THE EFFECTS OF PSYCHOLOGICAL PRICING ON
PRICE AND QUALITY PERCEPTION
By
Randi Doddema
Faculty of Economics and Business University of Groningen
June 2019
Master’s Thesis
First supervisor: prof. dr. L. M. Sloot Second supervisor: dr. J. P. R. Thomassen
2 ACKNOWLEDGEMENTS
During the past months I have been working on my Master’s Thesis, in order to graduate for the Master Marketing Management. Throughout the writing of this thesis I have received great support. First of all, I would like to offer my special thanks to my supervisor, prof. dr. L. M. Sloot, for his expertise, enthusiasm, and benevolence towards me and my research topic. The assistance provided was greatly appreciated.
I would like to thank dr. J. P. R. Thomassen for taking the time to read and assess my thesis. I would also like to thank every participant who took the time and patience to carefully fill in my survey, my fellow thesis students, and family and friends who supported me through this challenging – but fun – period of time.
3 ABSTRACT
The purpose of this study was to examine the effects of two opposing pricing strategies, psychological pricing and round pricing, on the price and quality perceptions of products, with the objective to get clear insights for managers, thereupon they are able to positively influence their price and quality perception through the use of either of these strategies. Two different moderators were considered. In a 2x2x2 experimental design study, a survey was conducted among 111 Dutch respondents, which lead to 430 individual cases, to test the conceptual framework. This consisted of one independent variables, two dependent variables, and two moderating variables. The results showed that psychological pricing had a negative effect on the price perception of products, in comparison with round pricing, but only when the product was shown in a promotional setting with a 25% discount, as opposed to a regular price setting. Neither hedonic level of the product or the existence of a promotional setting were moderating the effects, and no other effects of pricing strategy were found. Based on this, limitations and further research ideas were discussed.
4 TABLE OF CONTENTS 1. INTRODUCTION 5 2. LITERATURE REVIEW 7 2.1 Psychological pricing 7 2.1.1 Left-to-right processing 7 2.1.2 Derived meaning 7 2.2 Research evidence 8
2.3 Hedonic versus utilitarian products 8
2.4 Price promotions 9
2.5 Price as a que for price perception 10
2.6 Price as a que for quality expectations 11
3. CONCEPTUAL FRAMEWORK AND HYPOTHESES 12
3.1 Psychological pricing effect 12
3.2 Price perception and quality perception 13
3.3 Hedonic versus utilitarian products 13
3.4 Price promotions 14
4. METHODOLOGY 16
4.1 Variable measurement and manipulation 16
4.1.1 Dependent variables 16 4.1.2 Independent variable 17 4.1.3 Moderating variables 17 4.1.4 Control variables 19 4.2 Study Design 19 5. RESULTS 20
5.1 Sample description and demographics 20
5.2 Data checks 20 5.3 Reliability analysis 21 5.4 Assumptions 22 5.5 Control variables 23 5.6 Testing of hypotheses 25 6. DISCUSSION 29 6.1 Discussion 29 6.2 Managerial implications 30
7. LIMITATIONS AND FUTURE RESEARCH 31
REFERENCES 32
5 1. INTRODUCTION
Even though retailers are able compete on many aspects, pricing strategy is seemingly the most used way to differentiate themselves as a firm (Ellickson & Misra, 2008). From a retailer’s point of view, the price is an important marketing variable, because it affects a retailer’s revenue, but it is also the only P in the marketing mix that can be controlled by the firm without investing a large amount of money (Samiee, 1987). From a consumer’s point of view, a price is a monetary sacrifice to obtain a product (Zeithaml, 1988), as well as an objective measure of the value of a product, from which consumers derive subjective meaning (Dodds, Monroe, & Grewal, 1991). Warren Buffett, an American business magnate, once said – “Basically, the single most important decision in evaluating a business is pricing power”. Despite the importance of pricing, less than 5% of all Fortune 500 companies dedicate a managerial function to setting a pricing strategy (Hinterhuber & Liozu, 2012).
When done well, a good pricing strategy can deliver great profitability to a company (Hinterhuber & Liozu, 2012). However, the company can be at risk when a pricing strategy is used inappropriately. It can violate consumers’ trust, decrease brand equity, or even lay down the basis for a lawsuit (Anderson & Simester, 2003b).
Changing the rightmost digits of a price – price ending – is a pricing strategy that is a popular marketing technique among retailers. Different studies show a use of 30%, 65%, and even 80% of this pricing strategy among retailers all over a country (Anderson & Simester, 2003a; Schindler & Wiman, 1989). Psychological pricing, also sometimes referred to as ‘odd pricing’, is a pricing strategy of ending a price with a digit other than zero, or just below zero (Gendall, 1998). The idea behind psychological pricing is that it creates an illusion that makes a product seem cheaper (Gendall, Holdershaw, & Garland, 1997). Consequently, a written price of $1.99 is perceived as cheaper than $2.00. Despite the substantial use of this technique, the phenomenon has not been researched extensively. Moreover, relatively little is known about the effects of pricing strategies on subjective perceptions of consumers. A favourable price perception has a positive influence on return intention of a customer (Jiang & Rosenbloom, 2005), and quality perception plays a major role in purchasing behaviour and brand loyalty (Olson & Jacoby, 1972).
6 effects, in order to optimize the price and quality perception of products. Based on this, the following research question has been formed:
RQ: What are the effects of price ending strategies on subjective consumer perceptions?
1) How does psychological pricing – as opposed to round pricing – influence price and quality perception?
2) Does the effect vary among different situational contexts?
The aim of this thesis is to introduce clear managerial implications on how to use psychological pricing under different moderating conditions. As a good pricing strategy can benefit retailers’ profitability, and a bad pricing strategy can put them at risk, it is important that retailers have a clear view on what the effect of these strategies are in terms of their own products and environment. It also seeks to contribute to the current literature about psychological pricing, by taking into account perceived price and perceived quality. Fassnacht & El Husseini (2013) stated in their article that the impact of pricing strategies on perceived price image is an interesting topic for further research, for example.
