Measuring Reference Price Formation: Analysis In A Virtual Experimental Context

Abstract

As many surveys stated, companies are investing in better pricing processes, tools and capabilities. Among these companies, 42% consider that capturing the full value of products and services is one of the top challenges related to price setting and optimization. In addition, many improvements have been made recently in the way companies set an optimal price level and adapt their pricing processes. However, pricing decision-makers have to face a paradox: price setting is a left-brained (rational) process, whereas price perceptions and evaluations are right-brained (subjective). Tools available to solve this paradox are limited. Direct measures (price tresholds,...), Van Vestendorp’s PSM approach, conjoint measurement can be useful in assessing price evaluations but fail in measuring how consumers compare, evaluate and memorize price offers. Reference price, viewed as a standard against which the purchase price of a product is judged (Monroe, 1973), is one of the most studied constructs in research on strategic pricing decisions. As Kalyanaram and Winer (1995) stated, “reference price is a psychological construct which, when incorporated into normative models, can change the way marketing managers make decisions about price and promotions”. One stream of research has identified antecedents of reference price and has assessed their effects through experimentation, others have reported effects of reference price models on brand choice and other purchase decisions (Mazumdar et al. 2005). Many studies have examined and called for greater integration of different measures of reference price, noting that the research area is highly context specific (Lowe and Alpert, 2007). The purpose of this research is to operationalize a tool to measure and control contextual influences on reference price formation using a simulated experiment. The decision environment is generated and controlled in a lab setting using a software that simulates a purchase decision context and records the behaviours induced by that process. Contextual and temporal influences can be measured monitoring the total amount of information consulted for competing products (attributes and prices), as well as the time spent on information search. More specifically, this research evaluates the impact of search effort on the perceived reference price in the market at different points in time in the decision process.