The impact of household level heterogeneity in reference price effects on optimal retailer pricing policies

The field of marketing has witnessed substantial improvement in modeling household level heterogeneity. However, relatively little has been written about how modeling household heterogeneity translates into better marketing decisions. In this paper, we study the impact of household level heterogeneity in reference price effects on a retailer's pricing policy. Reference prices are certain anchors or standards that households use to compare the observed purchase price of a product against. If the observed price is greater than the reference price it is perceived as a “loss” and if it is smaller than the reference price it is perceived as a “gain”. In order to study the impact of heterogeneity in reference price effects on retail pricing, we test a nested logit model under two alternative reference price (memory and stimulus based) and heterogeneity (finite mixture and hierarchical Bayes) specifications. In the empirical analysis, we find that households are quite heterogeneous in terms of their gain and loss effects. For some households a gain has higher impact than a corresponding loss, while the opposite is true for others. Using individual level estimates we then develop a normative pricing policy for a retailer maximizing category profit. Our results indicate that the optimal pricing policy derived from the heterogeneous case is qualitatively different, and more profitable, than the case when heterogeneity is ignored. We show that for an important marketing problem pertaining to a retailer, the optimal pricing decisions for various brands in a category are inextricably related to household heterogeneity in reference effects and brand preference.     

The role of brand strength,type, image and product-category fit in retail brand collaborations

Retailer brand collaborations are an underexploited way for retailers to expand product lines and target new segments relatively quickly and cheaply, yet little work has explored the area and the influence of important factors in the image inheritance process remains unknown. Using data from two experiments involving 240 subjects, we examine the role of brand type, brand strength and the fit between parent and brand collaboration product categories to show that a new retail product's image inherits more characteristics from a symbolic parent brand (even when the brand is weak) and when there are higher degrees of parent retailer-image fit. However, fit between the new retail collaboration's product category and that of the parent brands is only important for functional brands. The results help retailers decide which partner to choose to maximize image inheritance.     

Pricing strategy and the formation and evolution of reference price perceptions in new product categories

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.     

Brand-Pack Size Cannibalization Arising from Temporary Price Promotions

This study investigates how price promotions for one pack-size of a brand steal sales from the other pack-sizes of the same brand. To do so, the study examines twelve grocery product categories (seven US, three UK, two Australian). The analysis finds heavy cross-pack cannibalization. On average, 22 percent of the sales uplift for a promoted brand-pack size comes from other pack sizes of the same brand. Cross-pack cannibalization most typically occurs in the week of the promotion, but also transfers future week's sales away from the non-promoted pack size in 31 percent of cases. The study finds higher cannibalization is associated with packs that sell for a higher dollar value than others sold under the same brand; whereas higher price-per-weight, a packaging difference, and the item having a larger relative share of sales in the brand portfolio, are linked to lower cannibalization. Also examined is the impact of pack-size cannibalization on promotion profitability for retailer PLs. That analysis finds PL price promotions have generally negative impacts on PL profits, and that pack-size cannibalization exacerbates this negative outcome. The results suggest both retailers and manufacturers should carefully consider pack-size cannibalization when evaluating the outcome of temporary price promotions. The study also provides some evidence-based recommendations from which managers can attempt to minimize such cannibalization.     

Role of Retailer Positioning and Product Category on the Relationship Between Store Brand Consumption and Store Loyalty

Recent empirical evidence regarding the relationship between store brand purchase and store loyalty suggests a nonmonotonic relationship (inverted U): positive up to a certain store brand consumption level, after which it becomes negative. To investigate this idea further, this research analyzes the role of (1) the retailer's competitive positioning, and specifically its price positioning, and (2) the product category. On the one hand, the more price oriented the retailer's positioning, the more favorable is the relationship between store brand consumption and store loyalty. The threshold level of store brand purchasing at which the relationship becomes negative occurs later, and this negative relationship is less prominent. On the other hand, the relationship between store brand consumption and store loyalty appears to differ across product categories as a consequence of several factors, including perceived risk. The relationship therefore appears more favorable for risky categories. An empirical study of ten retailers that adopt different price positions corroborates these propositions.     