7 2. LITERATURE REVIEW
2.1 Psychological pricing
Price ending is a pricing strategy that can be expressed in different forms. The most diametrically opposed forms are round prices and psychological prices. There are different terms and definitions for psychological pricing used in literature; ‘psychological price’, ‘charm price’, ‘odd price’, ‘nine-ending price’, ‘magic prices’, and ‘irrational prices’ are used to describe the same pricing strategy (Beracha & Seiler, 2015; Holdershaw, Philip, & Ron, 1997; Salter, Johnson, & Spurlin, 2007). These terms may be used interchangeably throughout this paper. Psychological pricing is ending a price with a digit different from zero, or more specifically, just below zero (Gendall, 1998). The effect of this pricing technique is that it creates the illusion of being a lower price (Gendall et al., 1997).
Throughout the years, explanations have been developed to support this theory, and explain the rationale behind the effect.
2.1.1 Left-to-right processing
Processing multi-digit numbers happens from left to right, causing consumers to pay less attention to the numbers on the right, than to the numbers on the left (Schindler & Kibarian, 1996). Bizer & Schindler (2005) provided direct evidence for this so called ‘drop-off’-effect, in which people ignore the two rightmost digits of a price. They also found evidence for a moderating variable, which is the internal and external motivation to process the numbers. According to Stiving & Winer (1997), consumers implicitly weigh the cost of processing the cent digits against the benefit of the additional information. Since the information of the left digit is ten times more important than the sequential right digit, people are less likely to choose to process the digit on the right side. This is in line with the theory by Shugan (1980), who proposed that consumers, for each decision, make a trade-off between the cost and benefit of mental processing.
2.1.2 Derived meaning
8 connotation from the marketplace. Research found that prices ending with a digit 9 imply a good value for money, whereas ending with a digit 0 implies high quality. Using nine-ending products can therefore imply inferior product quality (Macé, 2012). Schindler (2001) suggests that if the mental connection with the digit 9 indeed exists, this effect should be stronger for prices with two nine-digits (i.e., 99) instead of just one. However, this was not found to be significant. Besides product quality, other connotations to the digit that were found were that nine-ending prices impair an upscale image, signal that retailers are not being fully honest, and cause inconvenience regarding calculating and communicating the price (Schindler, Parsa, & Naipaul, 2011).
2.2 Research evidence
The psychological pricing effect has been tested in different studies. When consumers were given a budget of $73, consumers faced with prices that ended with a nine thought that they could buy significantly more than consumers faced with prices that ended with a zero (Bizer & Schindler, 2005). In his study, Coulter (2001) found evidence for left-to-right processing. When the digits of a price were exposed to a consumer from left to right or all at once, the demand for psychologically priced (i.e., nine-ending) products was higher than the demand for products with prices ending with a zero. The study by Schindler & Kibarian (1996) concluded that ending prices with digits 99 was more effective than 00 in terms of consumer purchase. A UK-based study tested the “difference between the level of sales attracted through the use of 9-ending prices and round-pound prices” and found the effect to be significant as well (Bray & Harris, 2006). In 2012, another study found that the use of nine-ending prices can increase the sales of small brands, but that extensive use of ending with the digit 9 is counter effective (Macé, 2012). The rationale behind this, is that the digit 9 makes a product seem cheaper, and signals lower quality.
2.3 Hedonic versus utilitarian products
9 that odd-ending prices reduced anticipated guilt and therefore justified the consumption of hedonic products, and that consumers choose hedonic products over utilitarian products when odd pricing is used (Choi et al., 2014). Another study found that framing the idea of ‘savings’ is more effective for hedonic products than for utilitarian products, because no such feelings of guilt are associated with utilitarian products (Khan & Dhar, 2010). Mishra & Mishra (2011) found that consumers prefer bonus packs they are buying virtue food, but have a preference for price discounts when it comes to vice foods. The reasoning behind this, is that people cannot justify higher consumption of vice food, but a price discount serves as a justifying mechanism.
Nine-ending price could induce feelings related to utilitarian benefits (i.e., economy, efficiency, and utility), and that relate to hedonic benefits (i.e., intrinsic stimulation, fun, and self-esteem) (Gaston-Breton & Duque, 2015). It is proposed that an analytical versus an intuitive thinking mode is a moderating variable that can lead to being more prone to buying utilitarian or hedonic products. The authors found that nine-ending prices should increase the demand for utilitarian products when consumers are primed with an analytical thinking mode, and vice versa when primed with an intuitive thinking mode.
In a study that examined the quality of wine, researchers found that quality was not just a combination of objective measures, but was mainly determined by sensory characteristics (Combris, Lecocq, & Visser, 1997). According to Lageat, Czellar, & Laurent (2003), hedonic products are characterized by such vague and abstract sensory evaluation. Another study found that wines for which a higher price was charged placed themselves on a higher-end of the quality spectrum, than did lower-priced wines (Costanigro, Mccluskey, & Mittelhammer, 2007). This indicates that there is a strong connection between the price and quality perception for hedonic products.
2.4 Price promotions
nine-10 ending has a negative effect on price recall and that prices are underestimated when they are being recalled, emphasizing on the leftmost digit being remembered best. This could lead to a higher perceived discount when using a nine-ending price as a promotional price, and using a zero-ending price as the anchor. This was hypothesized and found significant by Guéguen & Legoherel (2004). Another study found that a price discount using nine-ending is perceived as larger when the digits on the left are small (i.e., below five) than when they are larger (i.e., above seven) (Lin & Wang, 2017).
Customers assume that items priced with nine-ending are related to a discount. Using a nine-ending price in a discount setting therefore only adds little additional information, because it is already implicitly clear that the item is on sale (Anderson & Simester, 2003a).
