Identifying patterns of customer response to price endings

Abstract

Purpose The purpose of this paper is to introduce a new approach for the identification of price thresholds, which enables learning true thresholds from previous buying decisions recorded in POS scanner data. Design/methodology/approach The methodology presented herein combines spline regression with generalized cross‐validation. Classical Chi‐square testing confirms the separation of regimes of the price response function by this methodology. Five propositions concerning the consumers' response to odd pricing in a Western‐type market are evaluated. Findings Despite the widespread retail practice odd prices are unlikely to flag the actual threshold in consumer response. The term odd price refers to prices with a non‐zero ending in the cent digit, e.g. .95, .98 or .99, which are commonly used in Western‐type markets. Moreover, the simple odd price effects are distinguished from odd‐ending prices with the first number left of the decimal point set to an odd number. The results show that even these prices not always flag a threshold in consumer response. Research limitations/implications The discussion of the odd‐price effect is confused by conflicting empirical results and related interpretations of the underlying mechanisms. In contrast to many previous investigations – which are restricted to the consideration of very few price endings – this study covers all reasonable prices. Statistically significant odd‐price effects are found for some brands, but not for all within the same category. Practical implications One must argue for checking the thresholds for each brand individually rather than generalizing by applying misleading rules of thumb. Originality/value The paper provides researchers as well as practitioners with a methodology to evaluate price thresholds and outlines the shortcoming of contemporary retailers pricing practices in a detailed manner.

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