Effects of prior brand usage and promotion on consumer promotional response

We examine how prior purchases influence consumer response to promotional activity in brand choice decisions. To improve understanding of the nature of this influence, we separate previous purchases into those on promotion and those not on promotion, and consider their differential impact on subsequent brand choices. Impact may be observed at the brand level, category level, or both and we suggest circumstances in which each might occur. Across four product categories, consumer sensitivity to price, price promotions, and feature advertisements increases for all brands in the product category following a promotional purchase but also decreases for the most recently purchased brand. The magnitudes of the results indicate that prior promotional purchases influence choice more than prior brand usage does. We offer managerial recommendations regarding promotional activities, for both retailers and manufacturers.     

Category-specific coupon proneness: The impact of individual characteristics and category-specific variables

In seeking to enhance the effectiveness of coupon promotions, researchers have long sought to identify “coupon prone” consumers. Previous measures of coupon proneness have not examined differences in coupon usage across product categories and have ignored the confounding effect of coupon attractiveness. An Item Response Theory (IRT)-based framework overcomes these limitations and yields category-specific estimates of propensity to redeem coupons that are independent of coupon attractiveness. The authors utilize an IRT-based model to estimate consumers’ category-specific propensities to redeem coupons for two product and two service categories, and investigate how coupon proneness varies across consumers and across categories as a function of individual characteristics and category-specific variables.The authors find that category-specific measures of propensity to redeem coupons achieve an average accuracy of 89 percent in predicting redemption intentions. Propensity to redeem coupons is also found to be related to category-specific brand loyalty and perceived coupon availability, as well as to individual characteristics such as general coupon proneness, value consciousness and price consciousness. These findings highlight the importance of studying coupon proneness at the category level and suggest that the IRT-based approach has considerable promise as a methodology for studying coupon usage. Using the approach proposed in this study, marketers can forecast the impact coupons are likely to have in their particular category, rather than relying on general coupon proneness measures to predict coupon redemption rates at the category level. The study's findings can also be used to identify categories and consumer segments where coupon promotions are likely to have a larger impact, and have important implications for managers planning joint couponing strategies.     

The role of product brand image and online store image on perceived risks and online purchase intentions for apparel

Purchase intentions for apparel products often require physical examination prior to purchase. Hence, greater risk is associated with shopping online for apparel products, making it important to examine factors that reduce various risks influencing online purchase intentions. This study examines and compares the impact of two of the most important risk reducers for online apparel shopping – product brand image and online store image – on specific types of perceived risks and online purchase intentions for apparel. The results show that product brand image influences consumers' online purchase intentions both directly and indirectly by reducing various risk perceptions. Online store image impacts purchase intentions indirectly by decreasing risk perceptions. The results of this study provide fresh insight into understanding the impact of product brand image and online store image on each type of perceived risk associated with online shopping.     

The effects of product knowledge on the evaluation of warranteed brands

This study explores the effects of consumer knowledge on respondents' evaluations of both known and unknown brands that include either a 2-year or a 20-year warranty. Both experts and nonexperts evaluated warranty as more important than brand name in their product quality decision. Warranty length was positively correlated with product quality perceptions for both known and unknown brands. With the unknown brand, nonexperts perceived significant improvement in product quality when the warranty length was increased from 2 to 20 years. For the known brand, nonexperts perceived little difference in quality for the two warranty lengths. Experts indicated no significant differences in perceived quality, given the four brand/warranty-length conditions. The results indicate that warranty length is most heavily weighted as a cue to product quality when consumers are not highly knowledgeable, and the brand name is not well known. © 1996 John Wiley & Sons, Inc.     

Attitude formation from product trial: Distinct roles of cognition and affect for hedonic and functional products

Affective and cognitive responses to a product trial are examined in an experiment containing two cells representing two product types: hedonic and functional. The stimulus products were a computer game and grammar‐checking software. Forty‐two college students comprised the sample for the experiment. The specific affective responses studied are pleasure and arousal, and brand cognitions are represented as the expectancy value from brand attributes (the product of brand beliefs, belief confidence, and attribute evaluations, summed across the attributes (σ b_ic_ie_i)). The relative level and influence of affective and cognitive responses to a product trial were shown to differ significantly, depending on whether the product was hedonic or functional in nature. Specifically, for the hedonic product, felt arousal during the trial was higher than for the functional product, and emotional responses were significant antecedents of subjects' evaluations of the trial experience. Brand cognitions, however, were not significantly related to trial evaluations for the hedonic product. In contrast, for the functional product, brand cognitions and pleasure were significant antecedents of trial evaluations, but arousal was not. The findings of this study demonstrate the importance of considering both the cognitive structure created by a product trial and the consumer's emotional reactions to the trial. For hedonic products, especially, emotional responses to the trial were shown to be powerful antecedents to consumers' evaluations of a trial experience, and subsequently, brand attitude. Marketers and marketing researchers can use these results to predict which category of responses to product trial (affective or cognitive) will be most important for brand evaluation for the particular product in question. This knowledge may also enable marketers to manipulate aspects of a product trial that are most influential on the set of trial responses that this study has shown to significantly affect brand evaluation for that product type. © 1999 John Wiley & Sons, Inc.     

