An Investigation of Reference Price Segments

Abstract

Empirical research on reference price has typically assumed that consumers use either an internal reference price (IRP) or an external reference price (ERP), but not both, in brand choice decisions. In this article, the authors assume that consumers use both IRP and ERP but may consider one of them more salient than the other. The authors develop a model that segments consumers on the basis of the differences in the importance they assign to each type of reference price as well as in their brand preferences and responses to marketing-mix variables. The authors calibrate the model on data for four categories: liquid detergents, ketchup, tissue, and yogurt. In all four categories, the proposed model performs significantly better than the one that assumes that consumers use either IRP or ERP exclusively. The authors discuss the managerial implications of this finding.