Reference Price Research: Review and Propositions

The impact of internal and external reference prices on brand choice: The moderating role of contextual variables

An emerging consensus in marketing is that consumers respond to price relative to some standard or reference price. Most researchers modeling brand choice have reasoned that this standard is based on past prices of the brand. The authors argue that consumers do use reference prices, but one that is also based on context- other prices in the store-rather than on past prices alone. An analysis of households' brand choices in two subcategories and over three cities support this premise. Within context, the lowest price seems to be an important cue for reference price, whereas within time, a brand's own past prices seem to be the most important cue. Households' use of a contextual reference price also varies predictably across some consumer characteristics. Though their model can be applied to other categories, the findings have important managerial implications: Managerial focus on temporal reference prices could lead to an everyday high price, whereas focus on contextual reference prices could lead to an everyday low price. Only the inclusion of both contextual and temporal reference prices justifies variable pricing.

A well-known concept in the marketing literature is that consumers use prices paid in the past or the current market price as a reference point to assess the value of the current price of an item. These 'reference prices' have been shown to have a significant impact on a consumer's purchase decision and a resulting influence on the selling firm's demand of the item. Recently, considerable research has been conducted on coordinated pricing and inventory decisions; however, very little has recognised the existence of reference prices. Thus, a single-period model is developed that incorporates the effects of reference prices, demand uncertainty and price elasticity on the solution. Numeric analysis indicates that accounting for reference prices can have a substantial impact on the pricing and inventory decisions and the resultant profitability, made by a firm.

This study aimed to explore how producers’ reference prices are formed and adapt over time, and how they affect marketing decisions. Results indicate that producers focus on three major variables to form their reference prices: the current market price, the highest price to date, and their expectation about price behavior. Further, they update their reference prices during the marketing season mainly in response to changes in current market prices, their own expectations about price behavior, and the general price trend. Finally, our findings suggest that producers’ marketing decisions are based on the spread between current market price and reference price, the general market trend and price expectation.

Social perception influences product and brand evaluations. Consumers are especially susceptible to reference price effects when they make purchase decisions for a certain product. Meanwhile, the advertising and pricing are the determinable factors that have impact on consumers’ reference price which also are fundamental marketing strategies. Therefore, how to dynamically set advertising and pricing to maximize firms’ profits are essential tasks. We investigate a duopoly market in a mature product category where two firms compete through time using advertising and pricing as their dominated marketing tools. The firms make the advertising and pricing decisions to maximize their own profits in the planning period. The main results of this paper include the following. (i) The optimal retail price and advertising effort are positively correlated to the initial reference price and basic market size. (ii) When the two firms’ initial basic market size are different, the retail price difference is positive correlated to the initial basic market size difference, so is the advertising effort difference. This conclusion will result to that the strong firm is getting stronger and stronger, however, the weak firm is getting weaker and weaker, this is the situation which happen in the e-commerce market, that is winners take all. (iii) The value of the initial reference price can also determines the reference price effect on the consumer demand rate, that is, when the initial reference price is relatively low, the reference price will have a negative effect on the consumers’ demand of both firms in the whole planning period; when the initial reference price is relatively high, the reference price will have a positive effect on the consumers’ demand of both firms in the whole planning period. Whereas, a moderate initial reference price may lead to different effects on demand.

