Penny wise and pound foolish? How thinking style affects price cognition

Nine-ending pricing is a common marketing technique because of the traditional belief that consumers pay more attention to the dollar digits and less attention to the penny digits. This research challenges the universal effectiveness of nine-ending pricing and identifies thinking style as a moderator for the nine-ending price effect with analytic (holistic) thinkers more (less) prone to the effect of nine-ending prices. Further, we examine cognitive resource as a boundary condition for the moderating effect. Our results demonstrate that holistic thinkers are not responsive to nine-ending prices when they have unlimited cognitive resources. With limited cognitive resources (e.g., under time pressure or cognitive load), both holistic and analytic thinkers are subject to the nine-ending price effect. We identify the lack of holistic thinking as a mechanism underlying the nine-ending effect.     

Integrative effects of firms' price and endorsement strategies on consumers' loyalty intention

This research examines the effects of price and brand endorsement that are adopted by firms from a consumer-based viewpoint, and provides practical brand management discussions as a reference for both manufacturer brands and retail store brands. According to the findings, manufacturer brands support high prices and boost those vivid impressions which are helpful in engendering consumer loyalty intention. Without a careful evaluation process, a brand-endorsing strategy may prove detrimental to the manufacturer. Retail store brands follow distinct pricing policies and carry out brand-endorsed strategies. Price/endorsement stimuli influence consumer brand loyalty through the partial mediating effect of brand impression. Manufacturers and retailers could define appropriate price premiums on products with a potential for a manufacturer–retailer brand co-branding as identified by market research, thus increasing the sales of both.     

Offering value and capturing surplus: A strategy for private label sales in a new customer loyalty building scenario

The competition between private label brand and national brands in the diaper category is investigated from the view of the private label brand manager. In this category, new customers routinely enter the category buying entry-level diaper sizes (for infants) and then progress to buy larger diaper sizes over time (as their child grows older). Thus, consumer comparisons between the private label brand and national brands are focused on single diaper sizes during any single purchase scenario. Because private label brands are known to suffer from low quality perceptions that often understate the true quality levels of private label brands, this paper advances a pricing strategy to optimize private label performance in the category. The private label brand should price significantly low for small diaper sizes (maintaining a sizeable price gap from national brand competitors). Then, in most cases, the private label brand should shrink the size of this price gap for large diaper size offerings. This strategy will successfully offer initial value to new customers, build private label brand quality perceptions and loyalty, and then capitalize on these gains through higher dollar sales in the late stages of the customer relationship. The price gap shrinking strategy is found to be generally effective, but high national brand competition and too high of an initial price gap diminish the effectiveness of the strategy.     

What type of framing message is more appropriate with nine-ending pricing?

While the effect of nine-ending prices on purchases has been well documented, studies that examine the impact of this pricing technique in the context of advertisements are rare. This paper examines the joint effect of the pricing technique and message frames on the advertisement efficacy. Since a nine-ending price is compatible with gain-framed messages due to its gain image, we propose that nine-ending pricing strengthens the effectiveness of gain-framed messages (versus loss-framed messages) on the overall advertisement efficacy. The results of two experiments provide support for this hypothesis.     

Bridge,Focus, Attack,or Stimulate: Retail Category Management Strategies with a Store Brand

We investigate a monopolist retailer's category management strategy where the main strategic decisions are how to horizontally position a store brand relative to the incumbent national brands and how to price the store and national brands for retail category profit maximization. We analyze a market composed of two consumer segments with differing tastes and heterogeneity with respect to willingness to pay and a product category consisting of two competing national brands and one store brand. We find that contrary to the existing literature, it is not always optimal for a retailer to position its store brand against the leading national brand; instead there are many situations where it is best to position the store brand close to the weaker national brand or to position it in the “middle” so it appeals to both national brands' target segments. In the process we identify four distinct category management strategies that a retailer can use with a store brand. In three of these the optimal store brand price is the brand's monopoly price, while in the remaining one strategy the price is lower. We also suggest an easy to implement means for a retailer to determine which strategy is best to use, depending on the particular competitive environment present before the introduction of the store brand and the relative quality of the store brand. We find that the store brand entry is most beneficial to the retailer when the national brands are moderately differentiated. Finally we show that introducing a store brand not only allows the retailer to garner a higher share of the channel profits through higher retail margins, but also often provides the retailer the benefit of increases in national brand unit sales as well as incremental sales from the store brand. JEL Classification: M310     

Psychological pricing: Myth or reality? The impact of nine-ending prices on purchasing attitudes and brand revenue

Price is the variable through which the value proposition of brands is monetize, therefore, it is the driver that guarantees the sustainability and profitability of companies. Among different psychological pricing tactics that exist, prices ending in nine are the most accepted and used by practitioners as a strategy to penetrate markets; but this strategy should be carefully revised and applied as it is context dependent and has differential effects among categories and types of brands. Drawing on the importance of psychological pricing, the extended use of nine-ending prices and the identified need of a better understanding, this study validates the impact of such prices on the purchasing attitudes of consumers and the differentiated effect on revenue, among various brands and product categories, finding that this tactic significantly affects consumers' purchasing attitudes and brands’ revenue levels, but to a different extent, depending on the product category, the brand positioning and preference.     

