Behavioural theoretical models are hypothetical constructs that aim to understand and explain people’s mental trains of thought (Diller 2008, p. 94). Behavioral theoretical aspects are used in the pricing approaches discussed in this paper to understand how customers evaluate individual items in retail. The understanding of these individual price valuations in turn forms the basis for understanding how customers aggregate these individual price valuations into a price judgement for an entire store.
For the structuring of the topic of behavioural theory, the following is based on Diller (2008). Diller’s structuring was selected for several reasons. Firstly, it is a standard work. Standard works are characterized by the fact that they present a topic clearly and enable an efficient first introduction to a topic (Checkland and Holwell 1997, p. 41f). Furthermore, Diller does not only deal with behavioural models, but interprets them especially with regard to price management. Furthermore, many other price management works refer to Diller’s remarks (2008) or to other editions of this book (Simon und Fassnacht 2009; Müller 2003; Olbrich und Battenfeld 2007; Schröder 2002).
Diller’s (2008) comments on behavioral theory are relatively comprehensive. In order to take the scope of this work into account, the aspects of behavioral theory that are relevant for the understanding of the pricing methods presented in this paper were focused on. Relevant aspects in this respect are not only aspects that are taken up and implemented within the framework of the methods, but also those aspects that appeared relevant for the later (critical) inflection of these methods. Diller (2008) divides the topic of behavioural models into three areas (2008, p. 94). These three areas are activating processes, cognitive processes and price intentions (Diller 2008, p. 94). These areas are explained in the following subchapters.
The field of activating processes builds in particular on the approaches of emotion theory and experience marketing (Diller 2008, p. 94f). Diller in turn divides this area into price emotions and price interests.
The basic hypothesis in the area of price emotions is that people do not exclusively act rationally in the context of purchasing decisions, but are guided by emotions (Diller 2008, p. 95). People are emotionally fascinated by price experiences such as sales and special offers (Diller 2008, p. 95). The trigger for price experiences can be both the price itself and the price circumstance, for example the price presentation (Diller 2008, p. 98). Possible positive effects of price emotions, according to Diller, are an improvement in the store image and the emotional loyalty of customers, as well as an increase in the frequency of purchases or visits, the time spent in the store, impulse purchases and readiness to spend (2008, p. 100). Furthermore, price emotions can cause customers to concentrate on the positive aspects of a shopping location and hide the negative aspects, which can be exploited accordingly (2008, p. 100).
Price interest is concerned with the motivational aspects of customers with regard to prices and the resulting behaviour patterns and purchasing decisions of customers (2008, p. 101ff). The higher the price interest of a customer, the higher is his ambition to find the cheapest price (2008, p. 101). This, in turn, involves striving to find as much price information as possible and weigh as many alternative offers as possible against each other (2008, p. 101).
An important aspect in the context of price interest is the differentiation between different purchasing motivations of individual customers (2008, p. 109). According to Diller (2008, p. 110), there are three conflicts regarding customer motivation. The first conflict is the price-quality conflict, where customers have to choose between cheaper items of lower quality and more expensive items of higher quality (2008, p. 110). This conflict is discussed in more detail in the following subchapter and is therefore not explained in detail here. The second conflict is the role conflict in the context of social needs (2008, p. 110). According to this, customers can have what is known as a prestige endeavour, in the context of which higher-priced and luxurious articles are deliberately purchased in order to stand out from other customers (2008, p. 110). On the other hand, there is the striving to be a so-called price opinion leader, in which the striving to find the offer with the lowest price is particularly strong, in order to be able to call oneself a price expert (2008, p. 110). The third conflict is the discharge conflict (2008, p. 110f). After that, a client can
Theoretical Basics 6
after physical, psychological and temporal relief, which results in lower price interest (2008, p. 111). On the other hand, there is the so-called performance motivation, in which a customer feels fun and pride in obtaining price information and finding a reasonably priced offer (2008, p. 111f).