2.5 Price as a que for price perception
11 2.6 Price as a que for quality expectations
In order to evaluate a product before experiencing it, consumers use extrinsic and intrinsic cues of a product to form expectations about its quality (Acebrón & Dopico, 2000). Intrinsic cues are physical characteristics of a product (e.g., colour, freshness, or texture of food), whereas extrinsic cues are determined by marketing (e.g., price, brand name, promotion, packaging). When intrinsic cues are unclear or unavailable, consumers rely more heavily on extrinsic cues. Erickson & Johansson (2002) also investigated beliefs about product quality. They found that price may signal information about a product, making price an extrinsic ‘attribute’ of a product. The ideas about this attribute are often interwoven with other attribute beliefs. Of course, if a product is of higher quality, it will retail for a higher price (Stiglitz, 1987). Consequently, it is not irrational to think that high prices indicate high quality (Scitovszky, 2006). However, whether price really indicates higher perceived quality is a much debated topic. When you are an expert in the market, you know what you buy. In that case, it is reasonable to think that price indicates quality, as the expert cannot be fooled. However, in a world of laymen, this is not reasonable. A layman often has to rely on meaningless cues to derive quality perception, and forms perceptions with the information that is available to him (Scitovszky, 2006). When price information is available, and the quality of a product is uncertain, consumers use the price as an indicator of quality (Monroe, 2006).
The definition of quality perception that will be used in this paper is the one by Steenkamp (1990): “Perceived product quality is an idiosyncratic value judgment with respect to the fitness for consumption which is based upon the conscious and/or unconscious processing of quality cues in relation to relevant quality attributes within the context of significant personal and situational variables.” This definition encloses the individual judgment, as well as the situational variables that have been found to be important. Most central, however, is the fact that it is a value judgment.
12 3. CONCEPTUAL FRAMEWORK AND HYPOTHESES
In this section of the thesis, the conceptual framework will be discussed, as well as the relevant hypotheses that have been derived from the theoretical framework. In this framework, price perception and quality perception are central concepts. Whereas most previous studies are focussed on the effect of price ending strategy on demand (Bray & Harris, 2006; Gendall et al., 1997), retail sales (Anderson & Simester, 2003a; Schindler & Kibarian, 1996), and other objective measures, this framework is especially interested in subjective measures. The conceptual framework can be found in Figure 1.
Figure 1: Conceptual framework 3.1 Psychological pricing effect
Literature suggests that psychological prices can influence the perception of a price by (1) left-to-right processing and (2) derived meaning from nine-digits. Letting prices end with a nine-digit causes consumers to round prices down. Therefore, based on left-to-right processing, it is expected that a psychological price will lead to a lower perceived price than a rounded price. Even though price perception should be higher for a higher price inherently, the increase in price perception is expected to be larger than an increase of one cent would cause for a random price. The following hypothesis is proposed:
13 Based on the effect of derived meaning, it is expected that psychological pricing, as opposed to a rounded price, has a negative effect on quality perception, because a nine-digit implies inferior quality. Moreover, when combining the left-to-right processing effect with the finding that a high price signals high quality, it can be expected that a psychological price causes a price to be perceived as lower, thus signalling lower quality. The opposite effect can be expected to be found for rounded pricing, based on the theoretical framework. This leads to the following hypothesis:
H2: A psychological price results in a lower quality perception than a rounded price. 3.2 Price perception and quality perception
Price is seen as an attribute of a product. When other cues are not available, the price may be used as an indicator to derive the quality from. Consumers are under the assumption that high quality products retail for high prices, and vice versa, that low priced products are lower in quality. To test whether the price cue indicates a certain perceived quality, the following hypothesis is stated:
H3: Price perception has a positive relationship with quality perception. 3.3 Hedonic versus utilitarian products
With the purchase of hedonic products, consumers often experience feelings of guilt – more so than with the purchase of utilitarian products. Therefore, purchases that are more hedonic often have to be justified; previous research found that consumers are more prone to buying hedonic products when the purchase can be justified. As it is expected that a nine-ending price is seemingly cheaper, and possibly has a ‘sales’-connotation, it is expected that consumers will react more favourably to a psychological price, than to a rounded price, in terms of price perception, when the hedonic level of that product is high as opposed to low. In other words:
H4: The negative effect of psychological pricing (9-ending) on price perception is negatively moderated by the hedonic level of the product.
14 strong for hedonic products in general. Because the evaluation of quality of hedonic products is more dependent on sensory experience and subjective measures than less hedonic products – which rely on objective measures as well – it is expected that the relationship between price and quality is stronger for more hedonic products than for less hedonic products. Therefore, the following hypothesis is stated:
H5: The negative effect of psychological pricing (9-ending) on quality perception is negatively moderated by the hedonic level of the product.
A visual representation of the moderator can be found in Figure 2.
Figure 2: Visual representation of hedonic level moderator 3.4 Price promotions
Prior research found that consumers have connotations with the nine-digit, which are related to discounts and low prices. Therefore, it might be plausible that this effect is even stronger when used in an actual promotional setting. Another possible outcome is that there is no use in using a psychological price in a promotional setting, as there is little perceived difference between a promotional rounded price and a non-promotional psychological price. To find out, the following hypotheses have been proposed:
15 H7: The negative effect of psychological pricing (9-ending) on quality perception is negatively moderated by the existence of a promotional setting.
A visual representation of the moderator can be found in Figure 3.
16 4. METHODOLOGY
In this chapter, the methodology will be discussed. First, there is an explanation of the measurement of the dependent variables, as well as the manipulation of the independent, moderating, and control variables. Then, the study design will be presented.
The study is a 2 (price ending strategy) x 2 (hedonic level of product) x 2 (promotional price setting) between-subjects experimental study. All variables are summarized in Table 1.
4.1 Variable measurement and manipulation
Variable Type Measurement Source
Price perception Dependent variable Four-item 7-point Likert scale
(Zielke, 2006)
Quality perception Dependent variable Three-item 7-point Likert scale
(Richardson, Dick, & Jain, 1994)
Price ending strategy Independent variable
Manipulation: psychological price (9-ending) versus round price (0-ending) - Hedonic level of product Moderating variable
Five-item 7-point semantic differential scale
(Voss, Spangenberg, & Grohmann, 2003) Promotional pricing Moderating
variable
Manipulation: regular price setting (no discount) versus promotional price setting (25% discount)
-
Purchasing frequency
Control variable Scale 0-100% -
Supermarket shopping frequency
Control variable Scale 0-100% -
Table 1: Variable summary 4.1.1 Dependent variables
17 quality of other brands, (3) This brand also sells products in the lower price range, and (4) This brand also sells products in the higher price range. This scale was used by Zielke (2006) to measure price image of brands and products. Question 3 was a question that was answered using opposing values. Quality perception was measured using three statements on a 7-point Likert scale, stating (1) All things considered, I would say [brand] has (1 = poor overall quality, 7 = excellent overall quality), (2) To me, this product offers (1 = poor value for money, 7 = excellent value for money), and (3) If I were to try buy a brand from this type of product, I would (1 = never try this brand, 7 = definitely try this brand). This scale was used by Steenkamp (1990) to measure quality perception.