Drivers of the synergy between price cuts and store flyer advertising at supermarkets and discounters

Despite retailers’ intense use of both price cuts and store flyer advertising, it is still unclear whether and when it is beneficial for retailers to combine the two promotion tools at the same time as opposed to using them separately. We systematically investigate synergies between price cuts and store flyers for a broad set of 488 brands from 44 consumer packaged goods categories across six leading German retailers. We find that a clear majority of the brands benefit from positive synergies and hence, combining price cuts and store flyer advertising is recommended, especially at supermarkets. This synergy can be strong. For instance, a 15 % price cut without store flyer support at a supermarket, on average, increases sales by 11 %, and medium spending on store flyers for the brand at its regular (non-promoted) price results in a sales lift of 8 %. The combined use of both tools, however, increases sales by 52 %, much more than the sum of their separate effects (11 % + 8 % = 19 %). Yet, there is also substantial variance in the synergy, which we explain with retailer format (supermarkets versus discounters) as well as various brand and category characteristics. Our findings have important implications for the coordination of promotion activities by retailers.     

Retailer Dynamic Pricing and Ordering Decisions: Category Management versus Brand-by-Brand Approaches

This paper provides a framework for retailer pricing and ordering decisions in a dynamic category management setting. In this regard, the key contributions of this paper are as follows. First, we develop a multi-brand ordering and pricing model that endogenizes retailer forward buying and maximizes profitability for the category. The model considers (i) manufacturer trade deals to retailers, (ii) ordering costs incurred by the retailer, (iii) retailer forward buying behavior, and (iv) both own- and cross-price effects of all the brands in the category. Second, we use this model to compare differences in ordering and pricing decisions, and in profits, resulting from using a category management versus a brand-by-brand management approach. Our approach allows us to derive implications in a dynamic setting about the impact of interdependence among the brands upon decisions on pass-through of trade deals and retailer order quantity. We show that category management results in noticeably higher profits versus brand-by-brand and cost-plus (markup) approaches. Further, our results suggest an interaction between a brand's own-price effect and its cross-price effect emerges. If the cross-price effect for a brand is low - that is, the brand takes away relatively few sales from the other brands - the retail pass-through should increase with that brand's own-price effect. On the other hand, when the cross-price effect is high, the retail pass-through decreases with the brand's own-price effect.     

Consumers’ choice of private label considering reference price and moderating effect

Retailers frequently place private labels (PLs) next to the top-moving sales national brands (NBs) and utilize comparative pricing that is related to the national brands. There is thus always an external reference price between the private labels and the national brands. In this study, two categories of products were selected, and a hierarchical non-linear model used to study the impact of external reference prices on consumers’ choice of private labels. In addition, the effects of package size and average disposable income (ADI) were introduced into the analysis for the relationship between external reference price and consumers’ choice of private label. The findings show an inverted U-shaped curve between consumers’ choice of private labels and the external reference price discrepancy. Consumers in areas with high ADI are more likely to buy private labels. Package size and ADI have different direct and moderating effects on two categories of products. This study contributes to reference dependence theory and category management.     

How category characteristics affect the number of store brands offered by the retailer: a model and empirical analysis

Our research examines why retailers offer, not one, but multiple store brands in some product categories. More specifically, we are interested in how certain product category characteristics affect the number of store brands. We model a product category consisting of two incumbent national brands that may differ in strength. The retailer may introduce one or two store brands depending on which maximizes category profits. Our analysis suggests that the retailer is likely to carry two store brands in categories where (i) the national brands are similar in strength; and (ii) the price sensitivity between the national brands is low. Interestingly, the conditions that support the introduction of more than one store brand are quite different than the conditions that would facilitate the introduction of additional national brands. We provide empirical evidence that support our model-based predictions.     

