all sellers communicate their prices multi-dimensionally, it is of practical importance to understand specific inferences consumers draw from each individual price dimension. In contrast with a uni-dimensional pricing environment where consumer inferences about key variables such as quality and value are based on a single number, in a multidimensional price, each price dimension may serve as a signal of transaction value. For example, in a lease arrangement consisting of monthly payments, number of payments, and a down payment, each individual price dimension may infer different aspects of the transaction. It is therefore critical for price setters to have a practical understanding of what these inferences are. For example, in a multi-dimensional pricing environment, it may be useful to know which price dimension is likely to result in quality inferences (e.g. Rao and Monroe, 1989), and which price dimension is likely to convey a point about offer value. Moreover, it is important for price setters to establish the likelihood by which consumers might make price-based inferences in a multi-dimensional pricing environment, versus a uni-dimensional pricing environment. A practical and accurate understanding of these questions is crucial to an educated approach to pricing.
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Strategic implications for regulators Considering the cognitive challenges that multi-dimensional prices present to consumers, the practice of multi-dimensional pricing may also be of interest to regulators. While limited legislation and communication guidelines exist for multi-dimensional pricing, regulatory measures aimed at protecting consumers against misleading pricing practices may be needed. Several related issues emerge from this perspective: Price regulation
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Is multi-dimensional price regulation necessary? Existing legislation aimed at consumer protection has largely dealt with uni-dimensional prices. For example, currently legislation exists for protecting consumers against deceptive pricing practices. Similarly, in the financial markets where complex pricing schemes may be used to hide the percentage interest rate of a financial product, the Truth in Lending Act (US) protects consumers by requiring sellers to communicate the annual percentage rate (APR) associated with the product. Moreover, the common practice of providing unit prices on grocery store shelves has helped improve consumers' ability in identifying the lowest price item. However, other than these tangential measures, no explicit effort is currently under way by regulators to control the complexity and resulting confusion in multi-dimensional prices. This is partially due to the fact that perceived complexity of a price is often subjective, and very difficult to quantify. Therefore, restrictions aimed at limiting such complexities may be difficult to formally specify and establish by regulators. Moreover, it can be argued that limiting sellers' ability to choose from an array of price presentation options may result in a less dynamic market environment, and may therefore limit market growth. Nevertheless, existing research evidence strongly supports the fact that multi-dimensional prices are difficult for consumers to comprehend, and a basic aim in consumer protection should be to improve this comprehension. Determine markets most likely to be problematic for consumers. A related issue to regulating multi-dimensional prices is the scope of such an effort. While measures such as the Truth in Lending Act and unit pricing of grocery products have helped improve consumers' ability to comprehend specific forms of prices, a determination is needed as to which prices and which markets are more critical for regulatory intervention. For example, markets such as that of automobile leases and telecommunication services, due to the complexity of the products and associated prices, often result in poor consumer understanding of prices. Regulators may therefore need to identify the specific markets that are of higher importance, in order to prioritize their efforts to clarify price communications. Clearly, such efforts would be subject to a perceived need for controlling price communications in a given market, and may be vigorously resisted by the industry. Political will and multi-dimensional price regulation go hand-in-hand. The political will to control price complexity in the marketplace is largely determined by consumers' call for such an effort. Legislative efforts to regulate multi-dimensional price communications would have to be initiated by consumers, whose voting power may provide an incentive to activate regulatory and legislative bodies such as the Federal Trade Commission and law makers. Given the higher priority of focus granted to more pressing issues such as national security and economic development, it is likely that multi-dimensional price regulation would