Another factor that influences the price interest of customers is the information situation (2008, p. 114). In markets where there is a high level of information transparency, i.e. a high amount of available information that is also easily available and usable, the price interest of customers is higher and so is the competition among suppliers (2008, p. 114). Overall, the price interest of a customer has an effect on various sub-decisions of consumption, including the choice of shopping location, brand, quantity and time of purchase (Diller 2008, p. 101).
The area of cognitive processes models the recording and processing of price information (Diller 2008, p. 94f). Understanding the cognitive processes forms the basis for understanding how individual price judgements are made, which in turn forms the basis for the subsequent integration of these individual price judgements into an overall price judgement (Müller 2003). According to Diller, the area can be divided into three sub-areas: price perception, price learning and price knowledge, and price assessment (Diller 2008, p. 94). The transition between price perception and price assessment is to be interpreted as fluid (Diller 2008, p. 120ff). The differentiation into sub-areas takes particular account of the structuring of the topic (Diller 2008, p. 120ff).
According to Monroe (1973) and Olson (1980), “price perception […] can be understood as the sensory absorption of price information […], in which objective prices and other price signals are classified into […] a subjective category system of the evaluator”. Within the framework of price perception, an objective price is thus transformed by the customer into a subjective price. Within the framework of the transformation, the customer carries out an individual evaluation of the price (Simon und Fassnacht 2009, p. 152). Individual customers can rate the price differently (Simon und Fassnacht 2009, p. 152). Price perception can be seen as a preliminary step before the more detailed price assessment (Diller 2008, p. 121). Within the framework of price perception, preliminary decisions are made for the subsequent price assessment (Diller 2008, p. 121). For example, certain alternatives can already be excluded, so that they are no longer evaluated within the framework of the evaluation (Diller 2008, p. 121). The theoretical foundation
Theoretical basics 7
The perception of prices is based on certain basic theories, which will be explained in the following.
Adaptation level theory and reference price theory
The adaptation level theory founded by Helson (1964) postulates that, in order to be able to evaluate an objective object of opinion, people compare it with a so-called adaptation level. The adaptation level is in turn dependent on so-called context stimuli and residual stimuli (Diller 2008, p. 122), which are explained below.
Helson differentiates between three different types of stimuli that play a role in the assessment of an object of opinion (1964, p. 37 and p. 58). Focal styles designate the stimuli of the actual object of opinion. When applying the theory to price management, the objective price of the article currently being assessed can be regarded as a focal stimulus (Diller 2008, p. 122). Context stimuli describe other stimuli of the current environment in which man finds himself at that moment. The visual presentation of the price and the prices of qualitatively comparable products on the shelf, which are perceived alongside the assessed price, can be understood as context stimuli (Diller 2008, p. 122). Within the framework of the application to price management, the other prices are also referred to as “external reference prices” (Diller 2008, p. 120). Finally, there are residual stimuli that represent cognitive and motivational aspects of the individual. In the framework of price management, the price experiences and price knowledge that are present in the memory of the decision-maker can be understood as residual stimuli (Diller 2008, p. 122). These include, in particular, prices paid earlier for identical or similar items (Diller 2008, p. 124). In the context of their application to price management, they are also referred to as “internal reference prices”.
The question arises as to how the various context and residual stimuli are offset against the adaptation level (Diller 2008, p. 125). Helson itself proposes to calculate the geometric mean value of the stimuli. Diller gives an overview of further proposals and studies, which are not discussed in detail here (2008, p. 125f).
The reference price theory, which can be interpreted as an extension of the adaptation level theory (Diller 2008, p. 122), postulates that the comparison of the objective price with the adaptation level price (reference price) is not only in the sense of greater or lesser price, but also in the sense of a more or less complex price.
For example, it shows that both the subjective price, and thus also indirectly the objective price, and the external reference prices of the current environment after the purchase flow into the internal reference price of the individual customer and can change it. The “subjective price” here refers to the result of the comparison between the objective price and the current reference price, whereby the reference price is influenced by the price optics, the external reference prices and the internal reference price.
