Academic journal article International Review of Management and Business Research

Effects of Reference Pricing on Customer Purchasing Intention

Academic journal article International Review of Management and Business Research

Effects of Reference Pricing on Customer Purchasing Intention

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Generally, customers often set their price expectations prior to purchasing a product or service. According to Lewis and Shoemaker (1997), these price expectations are used as reference points to compare prices and make purchasing decisions. Reference pricing can be simply defined as the amount customers expect to pay for a product or service (Kalwani, Yim, Rinne and Sugita, 1990).

Companies use reference pricing when they compare the actual selling price to an internal or external reference price. All customers use internal reference pricing; the internal expectation of what a product should cost. It can also be used to refer to a customer's memory in terms of the cost, or advertising that product or service. As consumers, our experiences provided us with a reasonable expectation of how much we should pay for common products, such as a meal, or a television, laptop... When it comes to common purchases, internal reference prices are critically important. However, some customers may have little experience with certain products, especially in services where intangibility and heterogeneity make it difficult for the customer to judge the appropriate price. In those situations, external reference pricing takes greater significance, which is provided by the manufacturer or retailer. A common use for reference pricing occurs when sale prices are compared to regular prices. It can also refer to the price of a competitor product or service, at the time of purchasing. Reference price is involved inadvertising, when marketers promote products during sales or the limits on best price buying times. Reference pricing also occurs when companies set prices slightly below most competing products. Most customers naturally choose the lowest priced products and companies use this to their advantage by creating lines of products that are similar in appearance and functionality, but are offered with slightly different features and at difference price points. Many marketing researchershave stated that customers either use external or internal reference pricing to stimulate their purchase intention. These studies have focused on how customers form their reference price points and utilize these to influence their purchase behavior. Moreover, all of these studies have examined the formation of reference price points and how they are built into internal reference pricing (IRP), external reference pricing (ERP), and the effect of these on consumer behaviors specifically purchasing intentions. Most of the studies have emphasized the effect of a reference price towards purchase intentions for physical or tangible products, where the price is normally fixed, unless a promotional activity such as a discount is introduced.

According to Daniel (1992), the impact of a reference price effect retailers' and manufacturers' optimal pricing policies. However, the impact of reference prices may lead to poor buying decisions on behalf of customers. When consumers purchase unfamiliar goods or services, they do not often have clear reference price information in mind (Yi cai, 2005).

Both internal and external reference prices have significant impacts on consumer purchasing intentions. Huang & Chen divided the participants into planned and unplanned purchase groups, and found that internal reference pricing affects both groups while external reference pricing has limited influence on unplanned purchasing intentions (Huang & Chen, 2013). Price is an indicator of purchase cost which assumes to influence consumers' choices. Assuming that consumers have accurate information concerning prices and want to seek comparable product alternative, they can determine whether a product maximizes satisfaction and meets budget constraints. However, most consumers pay more attention to those prices which reflect the price perceived in their first choice.

This study attempts to investigate the effects of reference pricing on customer purchasing intentions. …

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