Consumer Response To Utilization Of Comparison Prices In Retail Advertisements

Consumer response to utilization of comparison prices in retail advertisements

ABSTRACT

The use of comparative price advertising is widespread. An advertised reference price (e.g., regular price, original price, manufacturer's suggested price) suggests that consumers will save money, that they will "get a deal." Advertisers often appeal to this desire to "get a deal" by comparing the offering price (e.g., sale price) with some higher reference price (e.g., regular price), thereby making the offered price more attractive. Whether consumers actually save money depends primarily on the validity of this advertised comparative reference price. This paper attempts to examine the impact of comparative pricing on the consumer response towards that brand or that company and hence the buying behavior. The key factors that emerge out of the study are the wordings of the advertisement, the presence of a time constraint on the offer, the the focus of the advertising, for example if it was framed in a positive way (stressing the benefits) or negative way (stressing the potential costs) and the twin hypothesis that retail newspaper advertisements with comparison prices produce more positive consumer price perceptions, attitudes toward purchase, and intentions to purchase the advertised product than advertisements without comparison prices and advertisements with comparison prices for national brands produce more positive price perceptions, attitudes toward purchase, and intentions to purchase than advertisements with comparison prices for private and generic brands holding true. The paper also takes in account both online as well as offline sales. However, a primary reason that reference price advertisements affect consumers' price perceptions and behavioral intentions more in offline retail channels is due to consumers' lack of access to other price information at the time of purchase. Thus, the effect of reference price advertisements is nearly mitigated in the Internet environment, due to the declining cost of price information acquisition and the consequent reduction in price information asymmetry, combined with the increase in cost transparency in the online shopping channel.

CHAPTER #1

INTRODUCTION

1.1 Background

Most retail advertisements offer merchandise at “a special price”. Often this special price is compared with a previous price, manufacturer’s price, rival’s selling price, the price of similar merchandise or an area price. The general implications of these advertisements are that the consumer can pay a lower price than normal for the merchandise if he/she will purchase it from the advertiser. The seller promotes as “special price” in the advertisement in the belief that customers will purchase the item if they believe that the price is comparatively lower. This is termed as comparative or reference pricing. The paper aims to highlight the impact of such pricing on both online as well as the offline sales.

Price comparison advertising takes place when the current selling price (SP) of a product or service is compared with some other advertised reference price (ARP). Comparisons may be made with historical prices (e.g.: 'was/now'), reference prices (e.g.: '50% off manufacturer's suggested selling price') or with competitors' prices. The intention of presenting a comparator, in most cases, is to highlight potential savings to consumers and so influence their decision to buy.

This type of advertising is frequently used by retailers across a wide range of products and services and can be seen in newspapers, on posters within stores, on flyers and through other forms of promotional material. When used legitimately, price comparison advertising can increase competition, helping markets to work well for both consumers and business. This type of advertising can have particular benefit to businesses wishing to highlight competitive discounting and to consumers with high search costs. However, if consumers are misled, then this type of advertising has the potential to distort the behavior of consumers and hence to distort competition. The potential for misuse of price comparison advertising has been widely recognized by governments.

For a long time, retailers have considered advertising and promotion to be among the most crucial strategic tools in a firm's marketing mix. Retail advertisers have long been concerned with various kinds of decisions regarding the content and format of actual advertisements in order to achieve more positive response by consumers. The important issue among these decisions would be whether to use comparison price (include both the regular price along with the sale price) or only the sale price in the advertisement. Price promotions of online retailers closely resemble those of offline retailers. Online retailers frequently use advertised reference pricing as a promotion scheme. Extensive examination has been conducted on the effect of reference price advertisements on consumers' price perceptions, value judgments, and behavioral intentions. For example, Kalyanarm and Winer (1995) found that consumers will use the advertised original price provided by the seller as a frame of reference to evaluate the accompanying sale price. The resulting comparison between the advertised original price and the sale price increases the appeal and attractiveness of the price promotion (e.g., Biswas & Blair, 1991; Grewal et al., 1996; Urbany et al., 1998; Chandrashekaran, 2001).

However, a primary reason that reference price advertisements affect consumers' price perceptions and behavioral intentions in offline retail channels is due to consumers' lack of access to other price information at the time of purchase. Thus, the effect of reference price advertisements is nearly mitigated in the Internet environment, due to the declining cost of price information acquisition and the consequent reduction in price information asymmetry, combined with the increase in cost transparency in the online shopping channel (Bakos, 1997; Grewal et al., 2003).

1.2 Types of comparative pricing.

Price is an essential element of competition and a major factor in most buying decisions. Comparing two prices can be a powerful marketing tool and is probably the most commonly used advertising device. Consumers like the idea that they can shop around for savings, making price comparisons a powerful technique. Comparing prices can mislead consumers if the savings are not real. Price comparisons and implied savings