A Reference Price Based Model Of Consumer Brand Choice

Author : Sangkil Moon
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (137 download)

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Download or read book Profiling the Reference Price Consumer written by Sangkil Moon and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Consumers have distinctive price responses that reflect the manner in which they process price information. Many retailers assume that consumers make purchase decisions by simply trading off product preferences with product prices. In contrast, reference price theory argues that consumers use psychologically encoded prices when making a choice. Because the market-level reaction to price depends on the way that consumers use price information, it is important for retailers to understand the extent to which consumers in a particular trading area rely on reference prices. Given this information, retailers are better able to develop optimal pricing policies. In this research, we develop a procedure which classifies individual households into one of three price response segments: a no reference price segment (NRP), a memory-based reference price segment (MBR), and a stimulus-based reference price segment (SBR). NRP consumers take prices as given; they do not compare prices to a reference value. In contrast, MBR and SBR consumers compare current price to a reference value to determine whether a price level is reasonable. MBR consumers base their reference on past prices, while SBR consumers base their reference on the current price of a focal brand. Based upon past research, we assume that this focal brand is the last brand used by the consumer. Both types of reference price mechanisms assume that some aspect of past choice behavior (prices or product selection) impacts the current decision. For this reason, past marketing activity affects current purchase behavior whenever consumers rely on reference prices. We classify consumers into reference price segments using purchase histories of consumers in the toilet tissue product category. Significantly, our results clearly show that reference price consumers (MBR and SBR) constitute the vast majority of the market. In choosing a brand, both MBR and SBR consumers exhibit a characteristic known as loss aversion: they have a strong negative reaction to prices above the reference price and a weaker positive reaction to prices below the reference price. We find that MBR consumers, who recall prices from memory, are considerably more price and promotion responsive than SBR consumers, who rely entirely on price information available at the point of purchase. Our analysis shows that MBR consumers (relative to SBR consumers) pay lower prices, switch brands more frequently, and buy more often under promotional conditions. We believe that this difference occurs because MBR consumers continually monitor the pricing environment and buy when pricing conditions are favorable. Our work implies that MBR and SBR consumers will react differently to retail pricing policies. For example, we would expect that frequent promotions created by a HI-LO retailer would create an alternating pattern of positive and negative impacts for MBR consumers (due to perceived gains and losses over time). However, the impact of these HI-LO promotions on the SBR consumer depends on the depth of the discount: only those promotions that generate prices below the price level of the focal brand will have an effect. In contrast, an EDLP retailer minimizes the gain/loss mechanism of MBR consumers due to infrequent promotions. However, by choosing the price levels of the product category assortment carefully, the same EDLP retailer can ensure that all SBR consumers have a variety of products with reasonable prices, regardless of the identity of the focal brand. In choosing a retail pricing strategy (such as HI-LO versus EDLP), the retailer must take into account the intensity of retail competition, the extent to which the retailer has power in the distribution channel, and the purchase behavior characteristics of consumers in the trading area. However, all else being equal, we would expect the retailer facing a market dominated by MBR consumers would wish to alternate promotions on different brands over time and to publicize this information through advertising. This would ensure that consumers always find a brand whose price falls below its reference value. In contrast, a retailer facing a market dominated by SBR consumers can expect that a heavily promoted brand in one week will become the focal brand in future weeks. Thus, brands priced below the usual price level of this focal brand will benefit from past promotional activity, while brands priced above this focal brand will be hurt. For this reason, the retailer facing SBR consumers should confine promotions to the higher priced items in the category. By providing an analytical tool for understanding the reference price characteristics of the consumer population, our work allows the retailer to forecast the likely impact of changes in pricing policy.