Pricing practices: A critical review of their effects on consumer perceptions and behaviour

With the present challenge to compete on price or product assortment, retailers and manufacturers are increasingly focusing on state-of-the-art pricing strategies which have their roots in behavioural economics and psychology. The current review is an empirical investigation on the relative effectiveness of various pricing practices on consumer perceptions and behaviour. Six pricing strategies were reviewed; drip pricing, reference pricing, the use of the word ‘free’, bait pricing, bundling and time-limited offers. The review shows that the former three have received a significant amount of attention and have a robust impact on consumer perceptions and behaviour. There is less research on the latter three; however, the available evidence does suggest that they, too, may be capable of influencing consumers’ choices. Finally, it is also clear that the effects of pricing practices can be moderated by a variety of factors. Overall, the current review indicates that sellers are able to influence perceptions and purchase decisions of consumers based on the manner in which prices are displayed. The implications of these findings for retailers, policy makers and researchers are discussed.     

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.     

The characteristics of interest rates and stock variances implied in option prices

Using the Black-Scholes option pricing model, this study simultaneously estimates stock return variances and interest rates implied in market option prices. Results show that the shorter term options exhibit greater implied stock variances than do longer term options. Implied interest rates, however, appear to be constant over the different expirations. Overall, the implied interest rates exhibited higher correlations with Treasury bill rates than with other money market rates, but they were consistently about one-fourth higher than the Treasury bill rates.     

Export prices,selection into exporting and market size: Evidence from China and India

This paper empirically analyses the export pricing behaviour of Chinese and Indian exporters when there is selection into exporting. Previous exchange rate pass-through estimates that did not take selection into account could be biased if selection into exporting is correlated with pricing strategy. We use 6-digit product-level data across high- and low-income export destinations over the period 1994–2007 and assess a number of determinants of the degree of pass-through of exchange rates to export prices, such as the level of external demand, exporter’s wage cost, degree of competition in export markets, currency volatility and the direction of currency movements. We find systematic differences in the pricing strategies of Chinese and Indian exporters while uncovering a selection bias in exports to high-income markets, although the pricing of exports to low-income markets is independent of the decision to export. Export prices do not increase systematically with the destination market per capita income, and tend to be less sensitive in shipments to advanced nations. Export prices of India are sensitive to the volatility of the trade-weighted nominal effective exchange rate (NEER), indicating heterogeneity in prices to maintain competitiveness, but not in China as volatility is insignificant given a fixed currency system. It is also revealed that a country with a relatively flexible currency regime and arms-length trade such as India is more likely to exhibit incomplete pass-through, whereas a country with an inflexible currency system and involved in outward processing trade is more likely to have full pass-through as shown in the case of China.     

餐饮企业团购价格的合理确定

企业组织团购活动的目标主要有提升企业知名度、新产品的上市推广、薄利多销以及增加利润,实现不同的团购目标所采取的定价方法也是不一样的。对于以打开市场为组织团购目标的企业,可以采取亏损定价法;以上市推广位目的的企业采用捆绑定价法;以薄利多销为目的的企业可以采取捆绑定价法;以增加利润为目的的企业可以采取区分需求法。     

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.     

The promise and peril of dynamic targeted pricing

Dynamic pricing is widely adopted in many industries, such as travel and insurance. These industries are also gaining extensive capabilities in identifying and segmenting customers, partly fueled by the increasing availability of data. It is natural to ask whether firms should take advantage of such developments by charging different prices to different customer segments. If so, under what conditions? We seek answers to these highly managerially relevant questions.We consider a market with two customer segments served by a monopolist. The monopolist can choose among a set of pricing strategies to exploit consumers’ inter-temporal preferences and/or inter-segment variations. At one end of the spectrum, the firm can charge a constant price to all customers, which is called static pricing. At the other end of the spectrum, the firm can charge different prices to different customer segments and vary these prices over time, which is referred to as dynamic targeted pricing. We systematically compare these alternative pricing strategies. We show that dynamic pricing without targeting can be more effective than static targeted pricing when customers are not very forward looking, which corroborates the findings in the empirical literature. Interestingly, we find that the monopolist can be worse off when she adopts targeting in addition to dynamic pricing. We conduct laboratory experiments to test several key model predictions. The studies show that individuals behave in a manner consistent with the predictions of our model.     

