Consumer response to product and price programs

1. Consumer response to product and price programs

2. Outline • A model of quality, price, and value • Perceived quality • The quality perception process • Brand and COO as extrinsic quality cues • Perceived price • The price perception process • The psychology of pricing • Perceived value

3. Quality, price, and value • goods and services quality as both a macro-level economic policy concern and as a micro-level strategic issue; • prevailing promotional practices and the adoption of pricing strategies such as EDLP have given new importance to price as a marketing mix variable; • value marketing as one of the buzzwords of business;

4. A model of perceived quality, price, and value non-quality benefits perceived benefits intrinsic quality cues perceived quality extrinsic quality cues perceived value willingness to buy actual price perceived price reference price perceived sacrifices nonmonetary sacrifices

5. Perceived quality • perceived quality as a consumer’s evaluative judgment of the overall excellence (in terms of fitness for consumption) of a product relative to other choice alternatives; • perceived quality differs from management-based notions of product quality and presumably objective assessments of product quality; • judgments of product quality are based on cues that consumers believe signal overall quality;

6. Cues used in quality evaluations • search, experience, and credence properties: • search properties • experience properties • credence properties • intrinsic and extrinsic cues: • intrinsic cues • extrinsic cues

7. Which cues influence quality perceptions? • cue utilization is a function of a cue’s: • predictive value (PV): • confidence value (CV): • extrinsic cues are likely to be used more under peripheral processing conditions (lack of opportunity, ability, or motivation to use intrinsic cues); • at the point of purchase consumers may have to use extrinsic cues (esp. when the product has few intrinsic search properties), but at the point of consumption intrinsic cues should be more important (unless there are many credence properties);

8. Buckler non-alcoholic beer Non-alcoholic beer has traditionally had a watered-down negative image among beer drinkers. When Heineken introduced Buckler non-alcoholic beer, it used the following marketing strategy: new Buckler brand name but identification as a Heineken product; typical beer bottle and label; priced at a 20% premium above regular beer; Pan-European positioning as a premium brand with a good quality beer taste. Discuss Buckler’s marketing strategy from the perspective of the model of perceived quality and value.

9. National brands vs. private labels • problem that private labels frequently suffer from a low-quality image compared to national brands; • Richardson, Dick, and Jain conducted an experiment in which 1564 consumers sampled one of five products (cheese, chips, dip, cookies, jelly) marketed by either an established national manufacturer or one of two stores under a private label (intrinsic cue); consumers did not necessarily taste the real product but were made to believe that the sample came from the package shown to them; along with the brand name they were also provided with price and size information (extrinsic cue);

10. National brands vs. private labels (cont’d) cheese chips dip cookies jelly NB $2.29 $1.39 $.89 $2.49 $1.48 PL1 1.79 .99 .59 1.79 1.25 PL2 1.89 1.09 .79 1.79 1.38 although store brands enjoyed an average price advantage of 21%, mean value for money ratings were only 7% higher and perceived quality was more strongly correlated with willingness to buy than perceived value for money; extrinsic cue NB PL1 PL2 row mean NB 5.95 5.20 5.29 5.48 intrinsic PL1 5.73 5.11 5.01 5.28 cue PL2 5.58 5.24 5.37 5.40 col. mean 5.75 5.18 5.22

11. Which cues prompt country-of-origin (COO) perceptions? • Product category: the product category may be associated with a certain country of origin; • Company: the producer may be linked to a certain country of origin; • Brand name: the brand name may suggest the country of origin of the product; • Country of origin information: labels such as “made in” or “imported from” may signal the country of origin;

12. How do COO cues influence consumers? • affect transfer process: knowledge of a product’s COO evokes an emotional reaction which influences a consumer’s overall evaluation of the product; • cognitive mediation process: knowledge of a product’s COO affects a consumer’s perceptions of the product’s attributes which in turn influence overall evaluations; • direct behavioral process: knowledge of a product’s COO has a direct impact on behavioral intentions or behavior without mediating effects of product attributes or attitudes;

13. Consumer ethnocentrism (Shimp and Sharma) • consumer ethnocentrism as the extent to which a consumer believes that purchasing foreign-made products is inappropriate or even immoral; • consumer ethnocentrism can be measured with the CETSCALE (e.g., we should buy from foreign countries only those products that we cannot obtain within our own country, it is not right to purchase foreign products because it puts Americans out of work); • consumers who are more ethnocentric have more unfavorable attitudes and lower purchase intentions toward foreign-made products, more frequently own products manufactured in their home country, and attach greater importance to country of manufacture;

14. Components of perceived sacrifice • price: • the monetary component of sacrifice • actual prices vs. perceived prices • the price-quality relationship • Price awareness/consciousness (Dickson and Sawyer) • The psychology of pricing • nonmonetary sacrifices: • includes costs in terms of time, physical energy, mental effort, etc. • may at times be more important than price

15. Positive and negative role of price negative role of price positive role of price price consciousness value consciousness sale proneness prestige sensitivity price-quality schema coupon proneness price mavenism

16. When I use coupons I feel that I’m getting a good deal. • I am very concerned about low prices, but I am equally concerned about product quality. • The old saying ‘You get what you pay for’ is generally true. • I’m considered somewhat of an expert when it comes to knowing the prices of products. • I am more likely to buy brands that are on sale. • Buying the most expensive brand of a product makes me feel classy. • I will grocery shop at more than one store to take advantage of low prices.