The assimilation contrast theory examines how far a focal stimulus may be removed from the adaptation level in order to bring about an adaptation of the adaptation level after a purchase and not to be interpreted as an outlier (Sherif et al. 1958). If a stimulus is interpreted as an outlier, it does not distort the adaptation level in the corresponding direction, but is ignored or not adapted. The higher the general scatter of the stimuli, the higher the probability that stimuli further away will still be adapted. The more unusual a stimulus is, the greater the probability that it will be classified as an outlier. The fact that outliers do not shift the adaptation level can be understood as a protective mechanism against false shifts (Diller 2008, p. 127).
Price threshold effect
It has already been noted that objective prices are classified into subjective price categories in the context of price perception. People do not define a new category for each new price, i.e. at a 1 cent level, but use a few categories such as “very cheap”, “cheap”, “normal”, “expensive” and “very expensive” (Diller 2008, p. 128). It can therefore be hypothesized that certain price thresholds exist, at which the price valuation changes by leaps and bounds because it is assigned to a different category (Diller 2008, p. 128). If these price thresholds could be identified, this knowledge could be used to set the price of an article as high as possible within the target price category without changing the price judgement of the customers (Diller 2008, p. 128f). It is probable that the price threshold of individual customers cannot be determined and that this knowledge can therefore be used to a limited extent (Diller 2008, p. 129). In this context, Diller notes, however, that setting prices just below round prices, for example 0.99 euros, could make sense (2008, p. 129). Furthermore, he notes that the increasing price interest of an individual customer in a product area is likely to be accompanied by a more differentiated classification into price categories (2008, p. 129).
Price learning and price knowledge
This section focuses on how price knowledge is collected through price observations and price surveys (Diller 2008, p. 133). According to Diller, price learning is selective, i.e. a consumer focuses on price information that is particularly relevant for the article groups he prioritises, is readily available, easy to remember and time-stable (Diller 2008, p. 133). Price knowledge includes not only numerical price information, but is also characterised by ranking and nominal components (Diller 2008, p. 133). In the context of price knowledge, the so-called price image of a shop, which exists in the minds of the customers and is adapted with every visit to the shopping centre, is of central importance (Diller 2008, p. 136f).
While price perception examines the first preliminary decisions of the price evaluation process, which are based on rather unconscious behaviour, the area of price evaluation focuses on conscious cognitive behaviour in the evaluation of prices (Diller 2008, p. 138). Within the framework of this evaluation, article prices are categorized or a price judgement is made (Diller 2008, p. 138). The overall system of price perception and assessment is illustrated in the following figure.
In the context of price judgments, the distinction between so-called cheapness judgments and price worthiness judgments is of central importance (Diller 2008, p. 139). Cheap-price judgments focus solely on the absolute value for money of an article (Diller 2008, p. 139). This type of evaluation is possible when prices of articles are compared whose quality can be assumed to be (almost) identical (Diller 2008, p. 139). For example, a certain branded product between different shopping locations can be evaluated solely by the absolute price. In the case of price value judgments, on the other hand, the price of an article is compared with its quality (Diller 2008, p. 139). The following section deals in more detail with low-price judgments and value-for-money judgments. The explanations are particularly important for understanding how price judgements are made for individual articles. Chapter 3.2.1 builds on this knowledge and discusses how these individual price judgments can be aggregated into an overall price judgement on a transaction.
The central theory in the context of cheapness judgments is the prospect theory, which was founded in particular by Thaler (1985). The foundations for this theory are again the already discussed theories of price perception. It was postulated that the consumer comes to a subjective price perception judgement by offsetting the objective price against the external reference prices and his internal reference price (Diller 2008, p. 140). The external reference prices and the internal reference price are combined to form an adaptation level price or reference price. Furthermore, it has already been mentioned that the comparison of the objective price with the reference price is not only valued in the sense of greater or smaller, but that the difference between the two variables is of central importance for valuation. How this difference influences the valuation is discussed below.