4.1.2 Independent variable
The independent variable ‘price ending strategy’ was manipulated. Each product that was shown to the participant had either a psychological (9-ending) or a rounded (0-ending) price. These products are chosen based on characteristics that are explained in the next paragraph. The prices of each product were based on the original price set by Albert Heijn as much as possible. A comparison of the original and manipulated prices is given in Table 2.
Product Original price Psychological price Round price
Chocolate Regular €2,79 €2,79 €2,80
“Tony’s Chocolonely” Promotion - €2,09 €2,10
Donuts Regular €2,84 €2,79 €2,80
“AH Donuts” Promotion - €1,99 €2,00
Toilet paper Regular €3,99 €3,99 €4,00
“Page Origineel Schoon” Promotion - €2,99 €3,00
Pain killers Regular €2,05 €1,99 €2,00
“Nurofen Pijnstillers” Promotion - €1,49 €1,50
Table 2: Original and manipulated prices 4.1.3 Moderating variables
18 Figure 4: Pre-test results
The aim was to get two more hedonic products (i.e., scoring high on hedonic and low on utilitarian) and two less hedonic products (i.e., scoring high on utilitarian and low on hedonic). Based on this, the two most hedonic products were ‘donuts’ and ‘chocolate’, and the two least hedonic products were ‘pain killer’ and ‘toilet paper’.
19 4.1.4 Control variables
In order to account for participants having preliminary opinions about the product(s) or the supermarket, four control variables will be used: age, gender, income, purchase frequency, and supermarket shopping frequency. Income will end up being a subjective construct, by asking to indicate to what extent they think they can spend (1) much less, (2) less, (3) an equal amount, (4) more, or (5) much more money on groceries than other people. Park & Lessig (1981) found that consumers that are unfamiliar with the product are more prone to using extrinsic product information, like price, to evaluate the product. When consumers are highly familiar with the product, intrinsic cues are used to evaluate the product (Rao & Monroe, 2002). To measure purchase frequency, participants will be asked to indicate (in %) how often they buy the specific brand, when they buy that specific product type. Participants will also be asked to indicate (in %) how often they do they groceries at Albert Heijn, to measure supermarket shopping frequency.
4.2 Study Design
Participants are situated in an electronic setting. They are told that they are a customer at the Dutch supermarket Albert Heijn, and consumers will view a list of suggested products, based on their previous purchases at Albert Heijn. The basket consists of eight different products, equally distributing generic and branded, hedonic and utilitarian products. Participants are asked to take a look at the list of products, and are asked to answer different questions about four random products that will be shown individually. In reality, however, these four products are not chosen randomly, but they are the four products that have been chosen based on their proneness to being hedonic or utilitarian. At the individual view, participants are primed with a picture of the product (hedonic vs. utilitarian), and the price (nine-ending vs. rounded). These products may or may not be in a promotional setting (regular price vs. promotional price). This creates 4 possible scenarios per product. Participants are randomly assigned to different cells, but they will each encounter all four products, in a random order. Then, participants will answer questions about the product, including the price perception, quality perception, hedonic questionnaire, and questions concerning the control variables.
20 5. RESULTS
In this section the results of the study are presented, as well as all analyses that were done. First, the sample description and demographics are discussed. Then, the data is checked for outliers or oddities. After the data checks, reliability analysis is done for each construct. When the final dimensions are established, control variables are analysed, and finally, the hypotheses are tested.
5.1 Sample description and demographics
The survey was spread among Dutch residents. The questionnaire was started by 179 respondents, of which 66 had left the survey before finishing it. This lead to 111 respondents, who each filled in four different cells (i.e., four products), leading to n=444 cases. Of the 111 respondents 36.0 percent was male, and 64.0 percent was female. This does not represent the Dutch population, consisting of 49.63% male residents and 50.37% female residents (CBS, 2018). With a range of 19 to 65, the average age of the respondents was 36, whereas the average age of the Dutch population is 48 (CBS, 2018). This might be due to the high amount of students that participated in the survey.
Most respondents felt that they were able to spend an equal amount of money to other people (38.2%). Besides that, 32.7 percent felt that they could spend more, and 3.6 percent felt that they could spend much more than other people. On the other side, 19.1 percent felt that they could spend less money, and 6.4 percent felt that they could much less money on groceries than other people.
On average, the respondents do 42 percent of their grocery shopping at Albert Heijn. 5.2 Data checks
21 data, the cases in which these extreme values were given, were removed from the dataset. Because each outlier was the answer of a unique respondent (i.e., no individual respondent contained more than one outlier), it was decided that only the specific cases would be removed from the dataset, and not the entire respondent. This left the dataset from n = 444 to
n = 430 cases.
5.3 Reliability analysis
In order to judge the reliability of the established dimensions of price perception (PP), quality perception (QP), and hedonic level (HL), a reliability analysis was performed on these variables. The Cronbach’s Alpha on all constructs making up price perception was .655. Even though this scale has some reliability, it is not enough to consider it a reliable construct, as the general cut-off is a Cronbach’s Alpha of .7. The price perception ceased to change at a two-item level (i.e., Q4 and Q5 in Appendix C). Its reliability was measured using Pearson correlation, as this is the recommended reliability analysis for a two-item scale (Verhoef, 2003), and had a significant Pearson’s correlation of .529 (p = .000). The Cronbach’s Alpha on all constructs making up quality perception was .732. Even though it meets the criteria of internal consistency, at further consideration the last item (i.e., Q10 in Appendix C) was removed from the scale, as this measures purchase intention rather than solely quality perception. The two remaining items had a significant Pearson’s correlation of .467 (p = .000). The Cronbach’s Alpha on all items making up hedonic level for chocolate was .875, which met the criteria for internal consistency of the scale. After the validity of these variables was determined, the means of the items were used to represent the value of that specific construct.