Everyday “low price” or everyday “value”? The interactive effects of framing and construal level on consumer purchase intentions

Academic literature uses the term “everyday low price” (EDLP) when referring to a pricing strategy that offers relatively stable, low prices across a wide assortment of product categories. However, in real-world situations, many brands and retailers opt to use a different term – “everyday value” (EDV). Do consumers differentially evaluate such framings of the same pricing strategy? The present research draws upon construal level theory and demonstrates – across two experimental studies – that EDV (vs. EDLP) framing is more effective among consumers with high (but not low) construal levels. This effect is mediated by perceived benefit such that consumers with high construal levels derive higher levels of perceived benefit when evaluating a product promoted with an EDV (vs. EDLP) framing. The findings of this research can be useful for marketers and retailers in promoting and framing the EDLP (or EDV) pricing strategies in their advertising and marketing communications.     

Feste Benzinpreise für einen Tag — Mehr Preiswettbewerb durch die 24h-Regel?

The German Cartel Office’s recent study of retail gasoline markets provides strong evidence of an oligopoly in which the major suppliers coordinate pricing strategies and achieve supracompetitive prices. Competition law enforcement does not provide effective tools to improve market outcomes. We examine the potential benefits of a regulatory framework that would require gasoline suppliers to announce at a specified time their prices for the following day and prohibit price changes during a 24-hour period. Such a 24-hour rule could complicate coordination and lead to lower prices, although it cannot be ruled out that the oligopolists would adjust and develop new coordination strategies.     

Consumer willingness to pay across retail channels

Published research examining differences in consumer willingness to pay for products at omnichannel and pure-play online retailers is based on non-durable, search products and is equivocal; prices at pure-play online retailers are not always lower. This research examines differences in consumer willingness to pay for online purchases of functional and expressive products that differ in the length of product life, i.e. durable and nondurables at omnichannel versus pure play online retailers. Empirical analysis of consumer-centric, multi-site clickstream data of prices paid show that consumers are willing to pay higher prices for home goods products at omnichannel retailers compared to pure-play online retailers but differ for functional and expressive products. Implications are drawn to assist both omnichannel and PPO retailers in their pricing strategies.     

Mixed pricing in online marketplaces

A rich theory literature predicts mixed strategies in posted prices due to standard price discrimination, search frictions, and various other rationales. While typically interpreted as implying occasional sales or price dispersion, online marketplaces enable a firm to truly use randomization as a tool in pricing, and so such behavior should be expected to arise in online settings. We investigate a case of mixed pricing across a large subset of products on a major e-commerce website. We first test for randomizing behavior, and then construct a model of price discrimination that would generate randomization as optimal behavior. We estimate the model and use it to assess pricing effects of a proposed merger in the industry.     

Consumers’ preference modeling to price bundle offers in the telecommunications industry: a game with competition among operators

Network operators are merging their services, such as fixed or wireless telephony, internet or television, into single offers, called bundles. It is essential to understand consumers’ preferences to define the most profitable bundles, with their associated prices, especially in the fierce competitive current market. We start by defining a random linear utility model and then, analyze the competition between an integrated operator and new entrants proposing substitutable services. Each operator ignores the consumers’ reservation prices for his offers and has to deal with uncertainties about the marketing strategies of competitors, due to potential different size and cost structure. A two-level game is introduced and solved by backward induction. In the second level, the operators determine their optimal offer prices for each possible combination of marketing strategies while the consumers select their most profitable purchasing processes; the natural framework is that of Bayesian game theory. Finally at the top level, knowing the outcome of the other level, the operators identify which marketing strategy to use between market share expansion, segment targeting or multi-level price discrimination, to maximize their expected utilities conditionally to their private informations.     

Do Consumers Care about how Prices are Set?