Two issues that have become increasingly important while estimating the parameters of aggregate demand functions to study firm behavior are the endogeneity of marketing activities (typically, price) and heterogeneity across consumers in the market under consideration. Ignoring these issues in the estimation of the demand function parameters can lead to biased and inconsistent estimates for the effects of marketing activities. Endogeneity and heterogeneity have achieved prominence in large measure because of the increasing popularity of logit models to characterize demand functions using aggregate data. The logit model accounts for purchase incidence and brand choice by including a “no-purchase” alternative in the consumer's choice set. This allows for category sales to change as a function of the marketing activities of brands in the category.There are three issues with using the logit model with the no-purchase option to characterize demand when studying competitive interactions among firms. (1) The marketing literature dealing with brand choice behavior at the consumer level has found that the IIA restriction is not appropriate, as each brand in the choice set is more similar to some brands than it is to others. (2) Studies have found that the purchase incidence decision is distinct from the brand choice decision. Hence, it may not be appropriate to model the no-purchase decision as just another alternative in the choice set with the IIA restriction holding across all brands and the no-purchase option. (3) Even if the distinction between the purchase incidence and brand choice decisions is accounted for via, for example, a nested logit specification, accounting for the purchase incidence decision with aggregate data requires assumptions for computing the share of the no-purchase alternative which is otherwise unobserved.In this paper, we propose a probit model as an alternative to the logit model to specify the aggregate demand functions of firms competing in oligopoly markets. The probit model avoids the IIA property that affects the logit model at the individual consumer level. Furthermore, the probit model can naturally account for the distinction between the purchase incidence and brand choice decisions due to the general covariance structure assumed for the utilities of the alternatives. We demonstrate how the parameters of the proposed model can be estimated using aggregate time series data from a product market. In the estimation, we account for the endogeneity of marketing variables as well as for heterogeneity across consumers.Our results indicate that both endogeneity as well as heterogeneity need to be accounted for even after allowing for a non-IIA specification at the individual consumer level. Specific to our data, we also find that ignoring endogeneity has a bigger impact on the estimated price elasticities than ignoring the effects of heterogeneity. A comparison of the elasticities obtained from the probit model with those from the corresponding logit specification indicates that the range of elasticities obtained from the probit model across brands is larger than that obtained from the logit. The results have implications for issues such as firm-level pricing.In addition to specifying a probit model and providing comparisons with the logit model, the paper also addresses the third issue raised above. We propose a simple alternative to the purchase incidence/brand choice specification by decomposing the demand for a brand into a category demand equation and a conditional brand choice share equation. We provide a comparison of results from this specification to those from the specification that includes the no-purchase alternative and find that estimated elasticities are sensitive to the specification used. We also estimate the demand function parameters using a traditional specification such as the double-logarithmic model. Here, we find that the estimated elasticities could be signed in such a manner as to be not useful for firm-level pricing decisions.One of the key limitations of the proposed model is that while it accounts for the purchase incidence and brand choice decisions of households, it does not account for differences across consumers in their purchase quantities. The model and analysis are best suited for product categories in which consumers typically make single-unit purchases. Another limitation is more practical in nature. While recent advances have been made in computing probit probabilities, it could nevertheless be a challenge to do so when the number of alternatives is large.

Single-source yogurt data are used to examine whether both internal and external reference prices affect purchase decisions. Internal reference prices are memory-resident prices based on actual, fair, or other price concepts. External reference prices are observed stimuli, such as “regular prices,” that stores may display along with a sale price for comparability. Discrete choice models with variables representing the two types of reference prices are estimated, and both types of variables are found to have significant effects on purchase probabilities. This suggests that consumers may use multiple reference points in evaluating price in purchase decisions. In addition, a model using an indicator of a sale price discount explains purchase probabilities as well as one that models the actual discount, which suggests that consumers may be reacting to the indication of savings rather than to the amount of the discount.

PurposeThis study evidences the influence that sales promotion has on brand choice behaviour. Establishments wish to influence consumers' buying behaviour, and thus they launch strong promotional campaigns or introduce changes in their price policies, among other actions. However, they are not always capable of achieving their goal, since, although they may reach their objective in the short term, when the longer term is considered there are undesirable consumer actions.Design/methodology/approachThe problem of consumer brand choice can be adequately described with logit models that allow the use of discrete dependent variables. The probability that the consumer chooses a brand depends directly on the capacity of satisfaction that the brand holds for him/her. In this case, the dependent variable is the brand, and the independent variables are price, reference price, losses and gains, and the different types or techniques of sales promotion. With the aim of obtaining the necessary information for the present study, a regional consumer panel was used.FindingsThe results show that it is necessary to consider the product's promotional state at the moment of purchase as an explanatory element of the process. Promotion is a tool that can help manufacturers and/or retailers in the achievement of their objectives (try the brand, help to decide what brand to buy, etc.). Immediate price reduction is the technique that exerts greatest influence on the brand choice process. It is possible that the consumer perceives a promotion, for example, coupons or rebates, but does not modify his or her behaviour. In this case, manufacturers and/or retailers will be investing their resources in promotional actions that do not have any effect on the consumer.Originality/valuePresents a regional consumer panel that has been elaborated and planned by the authors. Because of this, the information collected is just what was necessary for this study. On the other hand, the paper shows that is very important to know the consumer's preferences and the actions that influence his or her behaviour. Considering the results, it seems that promotions based on price have the greatest effectiveness.