The value of private label brands to U.S. consumers: An objective and subjective assessment

This study investigates the value of private label brands to consumers using two approaches: First, subjective evaluations of the perceived relationships between price and quality for private label (PL) brand and national brand (NB) products based on survey responses; and second, objective measures of price and quality for PLs and NBs widely available in the U.S. Price was generally perceived to be a signal of quality for NBs, but not for PLs, an indication that consumers' knowledge may not have kept pace with quality improvement in PLs. Objective estimation of the quality gap potentially existing between PLs and NBs determined that the “quality premium” of NBs observed in the past has largely disappeared. Consumers, notwithstanding, sought a lower purchase price for PLs. In turn, the higher price they were willing to pay for NBs accorded with estimates of the actual “price premium” associated with NBs.     

The role of brand exposure and experience on brand recall—Product durables vis-à-vis FMCG

The purpose of this study was to examine the role of brand exposure and experience on brand recall, mediated by three affectional drivers: brand trust, brand image and self-image congruence. The study distinguishes between an individual consumer׳s brand exposure and experience, and how these impact brand recall. Using original data collected from a survey of 219 consumers, brand recall models in two product categories (Fast Moving Consumer Goods FMCG and durable goods) were tested. Structural equation modelling (SEM) was applied, resulting in models for the two types of goods, establishing notable differences between durables and FMCGs. Experience influences brand recall in durable goods while brand recall is established via exposure for fast-moving consumer goods. This suggests that consumers are better able to recall durable goods brands if they have personally used them, while consumers of FMCG are more heavily influenced by advertising. Our study also established that brand trust has a significant role in mediating both of these relationships. Ultimately, the study establishes key differences between the brand recall of product categories, as well as the mediating role of brand trust, providing a framework for future brand recall research.     

Multi-stage purchase decision models: Accommodating response heterogeneity, common demand shocks, and endogeneity using disaggregate data

The most comprehensive models of purchase behavior for frequently purchased supermarket items explain households' purchase incidence decisions (whether to buy), brand choice decisions (what to buy), and purchase quantity decisions (how much to buy). In this study, we develop a three-stage purchase incidence/brand choice/purchase quantity model for household-level data in which all three stages are specified with (i) random coefficient distributions for model covariates and (ii) random effect distributions to account for unobserved factors affecting demand (known as common demand shocks), while also (iii) controlling for the effects of endogeneity on prices. Compared to current state-of-the-art models for multi-stage purchase decisions, the results show improvements in fit and forecasting accuracy when purchase behaviors are modeled with all of these components in combination. Perhaps more importantly, when common demand shocks are ignored, substantial differences in parameter estimates and diagnostic information about consumer behavior are likely (median differences in parameter estimates are 10% and 20% in two product categories), which impact managerial deliberations about price and promotion policies. Further, failure to account for common demand shocks affects the mean and variance of random coefficient distributions in unpredictable directions, which could produce results that encourage managers to pursue inappropriate and costly micro-level product marketing strategies.     

Retail shopping lists: Reassessment and new insights

The paper addresses consumers' shopping lists. The current study is based on a survey of 871 lists collected at retail grocery stores. Most items on shopping lists appear on the product category level rather than the brand level. The importance of the brand level varies considerably across product categories. An association between the frequency of a brand's appearance on lists and the amount of money spent on advertising the brand could not be found. A strong link between brands, prices and store names is revealed. Price in the majority of cases refers to brands rather than to product categories. The paper ends with a discussion and with suggestions for future research.     