22 hedonic level (not hedonic vs. hedonic) were determined based on the scale from 1 to 7, with the cutting point at the middle. For each individual case, if the hedonic value allocated to the product was 4 or higher, the product was classified as ‘high hedonic level’, and products with a hedonic level lower than 4 were classified as ‘low hedonic level.
Table 3: Descriptive measures (Likert scale 1-7) 5.4 Assumptions
In order to be able to do parametric analyses such as independent samples T-test and ANOVA, items have to meet criteria regarding assumptions of normal distribution and homogeneity of variance. To assess the first criterion, skewness and kurtosis of the items were tested. Each item met the skewness criteria of being in the range of -2/+2, and therefore, it was assumed that price perception and quality perception were normally distributed. The test results can be found in Table 4. To assess the criterion of homogeneity of variance, a Levene’s Test of Equality of Error Variances was done for both dependent variables. The assumptions were not violated for price perception (p = .541), nor for quality perception (p = .895).
Product Skewness Kurtosis
Chocolate Price perception -.253 -.441 Quality perception -.167 -.733
Donuts Price perception -.308 -.369
Quality perception -.116 -.139 Toilet paper Price perception .145 .013
Quality perception -.607 1.311 Pain killers Price perception -.044 -.578 Quality perception .412 .005 Table 4: Skewness and kurtosis of items
23 5.5 Control variables
Before testing the main hypotheses, the independent variables were tested on their correlation with the control variables. Both price perception and quality perception were tested on their correlation with the general control variables (age, gender, and income) as well as purchase frequency (PUFR) and supermarket shopping frequency (SUFR). Since age, income, PUFR, and SUFR are variables on scale level, these analyses were done using correlation analysis. To search for any relations with gender, an independent samples T-test was used.
To look for any correlations of the control variables age, income, PUFR and SUFR with the price and quality perception, a Pearson’s correlation analysis was done. No significant correlations were found between the control variables and price perceptions of each product.
In case of quality perception, some correlations were found. Age was weakly and negatively correlated with chocolate quality perception (r = -.347, p = .000, n = 105), toilet paper quality perception (r = -.193, p = .045, n = 108), donut quality perception (r = -.299, p = .002, n = 107), and pain killer quality perception (r = -.216, p = .023, n = 110). Purchase frequency is an important variable as well, as it is weakly to moderately and positively correlated to the quality perceptions of the products. Statistically significant correlations were found for chocolate (r = .372, p = .000, n = 105), toilet paper (r = .285, p = .003, n = 108), donuts (r = .233, p = .016, n = 107), and pain killers (r = .538, p = .000, n = 110). This is in line with expectations that were formed about purchase frequency and quality perception, as a high perceived quality is likely to lead to higher purchase frequency. Another correlation that was found, was between income and the quality perception of toilet paper (r = .231, p = .027, n = 108). No other correlations between income and quality perceptions were found. No significant correlations were found for supermarket shopping frequency and quality perceptions of each product.
24 A summary of the correlations between the control variables and dependent variables is given in Table 4. The correlation of a product’s perception with the purchase frequency is always the purchase frequency of that specific product (e.g., the price perception of chocolate has a Pearson correlation of -.090 with the purchase frequency of chocolate), whereas the supermarket shopping frequency is independent of the product.
Age Income PUFR SUFR
Chocolate Price Pearson correlation .018 .044 -.090 -.079
perception P-value .857 .657 .360 .422
Quality Pearson correlation -.347** -.067 .372* -.144
perception P-value .000 .499 .000 .142
Toilet paper Price Pearson correlation .064 -.177 -.130 -.029
perception P-value .508 .067 .180 .764
Quality Pearson correlation -.193* .213* .285** -.114
perception P-value .045 .027 .003 .238
Donuts Price Pearson correlation .125 -.164 -.070 -.050
perception P-value .199 .091 .473 .611
Quality Pearson correlation -.299** .050 .233* .097
perception P-value .002 .609 .016 .320
Pain killers Price Pearson correlation .134 -.056 -.116 -.124
perception P-value .162 .563 .227 .196
Quality Pearson correlation -.216* .169 .538** .043
perception P-value .023 .078 .000 .653
Table 4: Correlations between control variables and dependent variables per product. *Correlation is significant at 0.05 level. **Correlation is significant at 0.01 level.
Concluding, age, income, and purchase frequency are variables to consider in the upcoming analyses, and have to be taken into account as control variables. Even though the analyses were statistically significant, the strength of the correlations was somewhat weak, especially in the case of the age of the respondent.
25 between the quality perceptions based on promotional pricing. Results of these tests are summarized in Table 5.
Regular Promotional T-test
Chocolate Price perception μ = 5.29, σ = 1.07 μ = 5.12, σ = 1.20 t(103) = .748, p = .456 Quality perception μ = 5.52, σ = 0.91 μ = 5.36, σ = 0.90 t(103) = .873, p = .385 Toilet paper Price perception μ = 5.52, σ = 1.14 μ = 5.07, σ = 0.91 t(106) = 2.182, p = .031
Quality perception μ = 4.66, σ = 1.07 μ = 4.69, σ = 0.95 t(106) = -.139, p = .889 Donuts Price perception μ = 4.39, σ = 1.23 μ = 3.75, σ = 1.20 t(105) = 2.734, p = .007 Quality perception μ = 4.45, σ = 1.02 μ = 4.61, σ = 0.76 t(105) = -.912, p = .364 Pain killers Price perception μ = 4.73, σ = 1.48 μ = 3.87, σ = 1.43 t(108) = 3.101, p = .003 Quality perception μ = 4.88, σ = 1.00 μ = 4.78, σ = 0.91 t(108) = .532, p = .596 Table 5: Independent samples T-test on promotional vs. regular condition
Because some control variables had statistically significant effects on the dependent variables, these are accounted for in hypothesis testing. Because the moderating variable of the promotion conditions had significant effects on the dependent variable price perception, the dataset was split during hypothesis testing, in order to get a clean idea of the different effects of the independent and moderating variables.
