Of all the tools available to marketers, none is more powerful than price. Price has a significant influence on consumer purchase behaviour and consequently on firm sales and profits.

It is, therefore, not surprising that price promotion has become an increasingly large fraction of the marketing budget and an almost ubiquitous aspect of consumer choice. In fact, consumers may be both conditioned to expect deals and be desensitized to small ones.

A base or reference price is based in part on the past pricing activity of a product, and is stored in a consumer's memory. The reference price serves as a point of comparison for future purchases. As a consequence, changes from a base or reference price are likely to have an impact only when the price change is above a certain threshold.

It is important for a manager to understand price thresholds for several reasons:

  • It helps a manager decide the minimum price discount needed to have any impact on consumer choice;
  • It provides a useful method of customer segmentation based on how consumers differ in their price thresholds;
  • It helps managers understand and monitor the power of their brand;
  • It provides an opportunity for mangers to identify and manage variables that affect price thresholds, and therefore, the power of their brand.

It is important for marketing managers to explore the existence and magnitude of price thresholds and the factors that influence these thresholds. These thresholds capture consumer insensitivity to small changes in price, or the zone of price indifference. Thresholds for consumer gains and losses provide a measure of the price gap (between reference price and shelf price) that is needed to impact consumers. For the purposes of the research model, the consumer gains when there is a price decrease and the consumer loses when there is a price increase.

The research reveals that the impact of price increases and decreases are approximately equal once the threshold is reached. It is also found that a product's own-price volatility increases the threshold for loss. In other words, with greater uncertainly in prices due to, say, frequent price promotions, consumers tolerate larger deviations (losses) from their reference prices. However, own-price volatility decreases consumers' threshold for gain, thereby making them more sensitive to small deviations (gains) in prices from their reference prices.

This suggests that frequent discounting may increase consumers' price sensitivity in the long run.

Discounting by competing brands does not have a significant effect on the threshold for gains, but it significantly decreases the threshold for loss. In other words, while the consumer feels a significant loss or disappointment toward a brand if competing brands offer substantial discounts, they do perceive any gain toward a target brand if competing brands are not discounting.

These results suggest that consumers are more sensitive to the loss (with respect to reference point of a brand) when competing brands are offering larger discounts. At the same time, consumers appear to be more sensitive to gain as the price volatility of the target brands increase.

Put together, these findings suggest a dual role of price promotions - increase sensitivity to gain for own brand, and also increase sensitivity to loss from competing brands.

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The study also offers some important implications for mangers with regards to segmentation and assessing the power of their brands. Thresholds for gains and losses provide of measure of the price gap (between reference price and shelf price) that is need to impact consumer choice. One way to segment consumers is based on their thresholds. Consumers with large thresholds are less sensitive than consumers with relatively small thresholds.

Similarly a comparison of threshold sizes for different brands provides an interesting measure of relative power or effectiveness of the price promotions of different brands. Brands with a small threshold for gain need offer only a small discount to realise significant effects on consumer choice behaviour. In other words, these brands have high leverage. Similarly, brands with a large threshold for losses have latitude in raising price or high resistance. Differences in thresholds across brands can also provide a powerful tool to retailers to negotiate the appropriate discount levels with manufacturers.

Traditionally the absolute magnitude of a deal has been a major factor for retailers in accepting a manufacturers' offer. However, the study results suggest that retailers should demand a higher level of discount from brands with larger thresholds for gain. Therefore, when evaluating competing promotional offers from brands, retailers may benefit by comparing them by the difference in the deal offered by a brand with a threshold for gain.

By Fiona Stirling, George Morris Centre

This is a summary of an article that was published in Grocery Trade Review, George Morris Centre. It first appeared in the Journal of Retailing entitled "Consumer Price Sensitivity and Price Thresholds". Reprinted with permission from Journal of Retailing published by Elsevier Science Inc, Sangman Han, Sunil Gupta and Donald R. Lehmann, Winter 2001, Volume 77, Number 4, pages 435-456. Elsevier Science Inc. can be reached at +1 212-633-3730.