In prospect theory it is postulated that the alternatives are always compared with the prospects when a decision is made (Diller 2008, S. 141). In the context of the application to price management, prices that are never higher than expected represent a profit and prices that are higher than expected represent a loss (Diller 2008, p. 141). When applying the prospect theory to price favorability judgments, the absolute price is compared with the internal reference price of the individual customer (Diller 2008, p. 141). If the absolute price P is lower than the internal reference price i, a profit is generated (positive value). If the absolute price P is greater than the reference price i, there is a loss (negative value). In order to describe these dependencies, a utility function N(P) = (𝑖 – 𝑃)𝑐 can be defined, where c describes the course of the function (Diller 2008, p. 141). For a linear function, c = 1 (Diller 2008, p. 141).
Within the scope of the prospect theory, it is discussed how exactly the subjective utility function or the function course c looks like. It is assumed that profits of the same absolute value are valued less and less as the distance to the reference price increases (Diller 2008, p. 141). As a result, the earnings curve is strictly concave. It is also assumed that losses of the same absolute magnitude are always valued lower as the distance to the reference price increases (Diller 2008, p. 141). The curve of losses is therefore strictly convex. From the prospect theory it can be concluded that it makes more sense as a retailer to implement two special offers with medium price discounts rather than a single special offer that combines the same amount of money on its own (Diller 2008, p. 141f).
The prospect theory postulates that the benefit function is steeper in the area of losses than in the area of profits (Diller 2008, p. 143). Diller justifies this with the fact that people tend to value the defence of what has already been achieved more highly than the gain from something new (Diller 2008, p. 143). This has also been proven directly and indirectly by the studies of Cardozo (1965), Uhl and Brown (1971), Kalwani et al (1990) and Mayhew and Winer (1992).
Furthermore, it is postulated that there is a phase of subjective preliminary decision before the extensive evaluation of alternatives (Diller 2008, p. 141). It is referred to as the editing phase (Diller 2008, p. 141). This phase can be equated with price perception (Diller 2008, p. 141). Within the framework of these preliminary decisions, the alternatives are simplified and made more comparable (DILLER 2008, p. 141). Diller cites price rounding and the elimination of unlikely or undesirable risks as examples of simplifications. The price assessment, and thus the prospect theory, therefore already works with the subjective prices, which are the result of price perception.
In the case of value-for-money judgments, on the other hand, the price of an article is compared with its quality (Diller 2008, p. 139). Within this definition, the price is considered to be the price divided by the scope of services, which can also be described as the price-performance ratio (Diller 2008, p. 140). The performance component of the price/performance ratio can be operationalized in different ways, whereby it must always be conceptualized as multiattributive (Diller 2008, p. 148). For example, the relevant attributes can include quality, benefit and satisfaction (Diller 2008, p. 148). It can be assumed that, as with price perception, objective quality is translated into subjective quality through subjective processes (Diller 2008, p. 148).
In any case, the complexity of the price worthiness assessment for consumers is significantly higher than that of price cheapness assessments, since on the one hand the quality of an article must be assessed and on the other hand a simultaneous consideration and weighing of price and quality is required (Diller 2008, p. 149). It can be assumed that consumers use heuristics to classify different articles in a ranking of price worthiness instead of using a metric scaling of the articles due to their striving for relief (Diller 2008, p. 149).
In the area of price intentions, the basic assumption is that customers internalize a certain and relatively permanent behavior for certain decision situations (Diller 2008, p. 154). For example, customers may have internalised the behaviour not to buy a certain product if a certain price is exceeded (Diller 2008, p. 155). These internalised rules enable customers not to repeatedly deal with a decision situation in detail (Diller 2008, p. 154). On the basis of this assumption, this section aims to analyse internalised behaviour in order to design price management in such a way that it appeals to customers (Diller 2008, p. 154).
A central concept in this area is price satisfaction and how it can be operationalized (Diller 2008, p. 157). Diller argues, for example, that price satisfaction can be aggregated by the factors price worthiness, price transparency, price fairness, price advantage, price reliability and price security (2008, p. 161).