A study of reference‐price formation in value judgment

Abstract

PurposeThe purpose of this paper is to examine the type and number of reference prices used and their formation process in consumers' price judgments across product and service categories.Design/methodology/approachA pretest of a group of 50 graduate students is conducted to determine the service and product stimuli. Questionnaires for shampoo and hair salons, respectively, are sent out to the employees in four different companies. The subjects are asked to provide information on five commonly used measures of reference price: price most frequently charged; lowest market price; fair price; normal price; and reservation price.FindingsAlthough consumers use the same process to evaluate the retail price, the number and types of internal reference prices (IRP) used by consumers for their price judgments are different. In the case of shampoo, consumers use the fair price and the normal price to determine the offer value. In the case of hair salons, consumers use the price most frequently charged, the fair price, and the normal price for their evaluation. The findings suggest that the relative importance of IRP differs between product and service categories.Research limitations/implicationsThis paper suggests that the relative importance of IRP differs between product and service categories. Further research is needed to determine if the findings also apply in different cultural environments.Practical implicationsThese findings have important implications for managers when creating price communication strategies, they should pay close attention to the specific reference prices and maintain these IRPs within a standard range when determining offer value.Originality/valueThis paper supports a multi‐dimensional view of reference prices and suggests the need to consider multiple reference prices when examining consumers' responses to price information.