A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category

We develop an empirical model for the adoption process of a new durable product that accounts for consumer heterogeneity as well as consumers forward-looking behavior. Accounting for heterogeneity is important for two reasons. As the mix of consumers with different preferences and price sensitivities could change over time, firms need to update their marketing strategies. Further, it allows for a variety of shapes for the aggregate adoption process over time. As prices for durable and technology products fall over time with firms continually introducing enhanced products, consumers may anticipate these prices and improvements and delay their purchases in the product category. Forward-looking consumers optimize purchase timing by trading off their utilities from buying the product and their expectations on future prices, quality levels, and brand availability. Such forward-looking behavior will result in price dynamics in the marketplace as price changes today influence future purchases. And it results in different shapes of the new product sales pattern over time by influencing the time to take-off. We show how the parameters of our model can be estimated using aggregate data on the sales, prices, and attributes of brands in a product category. We apply our model to market data from the digital camera category. Our data are consistent with the presence of both heterogeneity and forward looking behavior among consumers. At the product category level, we are able to decompose the effects of the entry of Sony into primary demand expansion and switching from other brands. At the brand level, we find that there exist several segments in the market with different preferences for the brands and different price sensitivities leading to differences in adoption timing and brand choice across segments. For a given brand, we show how the changing customer mix over time has implications for that brands pricing strategies. We characterize how price effects vary across brands and over time and how price changes in a given time period influence sales in subsequent periods. Model comparison and validation results are also provided.     

Understanding the Characteristics of Price Elasticities for Frequently Purchased Packaged Goods

This study examines category and brand level factors of packaged goods to determine which ones are related to brand price elasticities. A new nonparametric method of elasticity calculation is presented that is suited to situations where detailed feature and display information is not available. To obtain results that lead to strong and reliable generalisations, we examine 26 categories and 110 brands using store level weekly scanner data. We also synthesise our results with four previous studies that have looked at determinants of price elasticities. Three factors consistently emerge as important drivers of elasticity. They are, competitive intensity in the category, whether or not the product is storable and the brand market share. A further, less certain, factor is the frequency of promotion activity, with categories and brands having more frequent promotions exhibiting lower sales increases when one or more of the brands price promotes.     

A cross-category investigation into the effects of nine-ending pricing on brand choice

Retailers largely adopt nine-ending prices and these prices have attracted greater attention from researchers in marketing. Despite this increased interest, very few empirical studies have tried to quantify the effects of nine-ending prices on consumer actual behaviors. Those who have studied the behavioral effects of nine-ending prices have produced mixed findings. In this article, we investigated the cross-category effects of nine-ending pricing on consumer brand choice at the SKU level. We distinguished between different types of nine-ending while controlling for the rounded prices and other marketing-mix variables. We conducted our analysis on over 11,000 SKUs in 102 product categories of two (2) grocery retailers. We find that the effects of 99 ending prices on the SKU's category choice are larger in concentrated and promotional categories but smaller in expensive categories. However, their influence on purchase quantity is larger in expensive categories but smaller in concentrated categories.     

Uniform pricing effect: The influence of uniform pricing on product value judgement and purchase intention

Uniform pricing, which is a pricing strategy that sets a unified price for all products in the store or all products in the same category, is becoming increasingly popular over the past decades. However, scarce attention has been paid to investigating its impact on consumer behaviour. This research investigates the influence of uniform pricing on product value judgements and purchase intentions. Four studies demonstrate that uniform pricing (vs. non-uniform pricing) could induce stronger promotion perception, which leads to more positive product value judgements and purchase intentions. Moreover, price sensitivity and product involvement moderate this effect, and this effect only exists for high price-sensitive consumers and low product involvement consumers.     

The Impact of Price-Based and New Product Promotions on Fast Food Restaurant Sales and Stock Prices

A key tool used in demand or revenue management marketing strategies is the application of pricing tactics based on anticipated demand to enhance both customer utility and maximize firm performance (Wirtz et al., 2003). In the restaurant segment, particularly in quick-service restaurants (QSR), organizations focus on two main promotion formats to attract customers: price-based promotions and new product promotions. The purpose of this article is to explore how the number of price-based promotions and new product promotions influence firm sales growth or decline and change in stock prices. Results suggest that new product promotions can have a significant and positive effect on same store sales, whereas price-based promotions tend to results in lower same-store sales changes and changes in stock price. As an additional control for these results, the study controls for economic and seasonal conditions effects.     

“One-deal-fits-all?” On Category Sales Promotion Effectiveness in Smaller versus Larger Supermarkets

Even within a store chain and format, supermarket outlets often exhibit substantial differences in selling surface. For chain managers, this raises the issue of correctly anticipating the promotion lift, and of profitably managing promotion activities, across these outlets. In this paper, we conceptualize why and how store size influences the category sales effectiveness of four promotional indicators (depth of the promotional discount, display support, feature support, and whether the promotion is quantity-based). We then estimate the net moderating effect on four product categories for 103 store outlets belonging to four chains. For each of the promotion instruments, we find the percentage sales increases to be lower in large stores. For instance, whereas a 10% point increase in feature activity enhances category sales by about 1.64% in a 700 m² store, this figure drops to only 1.03% in a 1300 m² store – a 59% reduction. This moderating effect is especially pronounced for discount depth, the relative sales lift from a typical price cut being about 78% lower in the larger-sized outlet. However, since large outlets also have larger base sales, the picture changes when we consider absolute sales effects. The net outcome is that deeper discounts or quantity-based promotions do not systematically generate larger or smaller absolute sales bumps in large stores, whereas for in-store displays and features, we obtain a clear positive (be it less than proportional) link between store size and absolute category sales lift. When it comes to margin implications, we show that large stores gain higher profit from price cuts than small outlets only as long as the retailer keeps part of the manufacturer discount to himself. Managers can use these insights to improve their promotional forecasts across outlets, as well as to tailor their mix of instruments to store selling surface.     

