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In his book on Pricing, Kent Monroe (2003) opens with an
old Russian proverb: “There are two fools in any market: One
does not charge enough. The other charges too much.” That
adage continues to be true. Sellers are unsure of how high a
price is high enough. How much is too much. As a result,
many companies still use simplistic formulae to determine
their pricing structures rather than struggle with the problem
of getting the price right.
Getting the price right is, however, crucial to profitability.
Just a small price increase can have a dramatic effect. In their
book, Power Pricing, Dolan and Simon (1996) point out that a
1 percent price increase would boost net income by 6.4
percent at Coca-Cola, by 16.7 percent at Fuji Photo, by 17.5
percent at Nestle, by 26 percent at Ford and by 28.7 percent
at Philips. These numbers indicate the critical need for astute
price management.
Fortunately, we see signs that price management is
becoming more sophisticated. In executive MBA courses,
we now have students with “Pricing manager” titles. Business
education is now including pricing courses, and there are at
least five pricing textbooks on the market. Professional groups
like Informa hold pricing workshops. And academic
researchers spend more time investigating pricing problems.
In 2004, ABI-Inform cited 475 marketing articles on pricing
research compared to 354 in 1994.
A major change in pricing research has been the shift away
from the economic assumption of a rational buyer, the selfinterested
profit maximizer who searches out all the necessary
information to make an informed price choice. The new
researchers recognize that consumers have difficulty
processing prices accurately. They rely on cues to signal
additional information and utilize heuristics to evaluate prices
offered in the marketplace. They make comparative rather
than absolute judgments and are influenced by subjective
emotions as well as rational analysis.
These new pricing researchers, following the lead of Kent
Monroe, have founded a new field of behavioral pricing. Their
approach is based on the psychological principles of human
perception and information processing as well as on
sociological principles of human relations and social norms.
In this special pricing issue of the Journal of Product & Brand
Management, we feature several researchers who have
contributed to this new field of behavioral pricing. Their
research demonstrates the international scope of this
emerging field and was conducted across the globe in
countries such as Australia, France, Greece, and the USA.
In the first article, Donald Lichtenstein, reviews how sellers
can take advantage of consumers’ misperceptions. Based on
his 2004 acceptance speech for the “Lifetime achievement in
pricing research” at the Fordham Pricing Conference, in this
paper he shows that, despite what your mother told you, you
do not always get what you pay for. In addition, consumers’
evaluation of a reasonable price is influenced by advertised reference prices even when these prices are outside believable
ranges.
The second article is an analysis of the differences between
the marketing and economics approaches to price. Skouras,
Avlonitis and Indounas compare the all-embracing approach
of marketing to the narrow approach of traditional economics.
Whereas marketing draws on psychology, sociology and
anthropology, as well as economics, traditional economics has
focused primarily on its own theoretical constructs.
Traditional economics assumes that the consumer is
rational, whereas marketing assumes anything but. Although
the authors recognize the contribution of the new behavioral
economists, they conclude it doubtful they will “make an
impression beyond the fringe of the discipline.”
In an invited response to Skouras, Avlonitis and Indounas,
Donald Cox, himself a behavioral economist, spreads the
good news that behavioral economics is not going away
anytime soon. He cites the many interesting new questions
that behavioral economists are posing and shows how they are
using sound scientific methods to support their conclusions,
as well as to challenge and refute them. From our viewpoint
as Associate Editors of the Journal of Product & Brand
Management, it seems that both marketing and behavioral
economics have a lot to contribute to the difficult task of
understanding consumers’ pricing decisions.
One aspect of consumers’ irrationality is investigated in the
third article by Barat and Paswan. They research how
coupons influence purchase intentions and find that a higher
face value of a coupon results in higher purchase intention,
but subject to a threshold. At that coupon face value threshold
point, it appears that the high face value of the coupon acts as
a cue for the price of the good and makes it appear expensive.
Hence, purchase intentions level off. In addition, they have
found that a higher exposure to coupons results in higher
redemption rates, as if consumers learn the benefits of using
coupons.
The next article demonstrates that consumers can also act
rationally with economic self-interest as a primary motivation.
The Mather, Knight and Holdsworth article reports research
conducted in Australia where genetically modified produce
has been highly controversial. The authors find, however, that
when given a financial incentive, consumers will overcome
their negative attitude and still purchase genetically modified
food. The research demonstrates the unique role that price
may have in shifting traditional consumer tastes and patterns
of behavior.
The final article is by Desmet and Le Nagard examines the
effects of specific forms of price guarantees on consumers’
price perceptions. The paper extends current research on
price-matching guarantees by studying the effect of pricebeating
guarantees whereby the retailer not only matches
prices of competing stores, but also imposes a form of selfpunishment
by providing a refund in excess of the price
difference. The authors find the disproportionate effect of
price-beating guarantees on consumer post-purchase price
perceptions and behavior and provide practical prescriptive
directions on the use of price-beating guarantees.
The Associate Editors would like to take this opportunity to
thank the many people, including our managing editor
Richard Whitfield, who have helped us develop the Special
Pricing Section of the Journal of Product & Brand Management.
Our Editorial Board provides an invaluable service. Over the
past few years, they have been instrumental in moving the
pricing section of the journal forward, and as Associate
Editors we could hardly complete our responsibilities without their daily support. The support of the following reviewers is
therefore gratefully acknowledged.
Sarah Maxwell and Hooman Estelami
Previously published in: Journal of Product and Brand Management, Volume 14, Number 6, 2005
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Emerald Group Publishing Limited; October 2005
48 pages; ISBN 9781845448189
Read online, or download in secure PDF format
48 pages; ISBN 9781845448189
Read online, or download in secure PDF format
