Reference pricing how effectiv
Reference pricing how effectivThere is a psychological theory that states that people for perceptions based on present and past stimuli (Helson, 1964). This has been extended by marketing academics to include the concept of reference pricing. They do this by stating that consumers, based on their previous exposure to products and their promotion - have an internal 'learnt pricing level that they believe is equitable for a given product (Jacobson & Obermiller, 1990). This essay examines the role of reference pricing in the pricing decision, and particularly the evidence on which this theory is based. It will be concluded that although the reference price provides a starting guideline for making the price decision - there is little evidence to support the theory in actually setting price structures.
Put simply, a reference price is a standard against which observed prices are compared (Biswas & Blair, 1991). There are two types of reference price: internal and external. External reference prices are ones that exist in the environment and are used by consumers to assess the value of an item. Examples of these reference prices include reduced promotional prices and a competitor's price (Biswas, Wilson & Licata, 1993). The second major type of reference price is the internal reference price. These exist in the consumer's mind as either a point or a range of points (Putler, 1992). In either case, the reference price is used to evaluate the value of a price under consideration. The concept of the reference price is consistent with a number of psychological theories including adaptation level theory and assimilation-contrast theory (Kalyanaram & Winer, 1995).
Two important sides to the reference-pricing debate have emerged. Gijsbrechts (1993) takes a cognitive-based approach by saying he believes that it is important to examine three key areas. First, whether the reference price is a point or range. Second, determining how a consumer formulates the reference price (that is whether it is based on the highest, lowest median, etc.) and finally to examine how consumers store the reference price.
An opposing viewpoint takes the behaviorist's approach. These researchers (for example Kalramaran & Winer (1995) and Rajendran & Tellis (1994) believe that it is vital to observe whether the reference price influences consumer's actions and then quantify the effect.
As is expected, the Cognitivists are trying to determine how reference pricing works, while the behaviorists look at determining the influence of reference pricing. There is also a third interested party, the marketing practitioner. This group is concerned with how the reference-pricing concept can be put to best use by them.
One possible problem with reference pricing theory is that it is based on the assumption that consumers have a range of notions of what is "fair" or "appropriate" as a product's price. This means that unless consumers have some awareness of pricing levels, then they can not possibly determine the reference price of a product....
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