5.6 Testing of hypotheses
To test H1, the effect of psychological pricing on the price perception, a one-way ANCOVA analysis was performed to determine whether there is a statistically significant difference between psychological prices and round prices in price perception, controlling for age, gender, income, purchase frequency, and supermarket shopping frequency. There was no significant effect of psychological pricing strategy on price perception after controlling for the covariates (F(1, 423) = 1.529, p = .217). Age was significantly correlated to price perception (F(1, 423) = 5.119, p = .024), as well as gender (F(1, 423) = 4.480, p = .035). With this analysis, H1 would be rejected. The ANCOVA table can be found in Appendix D.
26 The mean price perception of a product with a psychological price (μ = 4.54) was actually higher than the mean price perception of a product with a round price (μ = 4.24). This finding was very surprising, as psychological price should be perceived as a lower price than a round price, according to the theory of left-to-right processing. This ANCOVA table can be found in Appendix D as well.
To have a clearer view on the mean price and quality perceptions in each pricing strategy condition, independent samples T-tests were done. The results of these test can be found in Table 6.
Psychological price Round price T-test
Regular Chocolate Price perception μ = 5.33, σ = 1.18 μ = 5.26, σ = 0.97 t(56) = -.266, p = .792 price Quality perception μ = 5.50, σ = 0.90 μ = 5.53, σ = 0.94 t(56) = .133, p = .895 Toilet paper Price perception μ = 5.76, σ = 1.17 μ = 5.23, σ = 1.05 t(59) = -.1835, p = .072
Quality perception μ = 4.65, σ = 1.16 μ = 4.68, σ = 0.96 t(59) = .098, p = .922 Donuts Price perception μ = 4.32, σ = 1.11 μ = 4.46, σ = 1.38 t(52) = .413, p = .681 Quality perception μ = 4.63, σ = 1.07 μ = 4.27, σ = 0.96 t(52) = -.1283, p = .205 Pain killers Price perception μ = 4.53, σ = 1.56 μ = 4.98, σ = 1.35 t(51) = .413, p = .281
Quality perception μ = 4.93, σ = 1.06 μ = 4.80, σ = 0.94 t(51) = -.462, p = .646 Promo- Chocolate Price perception μ = 5.34, σ = 1.28 μ = 4.82, σ = 1.02 t(45) = -1.493, p = .141 tional Quality perception μ = 5.48, σ = 0.88 μ = 5.18, σ = 0.93 t(45) = -1.115, p = .271 price Toilet paper Price perception μ = 4.68, σ = 0.94 μ = 5.32, σ = 0.82 t(45) = 1.764, p = .085
Quality perception μ = 4.82, σ = 0.81 μ = 4.55, σ = 1.09 t(45) = -.985, p = .330 Donuts Price perception μ = 3.98, σ = 1.30 μ = 3.46, σ = 1.02 t(51) = -1.608, p = .144
Quality perception μ = 4.59, σ = .074 μ = 4.65, σ = 0.80 t(51) = .280, p = .780 Pain killers Price perception μ = 4.06, σ = 1.41 μ = 3.63, σ = 1.44 t(55) = -1.137, p = .260
Quality perception μ = 4.89, σ = 0.95 μ = 4.65, σ = 0.86 t(55) = -.967, p = .338 Table 6: Independent samples T-test on psychological price vs. round price condition
H1 was now completely rejected, as the psychological price did not have significant effects on price perception in a regular price setting. The effect was significant in the promotional price setting. However, it had the opposite effect of what was hypothesized.
27 Covariates that were significantly correlated with quality perception were age (F(1, 423) = 24.713, p = .000), income (F(1, 423) = 5.964, p = .015), and purchase frequency (F(1, 423) = 75.527, p = .000). The ANCOVA table can be found in Appendix E.
The ANCOVA was also performed on the dataset that differentiated between regular price setting and promotional price setting. In the regular price setting, pricing strategy also had no significant effect on quality perception (F(1, 219) = .381, p = .538), after controlling for the covariates. In the promotional price setting, pricing strategy had a non-significant effect on quality perception as well (F(1, 197) = 3.306, p = .071), though it was very near meeting the standards for being statistically significant. The ANCOVA table can be found in Appendix E as well. With this analysis, H2 was rejected.
To test H3, a Pearson’s correlation was done between price perception and quality perception. These was a significant correlation between these two variables (r = -.152, p = .002, n = 430). However, the effect was the opposite of what was hypothesized. The analysis explained a negative correlation between the two variables, whereas it was hypothesized that they were positively correlated. The correlation matrix can be found in Appendix F.
5.7 Moderation analysis
To test whether the hedonic level of the product affects the relationship between pricing strategy and price perception, as hypothesized in H4, a two-way ANCOVA with interaction was performed. The interaction was not significant (F(1, 421) = .041, p = .839), as were the main effects of pricing strategy (F(1, 421) = 1.573, p = .210) and hedonic level (F(1, 421) = 1.006, p = .317). With this analysis, H4 would be rejected.
28 To test whether the hedonic level of the product moderates the relationship between pricing strategy and quality perception, as hypothesized in H5, another two-way ANCOVA with interaction was performed. The interaction effect (F(1, 421) = .105, p = .474) and the main effect of pricing strategy we both not significant, but the hedonic level of the product was significantly correlated to quality perception (F(1, 421) = 7.004, p = .008). Covariates that were significantly correlated to quality perception in this model were age, income, and purchase frequency. The ANCOVA table can be found in Appendix H. With this analysis, H5 was rejected.
To test whether the promotional setting does not only have a direct effect on price perception, but is also a moderating variable, another two-way ANCOVA with interaction was performed. The main effect of pricing strategy was not significant, as was the interaction. There were significant differences between regular price setting and promotional price setting for price perception (F(1, 421) = 22.277, p = .000), which was already concluded using an independent samples T-test in the fifth paragraph of this chapter. This analysis showed that there was no moderating effect of the promotional setting, and as such, H6 was rejected. However, it was already established that a promotional price setting facilitated the existence of an effect of pricing strategy on price perception. The ANCOVA can be found in Appendix I.