17. In-class exercise:Quality, price and value of E-book readers The December 2011 issue of Consumer Reports reported an evaluation of 21 models of E-book readers. The file EReaders.pdf reproduces parts of the article (you will need Acrobat Reader to open this file) and the file EReaders.xls contains a summary of the relevant data for your convenience. Graph the overall scores against price and then answer the following questions: Is price a good signal of quality in this product category? Which brands offer good or bad value? Would you rate any of the brands as a best buy? How can brands providing poor quality and/or value survive?

18. Empirical evidence concerning the price-quality relationship • a meta-analysis of studies conducted in the US by Tellis and Wernerfelt, based on observations from 1271 product markets between 1939 and 1980, showed that the mean (median) rank correlation between price and objective quality was .27 (.31); • a meta-analysis of 36 studies investigating the effects of price, brand name, and store name on buyers’ perceptions of product quality by Rao and Monroe showed that price had a moderately large and statistically significant effect on perceived quality ratings, the effect of brand name was slightly larger, and the effect of store name was small and nonsignificant;

19. The price knowledge of supermarket shoppers (Dickson and Sawyer) • 802 shoppers in four stores of a large supermarket chain were observed making a purchase in one of four product categories: • toothpaste (low turnover, infrequent price promotions); • coffee (low turnover, frequent price promotions); • cold cereal (high turnover, infrequent price promotions); • margarine (high turnover, frequent price promotions); • immediately after the chosen item was placed in the cart, shoppers were interviewed about price-related aspects of their purchase (e.g., recall of the the price of the chosen item, awareness of whether the price of the selected item was regular or special);

20. Price knowledge of supermarket shoppers (cont’d) • the average time between arriving at and departing from the product category display was less than 12 seconds; in 85% of the purchases only the chosen brand was handled; • only 58% of shoppers claimed to have checked the price of the chosen item and only 22% reported checking the price of an alternative brand; • only 47% of shoppers were able to state the correct exact price (56% gave a price within 5% of the actual price), 32% pro-vided a price estimate that was inaccurate (the average error was 15%, with the recalled price generally lower than the actual price), and 22% did not even offer a price estimate; • slightly less than half of the shoppers knew whether or not the chosen item was on special;

21. The psychology of pricing • Framing effects and prospect theory • Reference prices • influence of past prices • influence of competitor prices • Framing price differences • odd price endings • percentage differences

22. Framing effects and prospect theory value losses gains

23. Implications of prospect theory for pricing • Discounts from a higher price vs. premiums over a lower price • Endowment effect • Out-of-pocket losses vs. foregone opportunities • Unbundle gains • Bundle losses

24. Discounts vs. premiums The owner of a gas station intends to charge different prices for credit card and cash sales. There are two options: • Advertise gasoline for $1.20 per gallon and charge a $.10 surcharge if the buyer pays with a credit card. • Advertise gasoline for $1.30 per gallon and give a $.10 discount if the buyer pays with cash. What would you recommend?

25. Discounts vs. premiums value -1.30 -1.20 -.10 losses gains .10 v(-1.30)+v(.10) v(-1.20) v(-1.30) v(-1.20)+v(-.10)

26. The endowment effect Assume that one group of students gets Penn State coffee mugs which sell for $6 at the bookstore. Another group of students gets tokens to be used as cash. Students from the two groups are then paired and they are invited to “bargain” for the mugs. At what price do you think mug owners will be willing to sell their mug, and how much will cash holders be willing to pay for a mug?

27. The endowment effect value Lose mug losses gains Gain mug

28. Out-of-pocket losses vs. foregone opportunities A bank offers two options (assume an interest rate on savings accounts of 5.8 percent, compounded monthly): • You can keep a minimum balance of $1,500 (with no interest) and get a free checking account. • You can pay a $5.00 service charge and you don’t have to keep a minimum balance. What would you do?

29. In-class exercise:Bundling of gains and losses • You want to reward your loyal buyers by sending them a gift card. Should you give away two gift cards worth $10 each, or should you give away one card worth $20? • You want to sell an extended warranty plan to computer purchasers. Assume the computer costs $1,500 and the extended warranty costs $200 for three years. Should you try to sell the warranty at the time of the computer purchase, or should you contact buyers a short while after the computer purchase and offer them the warranty?

30. Framing price differences:Odd price endings Which seems the better bargain? • $.75 compared to a regular price of $.89. • $.79 compared to a regular price of $.93

31. Framing price differences:The relative value of money • A Sony Walkman you want costs $29. As you are about to make the purchase, a friend tells you that the same model is available at another store (10 minutes away) for $19. Would you go to the other store to buy the Walkman? • A Sony Camcorder you want costs $495. As you are about to make the purchase, a friend tells you that the same model is available at another store (10 minutes away) for $485. Would you go to the other store to buy the Camcorder?

32. The meaning of value • value as low price: focus on finding the lowest price, getting a deal, buying on promotion, etc.; • value as subjective utility: focus on aspects of the product that satisfy a consumer’s needs and wants; • value as a tradeoff between a product’s quality and price: focus on one “get” component (quality) and one “give” component (price); • value as a tradeoff between what is received and what is given: focus on all salient “get” and “give” components;

33. Perceived value and purchase behavior • the meaning of value is highly variable and depends on the consumer, the product, and the context (e.g., POP vs. consumption); • value is a function of perceived quality and price, but other (extrinsic) attributes might also serve as “value signals” for consumers; • value as a determinant of willingness to purchase;