What is a Reference Price?
⤷ A Reference Price is the price a customer expects to pay for a product.
⤷ It acts like a mental benchmark.
⤷ Example: If you usually buy a cold drink for ₹30, you expect all similar drinks to be around ₹30.
Challenges in Setting the Right Price
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Companies must find a price that:
- Helps them meet goals like profit, market share, or sales.
- Feels fair and acceptable to customers.
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Problem:
⤷ If the price is too high, customers won't buy.
⤷ If it's too low, customers might think the product is poor quality and still won’t buy.
Why Knowing the Reference Price is Important
- Customers compare your product's price with the price they have in mind (reference price).
-
If your price:
- Higher than expected → They might skip buying.
- Lower than expected → They might doubt the quality.
What Managers Can Do:
-
Increase the Reference Price by:
- Highlighting extra benefits (like better features or service).
- Making the product seem different from cheaper options.
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Understand Differentiation:
Example: Branding an ordinary chocolate as "premium" to justify a higher price.
How Marketers Capture Reference Price
| Source of Reference Price | Example |
|---|---|
| Category prices | Looking at the price range of all shampoos. |
| Similar brands | Comparing Coke to Pepsi prices. |
| Market surveys | Asking customers how much they expect to pay. |
| Next best alternative | Price of alternative products customers might buy. |
Types of Reference Prices
| Type | What It Means | Example |
|---|---|---|
| Internal Reference Price (IRP) | The price stored in customer memory, based on past experiences. | Remembering that a coffee usually costs ₹150. |
| External Reference Price (ERP) | A price shown through outside sources like ads or tags. | Seeing an ad saying "Now only ₹99!" |
How Reference Prices are Formed
| Factor | Meaning | Example |
|---|---|---|
| Past Purchases | Recent buying experience shapes expectation. | Last bought jeans for ₹2000, expects same price. |
| Deals and Discounts | Frequent offers create new price expectations. | Always buying pizzas during "Buy 1 Get 1 Free". |
| Promotions (Depth, Frequency) | Deep or frequent promotions change reference points. | Big festive sales on electronics. |
| Price Frames | How price is presented affects thinking. | "Save ₹500" vs "20% off". |
How Customers Use Reference Prices
Customers retrieve prices from memory (IRP) or from the environment (ERP).
⤷ Factors influencing which one they use:
- Size of options available (more options = more confusion).
- Frequency of promo purchases (more offers = memory updates).
- Time between purchases (longer time = memory fades).
- Involvement (small purchases = less thinking).
Effects of Reference Prices
⤷ Customers decide:
- Whether to buy or not.
- How much to buy.
⤷ They might also feel if a price is fair or unfair.
Understanding Price Fairness
⤷ Fairness = Customers feel the price and the way it was set is reasonable.
⤷ Based on:
- Similarity of transaction (Was I treated like others?)
- Trust (Do I trust the brand?)
- Attribution (Was the higher price justified?)
⤷ Games like:
- Dictator Game → One side decides how much another gets.
- Ultimatum Game → Offer can be accepted or rejected.
Customer Reactions to Unfair Prices
⤷ Stop buying.
⤷ Complain to others (Negative Word Of Mouth - NWOM).
⤷ Stay loyal (sometimes).
⤷ Seek revenge (like leaving bad reviews).
What Managers Should Do
- Make products feel different (justify higher prices).
- Build strong customer relationships (to maintain trust).
- Communicate clearly (explain why prices changed).
| Feature | Internal Reference Price (IRP) | External Reference Price (ERP) |
|---|---|---|
| Source | Memory (past experience) | External cues (ads, price tags) |
| Formation | Buying history, deals, personal experience | Marketing, competitor pricing |
| Example | "This burger usually costs ₹150" | "Ad says burger now at ₹120" |