29 6. DISCUSSION
In this section of the thesis, the previous results will be discussed. Subsequently, some managerial implications will be discussed.
6.1 Discussion
The aim of this study was to detect whether differences in pricing strategy (i.e., psychological pricing versus round pricing) would influence the price and quality perception of certain products, in order to provide managerial implications that could be applied in strategic pricing decisions.
Based on left-to-right processing and derived meaning, it was hypothesized first, that a psychological price would lead to a lower price perception of products than a round price. Contrary to what was expected, this hypothesis was rejected. A psychological price did not lead to a significantly lower perception of price than a rounded price. When the analysis was performed on a dataset that compared the effect in a promotional and regular price setting, the results were even more surprising. In the promotional setting, a psychological price lead to a higher perception of the price than a round one. This means that participants who encountered a rounded price in a promotional setting thought they were getting a better deal than participants who saw a psychological price in that same promotional setting.
The negative influence of psychological pricing (as opposed to rounded pricing) on quality perception was hypothesized as well, but was also not found significant. Even though participants’ knowledge of products was accounted for through the measurement of purchase frequency, the hypothesis had to be rejected. A psychological price did not lead to significant differences in quality perception in comparison to a rounded price.
Another odd conclusion that was made, was that there was a significant negative relationship between quality perception and the perceived highness of the price. This is very much in contrast to what has been established for years, which is that a higher price implicates higher perceived quality. A possible explanation for this to happen, was that products were already known in participants’ minds, about which they may have had preliminary opinions, which have spilled over to the participants’ answers.
30 as a moderator in the effect of pricing strategy. A promotional setting did have a direct effect on the price perception of products, but it did not moderate the effect of pricing strategy on price perception. It did not moderate the effect of pricing strategy on quality perception either, but there was no direct effect of promotional setting on quality perception directly. The significant direct effect was ascribed to the lower price that was shown in the promotional price setting.
In this study, the results of the additional analysis of the first hypothesis were surprising. The effect of pricing strategy on price perception did exist when participants were in a promotional price setting. However, contrary to what was hypothesized, a psychological price lead to a higher price perception than a rounded price. A possible explanation for this ‘flipped’ effect may be that consumers nowadays know that they are being fooled when prices are just below zero. A possible explanation for the fact that this occurred only in the promotional price setting, is building on the theory of derived meaning. A psychological price already implicates a promotion, according to literature (Macé, 2012; Quigley & Notarantonio, 2015; Schindler, 2001). A promotional price setting was expected to amplify this effect, but it appeared to flip the effect.
6.2 Managerial implications
Price perceptions play an important role in customers’ return intentions, and good quality perceptions are important as they influence purchasing behaviour and brand loyalty of the customer. Therefore, it is necessary for a retail manager to strive for as favourable price and quality perceptions for their products as possible.
31 7. LIMITATIONS AND FUTURE RESEARCH
In this final section of the thesis, limitations of the study are discussed. Then, future research ideas are discussed as well, laying the basis for improvements of this study.
One outcome of the study was odd and might imply some limitations to this research that may have influenced the results of this study.
The fact that price perception was negatively influencing quality perception, rang some alarms. A possible explanation for this measured effect may be that the perceived quality would only be influenced by price if the actual quality of the product is uncertain, as was stated in the literature review. Because this study used branded products, other cues may have been playing a role in assessing the quality of the product, which is a limitation in this research.
The prices that were shown to participants differed depending on whether there was a promotion or not. This is another limitation that is following up on the previous one. Because existing brands and products were used, the price range had to fit in with the brand and the product. Therefore, the promotional prices had to differ from the actual normal price. As a consequence, there had to be distinguished between these two settings throughout the whole study, in order to make conclusions about effects that were not due to the difference in price.
Even though purchase frequency was controlled for, this may not have been the right measure to take into account participants’ knowledge and preliminary thoughts about the products. In this study, purchase frequency was used to determine whether the participant had any prior experience with the product, on which they could base their quality assessment. However, what was not taken into consideration, was that zero purchases do not imply that the participant has no experience with the product; if the participant is not grocery shopper for its household, this can cloud the assumption.
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38 APPENDICES
Appendix A: Measurement of hedonic/utilitarian constructs (pre-test) To what extent do you experience this type of product as:
Effective O O O O O O O Uneffective
Helpful O O O O O O O Unhelpful
Functional O O O O O O O Not functional
Necessary O O O O O O O Unneccessary
Practical O O O O O O O Impractical
Not fun O O O O O O O Fun
Dull O O O O O O O Exciting
Not delightful O O O O O O O Delightful
Not thrilling O O O O O O O Thrilling
Enjoyable O O O O O O O Unenjoyable
39 Appendix C: Measurement of all constructs
Dear participant,
Thank you for participating in this survey. Please, carefully read the descriptive text before answering the questions and take your time to answer them. If you do not feel comfortable answering questions, feel free to leave the survey at any moment.
Kind regards, Randi Doddema
Q1 [AGE]. Please, first indicate your age. Q2 [GENDER]. Please, indicate your gender.
O Male O Female
O Prefer not to say
Q3 [INCOME]. Please answer the following question.
I feel like I can spend […] on my groceries than most people. O Much less
O Less
O An equal amount O More
O Much more
You are a customer of the Dutch supermarket Albert Heijn, and today you will be doing grocery shopping. For preparation purposes, you visit their website. Based on your previous purchases, Albert Heijn has composed a personal shopping bag. Please, take your time to look at the shopping bag. When you are ready, please click the button to continue.
You will now view four different products that have randomly been selected from your personal shopping bag. For each product, you are asked to answer a few questions about the specific product. Carefully read the questions before answering them.
40 referring to the specific product category of AH - not the store-brand as a whole. E.g., for AH Donuts, focus on the 'freshly baked cookie'-department of Albert Heijn.
Take a good look at this Tony's Chocolonely bar and the additional information provided. Then, please answer the questions below.
