Chapter 5

1. Chapter 5 Behavioral Foundations For Pricing Management

2. Chapter Objectives • Understand how people form perceptions of product or service quality, sacrifice, and value • Consider a conceptual model or the relationship between price, perceived quality, and perceived value Low prices will beget contempt, neglect and disuse, and there is the end to trade. -Letter from Josiah Wedgwood to Thomas Bentley, April 14, 1773.

3. Perception • We tend to place new experiences into existing classifications of familiar experiences • When confronted with a new price, buyers ask themselves if the difference between the new and old price is significant • Buyers use information cues to judge whether the price differences are significant • A cue is any informational stimulus about or relating to the product, service, or purchase context

4. Perception • Buyers’ perceptions of value represent a mental tradeoff between the quality or benefits they perceive in the product relative to the sacrifice they perceive by paying the price: Perceived Value = perceived benefits (gain) perceived sacrifice (give) Where perceived benefits are a function of perceived quality, perceived quality is positively related to price, and perceived sacrifice is positively related to price

5. Relationship of Price, Perceived Value, and Willingness to Buy

6. Multidimensional Role Of Price on Buyers’ Perceptions • Psychological price phenomena are the “irrational” effects of price on behavior • Customary prices • All price alternatives are excluded except for a single price • Price lines • Controls the price of an entire inventory of a particular item • Odd prices • Refers to a price ending in an odd number, or to a price just under a round number

7. Cognitive Effects • Buyers may have more difficulty remembering odd prices than even prices. • The ability of people to remember a series of numbers declines as the number of digits increases. • It is possible that odd prices are not encoded completely – more difficult to process cognitively.

8. Cognitive Effects • Because odd prices are more difficult to process, buyers are likely to encode an approximation of the price (e.g., $23.99 … ~$20, or $27.99 … ~$30.) • Implies that buyers may use cognitive reference prices that correspond to numerical frequencies.

9. Perceptual Effects • Odd prices may communicate a low-price image. • Odd prices may communicate a low-quality image. • Thus, using the tactic of odd prices to strategically convey a low-price image may lead to low-quality image. • $xx.99 ending vs. $xx.95 ending.

10. Sales and Profit Effects • Demand may abruptly change at specific price points – price thresholds. • Demand greater at $xx.99 than at $yy.00 and at $xx.95. • This effect may be stronger at relatively low prices, while at higher prices demand may be greater at $xx.95 than at $xx.99. • The positive image effect of even prices may be greater than the “bargain” effect of an odd price.

11. Sales and Profit Effects • A price just below a round price may be effective when it serves as a cue to buyers who are uncertain about whether a specific price is a “bargain.” • If there is a price-conscious segment and a quality-conscious segment, there may be multiple irregularities in demand.

12. Sales and Profit Effects

13. Psychophysics of Price • Weber’s Law suggests that small, equally perceptible changes in response correspond to proportional changes in the stimulus • S = K S • Weber-Fechner Law relates to two pricing errors: 1) not recognizing the relationship between perceived value and price, and 2) not distinguishing between absolute price and relative price • R = k log S + a

14. Numerical Cognition Processes • Number transcoding and calculation process • Calculating numerical differences between prices • Determining unit prices • Adding surcharges or tip amount to figure total cost

15. Numerical Cognition Processes • Quantification or enumeration process (numerosity) • Counting • Subitizing- process of enumeration where there are fewer than four items • Estimation

16. Numerical Cognition Processes • Approximation and processing of quantities • Tasks such as measurement, comparison of prices, or approximate calculations solicit an “approximate mode” in which we access and manipulate a mental model of approximate quantities similar to a mental “number line.” Dehaene 1992

17. Approximation Processes • Arabic numerals are first converted into an internal magnitude representation. • This encoding is automatic, fast and independent of the particular number. • These subjective numerical magnitudes appear to follow Weber’s law and Fechner’s adaptation. • Digits are not compared at a symbolical level, but are initially recoded and compared as quantities.

18. Automatic and Intentional Processing of Price Information • Price information that is presented in Arabic symbols is perceived initially in “perceptual” or nominal form. • For meaning to occur, these “data” must be transcoded into semantic or magnitude representation. • That is, the price information must be conceptually processed.