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not be at the top of most voters' lists of concerns. This will most likely limit the political power of consumer protection advocates in formalizing mechanisms for improving consumers' ability to deal with multidimensional prices. Strategic implications for consumer researchers Fundamental issues related to the validity of our current understanding of consumer response to prices also arise, resulting from the use of multi-dimensional prices of one form or another in previous pricing studies. An examination of past studies in pricing indicates that in many cases researchers have in fact used price stimuli that are multi-dimensional in nature. For example, in studying consumers' response to price discounts communicated in the form of a regular price and a discount, some researchers have communicated the discount as an absolute dollar (e.g. Lichtenstein et al., 1991; Urbany et al., 1988), while others have presented it in the form of a percentage (Berkowitz and Walton, 1981). As reviewed earlier in this paper, simple manipulations like this, as well as variations in the numeric presentation of the price dimension (e.g. $199 vs $200) have been shown to significantly influence consumer ability to comprehend, calculate, and process the presented price information (Estelami, 1999; Morwitz et al., 1998). Cognition factors As Monroe and Lee (1999) have noted, ignoring such numerical cognition factors may influence the empirical results of a research study. Our accumulated knowledge over the years on consumers' price responses may therefore be difficult to unify into a single theory due to incomparable choice of price stimuli used by various researchers. This combination potentially presents a fundamental threat to both the external and internal validity of many existing studies, as well as our overall understanding of price effects. Therefore in conducting future research in pricing, researchers need to carefully take into account the possible impact of price multi-dimensionality and arithmetical complexity in developing the price stimuli to be used in any empirical investigation. Moreover, a meta-analysis of the potential impact of multi-dimensional prices used in previous studies on observed empirical responses may be of great help in clarifying our current understanding of consumers' price responses. Nevertheless, multi-dimensional pricing provides marketing researchers with an abundance of topics to examine. For example, it would be useful to understand how simple consumer responses such as quality inferences or seller evaluations are formed in a multi-dimensional pricing environment. Moreover, it would be interesting to uncover the common simplifying heuristics that consumers may utilize in processing highly complex prices. For example, automobile rental prices or cellular phone prices, which may vary as a function of the level of the consumer's usage of the service (i.e. number of miles, number of minutes of call time), may require the consumer to estimate the distribution of likely usage (i.e. mileage, call volume) levels. Such dynamic prices may therefore force consumers to utilize simplification strategies in their price judgments and would be interesting to examine. Moreover, an empirical study of the extent to which multi-dimensional prices are utilized in various markets would provide useful information for researchers, practitioners and regulators. The use of multi-dimensional prices in the marketplace provides pricing managers with the ability to manage the complexity by which price information is communicated to buyers. The complexities introduced by
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Simplifying heuristics