Using a survey approach, we ask consumers to reveal their preferences over pricing schemes that may differ in terms of the average price of consumption, the amount of price variation, and the probability of being rationed. We find that consumers dislike pricing schemes that vary prices more but that they are willing to trade off price variation and rationing. Surprisingly, they are not willing to trade off an increase in price variation for a decrease in expected prices. We discuss the implications of these findings for firm pricing policies.     

Price competition during and after promotions

We provide a framework for setting regular prices and using promotional discounts in a duopoly where long‐term promotional effects are present and the firms' pricing and promotional strategies are common knowledge (e.g., as in online markets). We show that at equilibrium, the two firms may not promote and instead adopt an Everyday Low Price (EDLP) strategy. Consumers' tendency to stockpile promoted products, the level of brand loyalty and product differentiation, and the possibility of a postpromotional sales increase critically influence regular prices, price discount rates, and profits. Under some conditions consumer stockpiling intensifies promotional competition and reduces firms' profits while the possibility of attracting new consumers reduces the need to heavily promote and ensures better profits. Managerial implications are discussed. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.     

The price is right? Guidelines for pricing to enhance profitability

Pricing is a key element of the marketing strategy. It does not require significant investments or resources, and is perhaps the most accessible lever to manage profitability. Even minor fluctuations in pricing can have a significant impact on both revenues and profitability. As such, lack of careful planning in pricing is a wasted opportunity. With this as a backdrop, we make a case for precision in pricing to enhance profitability. Since consumers vary in their preferences, motivations, and propensity to spend, they assign varying degrees of emphasis regarding price upon their purchase decisions. We argue that pricing is a creative exercise in math and behavioral economics, and companies should stay focused on profits. We also provide a series of guidelines for creating effective base prices, and then modifying them to enhance profitability. Finally, monitoring prices at the transaction level will reduce leakage in profits and further add to the bottom line.     

Hedonic study on mobile telephony market in France: pricing–quality strategies

This paper provides a hedonic price analysis of mobile telephony services for the French market. We adopt the hedonic price theory to examine the relationship between changes in price levels and the evolution of the market for mobile telecommunications industry in France from June 1996 to December 2002. The results support the hypothesis that there was price competition between service providers in the earlier period. There were also large differences in prices set by individual service providers which, however, did not persist over time. Next, using estimates from hedonic-price equation for each operator separately, we found that the three-mobile providers seemed to adopt similar pricing strategies over the period 1996–2002. Quality indexes are also calculated. The results of a comparative analysis indicate that in the period 2000–2002 neither the quality nor the price indexes show significant changes for the three mobile providers. These results are of some consequence, especially after the French competition authority decision in December 2005 which stated the existence of collusion on the mobile market during the same period (2000–2002). Surprisingly, our primer results supporting the assumption of potential collusive conduct in France are not re-affirmed when comparing the French and German markets.     

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.     

Effects of price reframing tactics on consumer perceptions

This article compares the effects of three pricing tactics—temporal reframing of prices (TRP), measure-based unit pricing (UP), and usage-based UP—on various consumer perceptions. Although these tactics are similar as they all reframe retail prices to a smaller amount, dissimilarity also exists as the respective units used for calculating these reframed prices differ. A laboratory experiment was performed to draw comparisons among the three types in a context of print advertisement. The results suggest that usage-based UP provided the most beneficial information for consumers; however, the differences between usage-based UP and TRP were not substantial.     

Per piece or per kilogram? Default-unit effects in retailing

Retailers offer a variety of products either per unit or per weight. Depending on the product category, consumers may find either one of these pricing strategies typical and the default. Especially online retailers are increasingly using unit-based prices, which is the non-default for many produce categories. So far, consequences resulting from non-default pricing strategies are unclear. This study addresses the questions of whether and how pricing strategies affect consumer behavior. In a series of four experiments, we show that default pricing strategies exist in the marketplace and that consumers prefer products that retailers offer using default pricing strategies. We also demonstrate that this behavior is due to uncertainty issues when assessing prices in non-default pricing strategies. Furthermore, we elaborate on the influence of weight expectations and explicitly stated weight information on this default-unit effect. The findings suggest that retailers can mitigate negative effects resulting from non-default pricing strategies by providing weight information.