Reference Pricing

Since consumers have a memory, the carrier of price is not only based on its absolute level, but rather on its deviation from some reference level resulting from the pricing history. As customers revisit the firm, they develop price expectations, which become a benchmark against which current prices are compared. A formulation that captures this effect is called reference price.( Gurumurthy et al 1995)

Reference pricing, in simple terms, is known as that price which users compare with the price of a competitor’s product or the previously advertised price. Usually, reference pricing can be Internal (developed in buyer’s mind through expereince with product) or External (comparison price provided by others).

For company who use reference pricing, they actually sell goods at a price which is below the main price of its competitor. This can be a key benefit as most rational shopper wants to buy a product or a service if its price first matches his or her perceived value.

You can really see the company ‘H&M’ utilize this strategy to sell its product:

H&M is a clothing retail company known for its fast-fashion clothing.The picture above shown that is an event called ‘$5 SUMMER SALE HAUL’ organized by the company. The main fuction of this event is to clear the outdated/ overstocked inventory from H&M. During the sales, every machandise in H&M has their original price and reduced price in the price tag.The reduced price is the amount that buyers need to pay.

In my opinion, this is the great use of reference pricing as H&M don’t need to tell buyers how much they save but the buyer can just subtract the new price from the original price. This would make the buyer feel like he/she is getting a bargain and intentionally influence in buyer’s purchase decision. In the meantime, buyer will feel earned and satisfied as H&M’s merchandises are reactively pricey if no discount is provided.

Another proninent examples concerns Tesco.

Pictures above is the latest promotion run by Tesco Malaysia in favor of Ramadhan Month. In the catalogue, Tesco has shown buyers the original price and reduced price simultaneously. This is to let buyer know how much they actually save if they buy it during the dates (16-29 May). If the price is below the reference price, the observed price is lower than anticipated, it will make the buyer resulting in a perceived gain. This would make a purchase more attractive and raise demand and result in the buyer make a decision to purchase it now.

Usually, Tesco like to set a high reference pricing for its product and later offer discount. This would make the consumers think they are getting a good deal because they have a disocunt on the reference price.

Another example which I can relates to is Zalora e-retailer.

Zalora is an online retailer which sells clothings on different brands and also its own brand. I found out the company has use the reference pricing succesfully in their websites. Zalora show buyers the original price and the ‘now’ price(which is the discounted price) .This action can stimulate buyers don’t hesitate and buy it now in order to enjoy the benefit of the lower price.Putting the ‘now’ price in red colours font is believe to catch the awareness of buyers.

After studying all of this, we can tell that reference pricing can be a good strategy to stimulate sales if marketer utilise it correctly.

References:

G. Giuliani, G. Selkeb, L. Garattini 1998 ‘The German experience in reference pricing’, vol. 44, issue 1, pp.73-85, accessed 22 May 2019 https://www.sciencedirect.com/science/article/pii/S0168851098000128

G. Kalynaram, R.S. Winer 1995 ‘Empirical Generalizations from Reference Price Research’, Vol. 14, No. 3, pp. 161-169, accessed 22 May 2019
https://www-jstor-org.ezproxy.uow.edu.au/stable/184158?Search=yes&resultItemClick=true&searchText=Empirical&searchText=Generalizations&searchText=from&searchText=Reference&searchText=Price&searchText=Research&searchUri=%2Faction%2FdoBasicSearch%3Ffilter%3D%26amp%3BQuery%3DEmpirical%2BGeneralizations%2Bfrom%2BReference%2BPrice%2BResearch&ab_segments=0%2Fdefault-2%2Fcontrol&refreqid=search%3A700cd71ddfb2978f181bc344b1aa2b56&seq=1#metadata_info_tab_contents

J.Blechar, I.D. Constantiou & J. Damsgaard 2006 ‘Exploring the influence of reference situations and reference pricing on mobile service user behaviour’ ,pp. 285-291, accessed 22 May 2019 https://www.tandfonline.com/doi/abs/10.1057/palgrave.ejis.3000618

L.G. Heersink 2009 ‘ Models in Marketing Literature’, pp. 41-52, accessed 22 May 2019 https://www-jstor-org.ezproxy.uow.edu.au/stable/j.ctv9hj8x8.5?Search=yes&resultItemClick=true&searchText=Models&searchText=in&searchText=Marketing&searchText=Literature&searchUri=%2Faction%2FdoBasicSearch%3FQuery%3D%2BModels%2Bin%2BMarketing%2BLiterature%26amp%3Bfilter%3D&ab_segments=0%2Fdefault-2%2Fcontrol&seq=1#metadata_info_tab_contents