Modeling Dependencies in Brand Choice Outcomes Across Complementary Categories

We build an econometric model of a household's contemporaneous brand choice outcomes in complementary product categories. This model explicitly captures cross-category dependencies in brand choice outcomes of a household. Such dependencies have not been modeled in existing multi-category demand models.Our model accommodates cross-category dependencies that arise on account of three component effects: (1) complementarity due to the additional utility that a household derives from the joint purchase of brands in complementary categories, (2) marketing spillovers due to the effects of brands’ prices in one category affecting the households’ latent utilities for brands in the complementary category, (3) unobserved dependencies due to correlations in households’ latent utilities for brands across categories.We estimate our proposed multi-category brand choice model using scanner panel data on cake mix and frosting categories. We find that complementarity accounts for the vast majority of the estimated cross-category effects in demand. We also find that as much as 55 percent of the total retail profit impact of price promotions arise on account of brand-level (focus of our study), as opposed to category-level (focus of previous studies), dependencies in household demand. Finally, we propose an easily interpretable visual representation – Largess and Free-Ride Plot – of cross-category price elasticities that summarizes the differential abilities of brands to influence, or be influenced by, brands in the complementary category.     

Patterns of consumer response to retail price differentials

Decomposing price elasticity suggests that the major impact of promotions is on brand switching rather than increased consumption. Consumers may also buy smaller quantities of more expensive brands when compared to cheaper ones (inter-brand elasticity). Using panel data for the purchases of 80 consumers buying nine product categories over a 16-week period, we verified that inter-brand elasticities occur, and report the relative importance of intra- and inter-brand elasticities in determining quantity price elasticity per shopping occasion for the product category. Brands were classified by informational (socially mediated) and utilitarian (product-mediated) benefits. Intra-brand elasticity was higher than utilitarian inter-brand elasticity, which was higher than informational inter-brand elasticity.     

Adolescent Evaluations of Brand Extensions: The Influence of Reference Group

This study examines the reference group effect on adolescent evaluations of brand extension. Three factors are important to this process: the product fit between parent and extension category (similar vs. dissimilar), the consumption type of the extension product (public vs. private), and the parent brand image (prestige‐oriented vs. functional‐oriented). An experiment with 217 teenagers generally supports the hypotheses. Results suggest that adolescents are willing to pay a higher price premium to publicly consumed brand extension product than a privately consumed. In addition, the level of category similarity enhances the consumption type effect. Managerial implications on brand extension strategy in adolescent's market are discussed.     

Internal reference price response across store formats

Reference price models have a long tradition in marketing and consumer research. Pricing strategies can utilize consumer response to gains and losses relative to internal reference prices, which are price expectations developed from past-observed prices. Consequently, many previous studies have been devoted to analyzing differences in internal reference price response across product categories and consumer characteristics. However, knowledge about internal reference price response across different store formats is missing. Our study aims to fill this research gap. To do so, we estimate a reference price model for the same set of brands and the same sample of consumers across two store formats (discount chain vs. supermarket chain). The prices for the brands in our model are similar across store formats. Results from our proposed model show that the same consumers are loss-averse at the discount chain while gain-seeking at the supermarket chain. Predicted by previous literature, we attribute the difference in internal reference price response to the different price image of the store formats. Overall, our research contributes to the reference price literature and provides important implications for pricing strategies at stores with different price image.     

Consumer attitudes and loyalty towards private brands

Private or store brands improve the efficiency of consumer decision making by offering equivalent quality products at lower prices. The present study evaluated consumer attitudes towards private brands with the goal of understanding their appeal in order to enhance efforts to convince more consumers to buy them. We used three samples (ns = 279, 245 and 305) of US consumers to compare attitudes of buyers of private and national brands in three product categories: orange juice, cereal and bottled water. The results show that private label buyers (23% of orange juice, 6.5% of cereal and 14% of bottled water buyers) consider brands themselves to be less important and private brands to offer better performance than do national brand buyers. When asked about specific brands, national brand buyers tended to be price insensitive towards national brands, and private label buyers price insensitive towards store brands. In addition, the national brand buyers saw some of the national brands to be more relevant to their lifestyles and needs, but the private label buyers saw the private labels the same way. Being relevant to consumers' lives appears to influence brand selection. Besides touting lower prices, private brand promotions might stress the equivalent performance of private labels and create promotions showing how these brands can be relevant to consumers' lifestyles and needs.