This study examines the formation and evolution of reference price perceptions in new product categories. It contributes to our understanding of pricing new products by integrating two important research streams in marketing—reference price theory and the theory of pioneer brand advantage. Prior research has focused solely on products in existing or incrementally new categories, and has typically examined fast-moving consumer goods. Using a cross-sectional experiment to study the formation of reference price perceptions, and a separate, but related, longitudinal experiment to study the evolution of reference price perceptions, the findings suggest that the pioneer brand's initial price defines a consumer's initial reference price, whether the pioneer is following a skimming or a penetration strategy. This effect endures in later time periods where the initial price affects consumer perceptions of value and purchase intention. The study also finds that the pioneer, due to its prototypicality, has a stronger influence on reference price perceptions than the follower, creating a systematic bias to both the formation and evolution of reference price perceptions in new product categories. Thus, reference price perceptions are shaped by what the pioneer does, rather than what the follower does. Furthermore, category-level reference prices exist and explain purchase intention, but do not improve over brand-specific measures in this regard. These findings have implications for pricing strategy and the theory of reference prices. ©2010 Wiley Periodicals, Inc.

This chapter traces the development of the pricing research program of Kent Monroe, beginning with his doctoral dissertation and continuing to the present time. Drawing on psychophysics and adaptation-level theory the early research efforts concentrated on validating two important concepts relative to behavioral pricing research: reference price and acceptable price range. Then the behavioral pricing research program expanded to explore how the context of a purchase situation, including the structure of the prices available for judgment, influences buyers' price perceptions and willingness to buy. In the early years his research included pricing models and research on patronage behavior. Subsequently, concentrating primarily on behavioral pricing research, he began to integrate findings from the research program into examining how various sellers pricing strategies and tactics influence buyers' judgments and purchase decisions. These efforts led to the first edition of his book Pricing – Making Profitable Decisions published in 1979. The book was subsequently revised and expanded in 1990 and again in 2003.

This study aims to determine purchasing decisions among young people who need their daily life is still filled by the lord yes. Android smartphones among young people are still included in the category of expensive items. The sample used is young people who are still learning and have no income. Consumers in determining the decision to purchase products are influenced by including price perceptions, product features, and word of mouth. Consumer complaints about price perceptions are caused by Android smartphones perceived to be more expensive. Price perception is related to how price information is understood entirely by consumers and gives a deep meaning to them, three indicators namely: Price conformity to product quality, Price conformity to benefits and Competitive prices. Product features are elements of a product that are considered important by consumers and are used as the basis for making a purchasing decision, researchers use four indicators, namely: Diversity of Features, Quality of Features, Importance of Features and Completeness of Features. Word of Mouth or WOM is the act of providing any information related to the product by consumers to other consumers. there are three indicators of Word of Mouth, namely: Word of Mouth Organic, Word of Mouth Amplified and Word of Mouth Marketing. The purchase decision is a decision as the choice of an action of two or more alternative choices, there are six indicators namely: Product choice, Brand choice, Time choice, Store choice, Choice of amount and Choice of payment. From the results of this study it was found that the influence of Price Perception (X₁), Product Features (X₂) and Word of Mouth (X₃) on Purchasing Decisions (Y) had a very strong and positive effect because when young people whose financial needs were still met from his parents or young people who have not worked is largely determined by the variable Price Perception (X ₁), Product Features (X ₂) and Word of Mouth (X ₃) together or simultaneously affect the Purchase Decision (Y) of an android smartphone.

Most empirical choice models specify simple structures with marketing mix and household descriptors as independent variables and some measure of brand choice as the dependent variable. However, these models are not consistent with buyer behavior models that posit some type of multi-stage choice process with consumers moving through various stages such as perceptions and preferences. In this paper, a multi-stage model incorporating preference measures and reference prices is specified and estimated using consumer scanner panel data featuring household-level advertising exposure measures. Preference is estimated using scaling procedures recently shown to be effective with choice data. The results show empirical support for the model as preferences and reference prices impact household choice shares.

