Effects of Price Promotions on Consumers’ Reference Prices: The Role of Contextual Factors and Price Claims

Abstract

Price-related advertising aims to create positive consumer responses such as higher purchase intentions (Ailawadi and Neslin 1998). However, consumers faced with price promotions perceive a discrepancy between their reference price (RP) and the new (lower) price information, and they tend to adjust their price beliefs (Biswas and Blair 1991) by reducing their RP related to the promoted product (Folkes and Wheat 1995; Grewal et al. 1998). This mechanism leads to higher price sensitivity (Mela et al. 1997) and lower willingness to pay (Ranyard et al. 2001). Starting from the notion that consumers’ RP decrease after contact with price-related advertising, the objective of this study is to propose a regression model in order to examine the weights consumers assign to different price claims (consumers’ initial RP and the reduced price displayed in the price promotion) in the context of RP adaptation after contact with a price promotion displaying the reduced price and the saving. The regression model additionally includes specific conditions: the saving format that is used to present the discount (percentage-off vs. amount-off) and the number of ad contacts consumers have. Thus, we simultaneously analyze direct and interaction effects of price claims and marketer-controlled factors that play a role in the context of consumers’ RP adaptation through price promotions. There is evidence that the saving format plays a role in the context of effects of price promotions (Hardesty and Bearden 2003) because price information is processed differently depending on which saving format is displayed (DelVecchio 2005). Findings on effects on consumers’ RP are inconsistent across studies (Chandrashekaran and Grewal 2006; DelVecchio et al. 2007), but there is evidence that the saving format interacts with other variables. Moreover, while previous studies were based on one ad contact, consumers have more contacts with advertising in reality. Previous research provides the notion that repeated contacts with price discounts have effects on expected product prices (Chen 2011; Kalwani and Yim 1992; Lattin and Bucklin 1989), but the mechanism of consumers’ RP adaptation has not been analyzed in much detail in previous studies. Given that the major goal of price-related advertising is to trigger positive consumer responses, the results of such an analysis are interesting for marketers because they get new insights into the complex mechanisms that underlie consumers’ RP adaptation after contact with price-related advertising. As consumers’ RP influence response variables such as willingness to pay, it is important to understand RP adaptation in order to be able to anticipate possible negative effects of price promotions. As a consequence, marketers can make appropriate strategic decisions such as choosing the most beneficial saving format.