Q4 [CHOC_P_R_P1]. The price level of Tony's Chocolonely is very high. Completely disagree O O O O O O O Completely agree
Q5 [CHOC_P_R_P2]. With this brand, I pay more money than for the same quality of other brands.
Completely disagree O O O O O O O Completely agree
Q6 [CHOC_P_R_P3]. This brand (also) sells products in the lower price range. Completely disagree O O O O O O O Completely agree
Q7 [CHOC_P_R_P4]. This brand (also) sells products in the higher price range. Completely disagree O O O O O O O Completely agree
Q8 [CHOC_P_R_Q1]. All things considered, I would say Tony's Chocolonely has Poor overall quality O O O O O O O Excellent overall quality Q9 [CHOC_P_R_Q2]. To me, this product offers
Poor value for money O O O O O O O Excellent value for money Q10 [CHOC_P_R_Q3]. If I were to try buy a brand from this type of product, I would Never try this brand O O O O O O O Definitely try this brand
Q11 [CHOC_P_R_PUFR]. When you buy chocolate, how often do you buy Tony's Chocolonely? (in %) If you have never bought this brand, click 'not applicable'.
41 Q12 [CHOC_P_R_HEDO]. Some keywords are stated below. Please indicate to what extent you think this word fits with the product you just saw.
Not descriptive at all Very descriptive
Fun O O O O O O O
Enjoyable O O O O O O O
Thrilling O O O O O O O
Delightful O O O O O O O
Exciting O O O O O O O
Q13 [PUFR]. How much of your grocery shopping do you do at Albert Heijn (in %)? If you have never shopped at Albert Heijn, click 'not applicable'.
42 Appendix D: One-way ANCOVA (H1)
Tests of Between-Subjects Effects
Dependent Variable: Price perception
Source
Type III Sum of
Squares df Mean Square F Sig.
Corrected Model 29,515a 6 4,919 2,708 ,014
Intercept 689,410 1 689,410 379,483 ,000 AGE 9,299 1 9,299 5,119 ,024 PUFR ,003 1 ,003 ,002 ,967 SUFR 4,487 1 4,487 2,470 ,117 INCOME 6,444 1 6,444 3,547 ,060 GENDER 8,139 1 8,139 4,480 ,035 PSYCH 2,778 1 2,778 1,529 ,217 Error 768,467 423 1,817 Total 10376,750 430 Corrected Total 797,982 429 a. R Squared = ,037 (Adjusted R Squared = ,023)
Tests of Between-Subjects Effects
Dependent Variable: Price perception Promotional
setting Source
Type III Sum
of Squares df Mean Square F Sig.
Partial Eta Squared Regular setting Corrected Model 11,125a 6 1,854 1,095 ,366 ,029
43 PSYCH ,076 1 ,076 ,045 ,833 ,000 Error 370,871 219 1,693 Total 6042,000 226 Corrected Total 381,996 225 Promotional setting Corrected Model 24,425b 6 4,071 2,272 ,038 ,065 Intercept 269,878 1 269,878 150,628 ,000 ,433 AGE 10,362 1 10,362 5,783 ,017 ,029 GENDER ,007 1 ,007 ,004 ,949 ,000 INCOME 5,537 1 5,537 3,090 ,080 ,015 PUFR ,173 1 ,173 ,096 ,756 ,000 SUFR 6,284 1 6,284 3,507 ,063 ,017 PSYCH 7,350 1 7,350 4,102 ,044 ,020 Error 352,961 197 1,792 Total 4334,750 204 Corrected Total 377,386 203 a. R Squared = ,029 (Adjusted R Squared = ,003)
b. R Squared = ,065 (Adjusted R Squared = ,036)
Descriptive Statistics
Dependent Variable: Price perception
Promotional setting Psychological price Mean Std. Deviation N Regular setting Round price 5,0000 1,21132 108
Psychological price 5,0085 1,38672 118
Total 5,0044 1,30298 226
Promotional setting Round price 4,2418 1,35270 91 Psychological price 4,5354 1,36394 113
44 Appendix E: One-way ANCOVA (H2)
Tests of Between-Subjects Effects
Dependent Variable: Quality perception
Source
Type III Sum of
Squares df Mean Square F Sig.
Corrected Model 97,156a 6 16,193 20,459 ,000
Intercept 682,344 1 682,344 862,132 ,000 AGE 19,560 1 19,560 24,713 ,000 PUFR 59,777 1 59,777 75,527 ,000 SUFR 2,087 1 2,087 2,637 ,105 INCOME 4,720 1 4,720 5,964 ,015 GENDER ,451 1 ,451 ,569 ,451 PSYCH 1,817 1 1,817 2,295 ,131 Error 334,788 423 ,791 Total 10619,500 430 Corrected Total 431,944 429 a. R Squared = ,225 (Adjusted R Squared = ,214)
Tests of Between-Subjects Effects
Dependent Variable: Quality perception
Promotional setting Source
Type III Sum of
Squares df Mean Square F Sig.
Regular setting Corrected Model 68,784a 6 11,464 13,154 ,000
45
PSYCH ,332 1 ,332 ,381 ,538
Error 190,859 219 ,872
Total 5647,750 226
Corrected Total 259,643 225
Promotional setting Corrected Model 33,093b 6 5,515 7,811 ,000
Intercept 314,199 1 314,199 444,993 ,000 AGE 6,963 1 6,963 9,861 ,002 GENDER ,050 1 ,050 ,071 ,791 PUFR 17,671 1 17,671 25,028 ,000 SUFR 3,063 1 3,063 4,338 ,039 INCOME 2,110 1 2,110 2,989 ,085 PSYCH 2,334 1 2,334 3,306 ,071 Error 139,097 197 ,706 Total 4971,750 204 Corrected Total 172,190 203 a. R Squared = ,265 (Adjusted R Squared = ,245)
b. R Squared = ,192 (Adjusted R Squared = ,168)
Appendix F: Pearson’s Correlation analysis (H3)
Correlations
Price perception
Quality perception Price perception Pearson Correlation 1 -,152**
Sig. (2-tailed) ,002
N 430 430
Quality perception Pearson Correlation -,152** 1 Sig. (2-tailed) ,002
N 430 430
