Question

A large home improvement retailer has run an advertisement for a particular brand-name titanium drill bit set. The headline of the ad is “Was $19.97 – Now Only $14.97!”

(a) What is the external reference price that is mentioned in this ad?

(b) Assume that the external reference price mentioned in this ad causes the advertised selling price (i.e., the price at which the item is being sold) to be perceived by consumers as a loss and a gain. Assuming this, give an example of what that consumer’s IRP would have to be.

(c) Given the assumption of Part (b) and the IRP that you gave as an example, what would be the dollar size of the loss that the consumer perceives? What would be the dollar size of the gain that the consumer perceives? Briefly explain your reasoning.

Answer 1

A. $14.97 (Reference pricing is known as that price which users compare with the peice of acompetitors product or the previously advertised price.)

B. External reference prices can be provided to consumers through channels such as advertising, catalog listings and consumer price guides. Basic external reference price format are used in advertising:

1.comparing an advertised price with manufactures suggested retail price.

2.Comparing an advertised price with the sellers former price.

Reference prices in retail advertisment, reference price are found to increase consumers estimates of the savings offered by advertised prices through the full savings claims made by reference price are not accepted.

C. 1.Reducing prices and promoting the sale will lower the prior price expectations.

2. The store lowers prices without making a public announcement.

3.The store lowers prices and promotes these lower prices through advertisment.