The importance of closed-loop supply chains has been widely recognized both in academic communities and in industrial sectors. This paper starts from the traditional supply chains and the new self-supply chain of GREE to extract realistic problems, to mainly investigating two noncooperative dynamic pricing policies in a dual-channel closed-loop supply chain consisting of a manufacturer and a retailer. Then, it studies the influence of different channel power structures on dynamic decisions and their complexities. Furthermore, the reference price affects the purchase decisions of consumers. Therefore, the model takes into account the influence of reference price of the market demands. Results show that the manufacturer who opens up a direct channel can make a huge profit in the game. In the dynamic game evolution process, the game leader is in a more advantageous position when the system is in a stable region; once entering into the bifurcating region or chaotic region, the game follower needs to adjust his price to follow the leader’s decision in order to make a profit. In addition, the system’s stable region becomes smaller when the market demand becomes more sensitive to the difference between the reference price and the actual price. In this model, if the manufacturer acts as a leader, he is in a more advantageous position when the market is sensitive to channel competition in the stable stage while the result is opposite in the unstable stage.

We propose a structural model to investigate the impact of forgetting on consumers' brand choice decisions in frequently purchased products. Forgetting results in consumers imperfectly recalling their prior brand evaluations when making a purchase decision in the category. We conceptualize the imperfect recall by positing that consumers recall their prior evaluations with noise. Based on prior research in the behavioral area, we characterize the extent of forgetting as an increasing and concave function of time. Our framework generates analytical results on the impact of forgetting on consumers' brand evaluations and their consequent purchase behavior. We calibrate our model using scanner panel data for liquid detergents. Furthermore, we obtain insights into the consumers' extent of forgetting in the category, extent of learning, predicted price elasticities and implications on state dependence and habit persistence. Our results underscore the importance of modeling consumers' ability to recall only imperfectly.

Social media has eternally changed the purchasing cycle of consumers. Instead of merely making a purchase, today shoppers have added two vital rudiments that come prior and post purchase in the buying the process. By use of blog posts, review, forums and tweets, today consumers conduct online research on brands that they have an interest of purchasing and opinions posted by other consumers have an immense power to influence their decisions (Agresta, Bough and Miletsky 2010:32). This creates a measuring tool that can be utilised to direct efforts towards real time. Taking note of what users are saying in social media and engaging in their discussions is a great way of influencing these discussions. Social media is mostly if not wholly characterised by ratings, comments, reviews, and other features that are found on website that indicates what users think of the content being discussed (Evans and Bratton 2012:38). The aim of this study is to determine the influence of social media marketing on Durban consumers’ choice of brands, while the primary objective is to determine the degree to which social media marketing influences consumers’ decision making when selecting a brand. According to TNNG (2013) above 60% of traffic on the internet created by the African continent comes from South Africa. A method of study adopted by this research to achieve the set objectives was quantitative in nature. Convenience and purposive sampling were two non-probability sampling techniques employed to recruit participants in this study. All Durban consumers above the age of 18 who are active social media users were the population targeted by this study. 88% response rate was achieved as only 400 questionnaires out of 450 were collected. The study used a structured self-administered questionnaire which consisted of 45 items to gather primary data. Both descriptive and inferential statistics were utilised in this study. Data was analysed using Statistical Package for Social Sciences (SPSS) version 24.0. The outcomes of this research advocate that social media is a very powerful communication tool that can be used to influence consumers’ decisions when selecting a brand. All users emphasised that they are active on computer generated platforms of which Facebook is the most used network among Durban consumers. Literature reviewed in this study indicates that social media plays a significant part in the way users learn, explore, and share brand information. Generally, reviews and product ratings produced by users are the most favoured information sources among consumers in social media (Nielsen 2011). Consumers point out that social media is very important to them as it creates brand awareness which they make use of when making a purchase decision. Consumers in this study indicated that the more aware they became of a brand via social media, the more they would want to buy the brand and vice versa. Conversations about certain brands on social media create awareness about those brands among consumers (Liu and Lopez 2016). The study recommended that brands should incorporate promotional activities, contests and competitions on its social media brand page posts to increase traffic and excitement among consumers. Another recommendation was that marketers should identify a personality that will represent a brand well in social media, giving it a vital feel that will entice the target audience. The study also recommended further research on the influence of opinion leaders on consumers’ choice of brands, the influence of specific social media channels and the influence of social media on specific age groups to give broader insight of social media marketing to marketers and brand managers.