multi-dimensional pricing are beginning to be empirically documented by researchers. The results of these studies indicate systematic consumer limitations in processing and evaluating multi-dimensional prices. Such limitations therefore not only may provide sellers with opportunities for improving their margins, but also may be of concern to regulators attempting to protect consumers against a potentially sub-optimal information environment. Moreover, price multi-dimensionality provides consumer researchers with an abundance of topics to study, beyond the traditional uni-dimensional view of price. It is hoped that this paper has helped inspire additional interest on this important perspective on pricing.
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This summary has been provided to allow managers and executives a rapid appreciation of the content of this article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present

Executive summary and implications for managers and executives

Mental arithmetic is hard. And it is not because we are thick! Ever thought you have been ripped off but not been quite sure? You listened to the gentle words of a smooth sales assistant and, lulled by their assurances, bought into the deal that was offered. Why do you feel ripped off? Because you cannot (or have not got the time or energy to) work out just how much it is really costing you. Estelami presents a fascinating view of the problems associated with ``multi-dimensional pricing'' where working out the real cost involves a complicated calculation. From a distance, we might wonder why you did not work out the actual cost before you bought into the offer. After all the cost is arrived at through a straightforward arithmetical calculation involving the kind of maths you learnt at elementary school. Estelami explains why this is so and shows us why the issues associated with ``multi-dimensional pricing'' are important to marketers and to those who worry that marketers might be getting away with something. There are four primary issues we have to understand to appreciate why consumers do not make the calculation that provides the real cost: circumstance; assumption; gullibility; and simplification. Each of these interact to produce the reaction to the complex price that the marketer desires (we think). Do you take a calculator to the shops? The capacity to perform mental arithmetic is limited and not just by intelligence and training. Complex calculations cannot be performed easily without recourse to mechanical assistance. Clever folk can perform sophisticated estimation but this is no substitute for the actual answer. Estelami points out that out short-term memory restricts our capacity to perform mental arithmetic, especially when the calculation involves more than one function. And, since the process of mental arithmetic is difficult, the result is stress and error. Estelami observes that ``. . . reliance on mental computations is likely to result in consumer inaccuracy as well as cognitive stress.'' We can expect that you will make a wild stab at the right cost rather than remember to take your calculator with you. Or else you will just trust the salesman! If it is mostly so, it must be so We make assumptions. We look at the supermarket shelves and see large and small packages. We assume that the bigger packages will be better value for money. And because we cannot or will not make the calculation, we do not actually know whether our assumption is right. So next time we make the same assumption. This is a classic error in thinking (going from the general to the specific) it is generally true that buying in bulk represents better value for money than buying in smaller quantities. But this general truth is not necessarily specifically true. And what goes for bulk buying applies to other assumptions about the pricing and presentation of the goods and services we buy. Consumers can be suckers! Estelami remarks that ``. . . consumers may have difficulty evaluating prices which have been manipulated in their semantics, complexity and information presentation.'' We can be fooled into believing that something is cheaper or

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better value by the way in which the offer is made. And this gullibility is as much a function of words as it is of numbers. This might be an argument for us marketers to major on complicated price presentations, weasel words wrapped round simple offers and other such scams. But (leaving the ethical issues to one side for now) this does depend on the nature of what we are selling. In circumstances where our product is genuinely the best, cheapest or most cost effective then we should seek to simplify the offer to remove the potential for confusion or miscalculation. Where this is not the case a little semantic deception might be beneficial. Consumers try to make things simpler William of Occam argued that the simplest explanation is usually that most close to the truth (he clearly was not an economist) and consumers apply this process of simplification to the way in which they evaluate complex price offers. Rather than perform the complicated calculation necessary to arrive at the true answer, we focus on one aspect of the price the monthly payment, the price before tax and so on. The question for marketers is not whether consumers will seek to (as Estelami argues) ``. . . focus on individual price dimensions'', but which of these price dimensions us consumers will actually choose. As with the issue of semantic deception, the best products benefit from having a clear price rather than a complex offer requiring involved arithmetical calculation to achieve understanding. Where we have no choice but to present a complex price, we need to know which dimension of that price the consumer will choose to focus upon. Multidimensional pricing works so regulators do not like it It is true to say that the presentation of pricing information has received more attention from regulators than most other areas of marketing practice. There are rules about the presentation of discounting, the description of interest rates (although the use of annual percentage rate as a standard creates as many problems as it solves) and other pricing information. And, as important markets begin to attract the attention of regulators, marketers need to appreciate why it is that price regulation exists. Regulators make rules on prices because they see the evidence that shows how gullible consumers can be when faced with pricing information that requires complicated mental arithmetic. Because consumers are suckers, because they do not focus on the actual price but on just one aspect of that price and because we make assumptions that is why the powers that be introduce pricing regulations. The marketer should not seek to confuse the consumer it is not really in our interest. But we should also resist the view that says consumers are universally gullible (back to confusion between the general and the specific) resulting in restrictions on perfectly honest and reasonable approaches to pricing that produce real benefits for some consumers. Estelami's work gives an indication of the problems facing those setting prices and should act as both a guide and also a warning to marketers when it comes to the question of whether we are really communicating how much value-for-money the consumer will get when he buys our goods. (A pre cis of the article ``Strategic implications of a multi-dimensional pricing environment''. Supplied by Marketing Consultants for Emerald.)

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