Groundbreaking ideas and research for engaged leaders
Rotman Insights Hub | University of Toronto - Rotman School of Management Groundbreaking ideas and research for engaged leaders
Rotman Insights Hub | University of Toronto - Rotman School of Management

Why do we discount digital?

Read time:

Rhia Catapano

E-books are lighter and more portable than physical ones. They allow you to hold an entire library in the palm of your hand, and are easier to read in low light. A waterproof e-reader can even withstand an unexpected soaking during a day at the beach.

And though many consumers recognize these advantages, they are not willing to pay as much for e-books as they are for hardcovers and paperbacks. This is a behaviour that holds true across multiple product categories.

“When people are asked to make a choice between the digital and physical versions of a product, they choose the digital version. This is best aligned with what they want — something that is convenient and easy to use. But when we asked people about how much they are willing to pay for the products, they will pay more for the physical version,” says Rhia Catapano, an assistant professor of marketing at the Rotman School of Management. “People do not adequately consider the benefits of digital products when considering how much they will pay for them, and as a result, we see an irrational behaviour where people are not willing to pay as much for the product that they actually prefer.”

E-books are only one example. In a study published in the Journal of Marketing Research, Catapano observed similar behaviour across multiple product categories, including hypothetical purchases of the Marvel movie Black Panther, video games, and photographs with research participants’ favourite celebrities.

A subscription to the New York Times illustrates the scope of the irrationality. Out of 423 research participants who indicated they were interested in a subscription, 62 per cent said they would prefer the digital version of the newspaper — not a huge surprise, given how much news is now consumed online. But when the same people were asked how much they would be willing to pay for a subscription, only 14 per cent indicated they would pay more for the digital version.

The pattern could even be observed with purely hypothetical products. Catapano asked research participants to consider how much they would be willing to pay for a “skimble” — which isn’t even a real thing.

“This was very telling. We told people that it the product would come out in the future, but that we were not able to provide specifics about what it is or what company makes it, because of confidentiality and intellectual property reasons,” says Catapano

“Research participants were asked which skimble would be better in terms of convenience, a sense of personal ownership, and aesthetics. But skimbles are not a real product, and even though people have no idea what it is, they still think that the digital version is more convenient. When asked to choose which they preferred, they chose the digital skimble, but they were willing to pay more for the physical one.”

One reason for this disconnect is that people are not fully considering their preferences when they make decisions about how much they are willing to pay. But there is more going on here.

“Another factor is market valuation. People think about how much others believe something to be worth, and integrate this understanding of a product’s market value in to their own purchasing decisions,” says Catapano.

“In general, digital products are cheaper, and sometimes even free. People do not want to pay more for a digital product because of this, even when they are the better choice.”

To shift this perception, companies need to emphasize the advantages of digital goods. If digital products are positioned as substitutes for physical ones, this irrational behaviour could persist. But highlighting the differences of digital products could help increase consumers willingness to pay for them.

“Digital goods dominate on the attributes that consumers consider most important, so there could be welfare gains in encouraging people to purchase the digital version of a good. It is just more likely to align with the aspects that they actually want, and right now, I don't really see this emphasized a lot,” says Catapano.  

“We need to be thinking about horizontal differentiation. Rather than trying to convince people that digital and physical products are the same, we need to show people the ways that digital products are better.”

Rhia Catapano is an assistant professor of marketing at Rotman at the University of Toronto.