Ask people to name the price of a litre/pint of milk, a colour television, a pair of jogging shoes, a magazine, or virtually any other everyday product, and they will most likely provide a response. That is, most will not say “I really don’t know” regardless of how aware they actually are of these prices. The price provided is an indication of what they would expect to pay or what they believe the product is worth.
When customers go to buy a product, they bring with them an expected price. This is called a reference price, and represents an amount the customer regards as fair or appropriate for the value received. It may or may not be anywhere near the price the customer actually encounters. It is critical, however, because reference prices have a significant impact on whether or not the customer ultimately buys the product. They serve as an internal standard for evaluating other prices.
A buyer’s internal reference price for any item is probably the result of a combination of influential factors. Some of these include:
Last price paid.
The price the buyer. last paid for an item becomes a benchmark in evaluating prices subsequently encountered.
The buyer evaluates his or her historical experience in buying an item and estimates a modal price (the amount paid most frequently) as the reference.
Fair or just price.
A fair or just price implies that there is a normative price that reflects what the buyer “ought” to pay. The buyer interprets this price from the perspective of his or her own individual means.
Favourite brand price.
The price of the brand usually purchased by the buyer serves as a frame of reference in evaluating other prices.
Average prices of similar products.
A variation of the price most frequently charged; may be an average of competing brand prices.
Absolute price limit.
The highest price the buyer would consider, given his or her current need for an item.
Expected future price.
A buyer’s expectation of future prices may influence present purchasing behaviour. An anticipated price increase may encourage a present purchase, while an expected price decline may lead one to defer purchasing. In prolonged periods of inflation, reference prices are less stable.
There is a reference price for each unique quality level within a product line or category.
However, the reference price for an item is also influenced by the context within which it is purchased. For instance, the price one would be ready to pay for a soft drink might be quite different if purchasing it at a football game, a corner petrol station, a fast food restaurant, or from room service in a hotel. This occurs despite the fact that it is the same size and brand and may have come from the same beverage distributing company at the same unit cost, in all four cases.