Reference Pricing definition

It is human nature to compare, and to judge value based on these comparisons, and the world of consumerism is no exception. Most people will only feel justified in purchasing something if the price of it matches a perceived value. This value can be changed according to how it is framed - as with Perceived Value Pricing - and the use of Reference Pricing is one such way that framing a price can change our perception of its value. Reference Pricing refers to the fact that individuals will decide what is a justifiable price to pay for a product or service by comparing it to other reference prices (such as competitors’ pricing or previous, pre-sale pricing etc.).

For example, if you are told that an obscure vinyl record is on sale for £300, you won’t really have any idea whether this is good value or not as there is no point of market reference. If you then find out that another copy of the same record recently sold for almost £1000 then this provides a frame of reference and now the one on sale for £300 seems like it is a very good deal. On a smaller scale, if your local supermarket is selling tins of soup for £1, you’re unlikely to look twice unless you specifically came in to the store for that. However, if they have a visible reference price available showing that this soup is sold at a competitor’s store for £2 - it immediately puts the value, quality and price in to a new perspective and makes the soup a much more attractive purchase.

Research has shown that Reference Pricing even comes in to play on a subconscious level and that even the prices of unrelated products in close proximity can affect the perceived value of something. In a study conducted by Nunes & Boatwright (2004), CDs were placed on a beachside stall next to sweatshirts that were being sold alternately for $10 and $80 (at half hour intervals). When the sweatshirts were sold for $10 people were only willing to pay $7.29 for the adjacent CDs, but when they were being sold at $80, this price jumped almost 18% to $9! Without them even realising, customers were being influenced by the Reference Pricing of the completely unrelated sweatshirts.

In sales and marketing, Reference Pricing is a useful tool to help give products and services the desired value perception. By contrasting your prices with that of competitor’s or by highlighting how large a discount you are offering on a previous advertised price, customers will be likely to consider the purchase justified and, even more so, a good deal.

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