19. Comparative Numerical Judgments • Distance Effect • Time to compare numbers is an inverse function of their numerical distance. • 8 vs. 6 8 vs. 2 • Magnitude Effect • For equal numerical distance, it is easier to discriminate small numbers. • 1 vs. 2 8 vs. 9 • Special status of numeral 5 • 1 to 4 “small” 6 to 9 “large”

20. Comparative Numerical Judgments • Semantic Congruency Effect • When judging the larger number in a pair, response times are shorter when both numbers are “large” than when both are “small.” • The opposite is true when subjects have to decide which number is smaller.

21. Comparative Numerical Judgments • Size Congruency Effect • Response time is shorter when the “larger” numeral is displayed in larger font size. • Response time is shorter when the “smaller” numeral is displayed in smaller font size.

22. Comparative Numerical Judgments • Comparison to an Internal Standard • Two digit numbers are not lexicographically processed (first by decades and then by units), but rather wholistically (the whole magnitudes the two numbers represent are compared.) • For lower standards (e.g., 35 or 45), response times for “larger” are slower than for “smaller.”

23. Comparative Numerical Judgments • The Odd Effect • Even digits are processed faster and/or more accurately than odd digits. • People can judge smaller vs. larger faster than odd vs. even. • In odd-even judgments, the powers of 2 (2, 4, 8) were judged faster than 0 and 6. • For odd numbers, 3, 5, 7 were judged faster than 1 and 9.

24. Comparative Numerical Judgments • Remembering Numbers • When not instructed to recall four-digit numbers digit by digit: • Remembered according to magnitude encoding, i.e., thousands recalled best, then hundreds, tens, and ones. • When instructed to recall four-digit numbers digitally: • Remembered interior numbers less well than end numbers.

25. Proportion of Digits Recalled by Serial Position

26. Remembering Numbers • When remembering multiple digit numbers, people tend to use a memory representation that incorporates the value or magnitude of the numbers. • This tendency seems to occur when people are required to remember numbers used as arbitrary labels (i.e., nominally).

27. Implications for Pricing Management • Processing of some prices may be more automatic or easier than other prices. • Prices that end in even numbers. • Price comparisons in the lower-price range (i.e., smaller numbers involving fewer digits). • Identifying whether a specific price is higher than a reference price will be easier when the price is actually higher than the reference price.

28. Price Awareness • Refers to the ability of buyers to recall prices paid • Price awareness has been assumed to be negatively associated with income and other income-related factors like social status, household size, and marital status

29. Price Awareness • Buyers do not consciously attend to price information when considering or making purchase decisions, however, buyers may encode price information into memory in different representational forms • Comparisons, evaluative judgments

30. Remembering vs. Knowing • Remembering requires the conscious recollection of having encountered a piece of information • Remembering judgments demonstrate explicit memory • Knowing involves a sense of familiarity towards a previously encountered item • Knowing judgments demonstrate implicit memory

31. Explicit vs. Implicit Memory • Explicit memory is characterized by conscious recollection of the exposure event • Demonstrated by the respondent’s ability to retrieve information within the context of that event • Implicit memory facilitates the processing of subsequently encountered information • Demonstrated by enhanced performance on a task using a cue that is either conceptually or perceptually related to the information that had been seen earlier • Consumers rely on nonconscious, automatic processing in making purchase decisions, and these decisions are based on what they know rather than what they remember

32. Conscious vs. Nonconscious Price Information Processing • When price information is being processed consciously: • Buyers pay attention to the price, make judgments regarding the value of the product relative to some other products that are either present in the external environment or retrieved from memory, and finally make a purchase decision • Actual price information, a magnitude representation of the price, and their evaluative judgment maybe be transferred from working memory into long term memory, and they would be more likely to recall the price of the product at a later time • Also possible that the actual price information may not be transferred into long term memory

33. Conscious vs. Nonconscious Price Information Processing • When price information is being processed nonconsciously: • The buyer is more likely to demonstrate a lack of “price awareness” and not be able to recall the price of the product at a subsequent time • The processing of price information may be more appropriately assessed by using an implicit memory task, such as ranking of the different products in terms of their relative expensiveness

34. Commonly Used Measures of Price Awareness • Researchers have operationalized the concept of price awareness in three different ways: • 1. Buyers’ ability to recall the exact prices paid • 2. Buyers’ ability to recall the relative price rank of alternative items in their choice set • 3. Buyers’ ability to recognize the price paid for the item from a limited set of alternative prices • Researchers have attempted to measure price awareness using a recall memory test and have judged recall accuracy either in terms of exact recall or the absolute difference between recalled price and the correct price expressed as a percentage of the correct price