Price Reduction Theories

In order to determine the appropriate size and presentation of a price reduction, it is important to gain insight into the consumers’ price perception processes (Teunter, 2002). She notes that three theories have particular relevance to sales promotion; that is threshold theory (Weber’s law), adaptation-level theory, and assimilation-contract theory. She states that threshold theory (Weber’s law) is concerned with the question of how much of a stimulus change is necessary for it to be noticed by a consumer. She cites studies which demonstrate that there is a region of price insensitivity around a brand’s expected price within which price changes do not significantly affect purchase probabilities. Price differences outside that region, in contrast,

She explains that the adaptation level is determined by previous and current stimuli to which a person has been exposed. It thus changes over time as a person is exposed to new stimuli. She posits that the adaptation level for evaluating a particular item’s price is called the reference price. She thus observes that a consumer’s reference price might be based on previous prices paid for the item or similar items, previous prices observed, prices for comparable items available at the time of purchase, etc. Raman & Bass (2002), on the other hand state that this theory hypothesizes that the response to a stimulus depends on its relationship to preceding stimuli. They further point out that consumers form adaptation levels through exposure to the stimuli. They contend that response to the current stimulus is a function of the relationship between the stimulus level and the adaptation level. In the context of price response, they refer to this adaptation level as the normal or standard price. Teunter (2002) on the other hand posit that researchers have thought of the reference price as an expected price. She contends that there is some evidence that reference prices do exist and play a role in product choice. She, however, point out that the question of how various promotions affect reference prices is still

They explain that a stimulus inside this range is perceived as smaller than its real value, an effect they assert is referred to as the assimilation effect. They further note that assimilation contrast theory has been applied to price perception. They contend that the function of price has a cubic form, implying that a price inside the range is tolerated. On the other hand, a stimulus outside the range is perceived as larger than its real value, a phenomenon known as the contrast effect. They further argue that there are different assumptions about the influence of prices outside the range. They point out that some researchers assume that these stimuli do not have any effect on the reference point, while others think that a price outside the range, even though rejected, does have an influence on the reference price. This is in line with Raman & Bass (2002) assertion that this theory hypothesizes a range of prices called a lattitude of acceptance. They state that according to this theory, consumers tend to assimilate prices within the lattitude of acceptance and perceive them as acceptable. Prices falling outside the range are contrasted to prices within the acceptable range and their impact is strongly