How Do Price Perceptions of Different Brand Types Affect Shopping Value and Store Loyalty?

This research investigates the relationships among price perceptions for different brand types (national brands, standard store brands, regional store brands, organic store brands), shopping value dimensions (quality, price, social, and emotion value), and store loyalty (retention and word of mouth (WOM)). A comprehensive model depicts determinants of customer store loyalty. Using structural equation modeling, the model test includes 671 consumers intercepted during shopping trips. The data analysis yields several surprising results. In particular, low product price perceptions do not necessarily signal negative store quality evaluations. Shopping value dimensions influence store retention loyalty and WOM behavior differently. Furthermore, different brand types exert distinct effects on the value creation process. Favorable prices for national and standard store brands have comparable positive effects on store price value and emotional value creation; appealing prices of regional store brands instead reduce the emotional value of the store, and low prices for organic store brand products significantly increase social value creation.     

To divide or not to divide? The impact of partitioned pricing on the informational and sacrifice effects of price

Firms often partition a product??s price into two mandatory parts (e.g., the base price of a mail-order DVD and the surcharge for shipping and handling) instead of charging one all-inclusive price. This study examines whether and to what extent partitioned pricing (compared to one all-inclusive price) influences the informational and sacrifice effects of price. We empirically show that partitioned pricing oppositely affects these two distinct roles of price: the informational effect of price (i.e., price as an indicator of quality) increases, while the sacrifice effect (i.e., price as a measure of sacrifice) becomes more negative. In product categories with substantial price?Cquality inferences, the positive impact of partitioned pricing on the informational effect can overcompensate for its negative impact on the sacrifice effect, making partitioned prices the preferable strategy.     

The influence of demand factors on dynamic competitive pricing strategy: An empirical study

This empirical paper investigates the relationship between the dynamic strategic interactions among competitors in a component market and demand factors in the market for the end product. The structure of competition in the US microprocessor (MPU) industry is analyzed using data on prices and sales in both the MPU market as well as the market for personal computers. The pattern of dynamic strategic interaction between competing firms in this market on a key decision variable, price is studied. Non-nested model comparison tests based on equilibrium solutions derived for specific differential games are applied to identify the mode of competitive strategy between pairs of competing brands. The empirical fit to the longitudinal and cross-sectional data, of alternative models of competition, independent (Bertrand?CNash), Stackelberg leader?Cfollower, and Collusion, is used to determine which dynamic model best describes actual competitive behavior over the life of each MPU. Demand for the product market which is downstream from microprocessors, that for personal computers, is estimated using a generalized diffusion model with price effects. Data from the markets for desktop and laptop computers are analyzed at the level of computer vendor and internal microprocessor. Patterns are uncovered, linking downstream demand parameters with upstream competitive strategy. There is evidence to suggest that when there are strong diffusion effects driving sales of both the competing computer brands, there is a higher likelihood of Bertrand?CNash competition among MPU firms. However, when there are higher cross-price effects (substitutability) among personal computer brands there is a greater chance of Stackelberg leader?Cfollower price competition. When self-price effects are relatively high, the likelihood of Bertrand?CNash competition among MPU firms increases. Furthermore, when the potential demand for the computer product category is high, there is a higher likelihood of Bertrand?CNash pricing in the MPU market.     

Distortion of price discount perceptions through the left-digit effect

Through two experiments, we examined the consumers’ process of comparison of regular and sale price information in advertisements. This is an extension of studies of the left-digit effect with different price levels and multiple digits conducted using Taiwanese data. First, we find that in a comparison of regular and sale prices, specifically three-digit integers with different leftmost digits, consumers perceive the price discount to be larger when the left digit is small (e.g., 1 or 4) than when it is large (e.g., 7). The lower the two prices being compared, the more likely it is that the left-digit effect will exist. Second, the perceived discount is likely to diminish when the number of digits is increased to produce a four-digit integer. In other words, the number of digits can affect perceptions of the numerical difference when comparing two prices. Thus, the effect of a left-digit change to produce a nine-ending price would be weaker for higher-priced products. The findings indicate the existence of a novel boundary to the left-digit effect.