Sunday, February 21, 2010

Reference Pricing

Being comparative is a natural human instinct. Most rational shopper wants to buy a product or a service if its price first matches his or her perceived value. Then the rational buyers might compare its price that this store offers relatively to other stores. The buyers might also have a set price in mind. Sometimes buyers do not have all of the relevant information to know how much a certain product or a service is worth, and this is where marketers can come in and assist (or trick if you have a negative view on marketing) and help buyers make buying decisions. Marketers can convince the buyers to purchase their product or service by implementing reference pricing strategy, most prominently used in discount stores. Reference prices are prices that buyers carry in their minds and refer to when looking at a given product. Reference price is one component of psychological pricing, in which the sellers consider the psychology of prices and not simply the economics.

Nordstrom Rack is a great example of a store that utilizes reference pricing to sell its product. Nordstrom Rack is the discount/clearance store for Nordstrom and it typically carries overstocked inventory from Nordstrom and other big name brands, original Nordstrom Rack brand such as Evergreen and returned merchandise from Nordstrom. There are very few instances where there will be the same product being sold at the regular store and the Rack (ex. Burberry Weekend Cologne). All the products from Nordstrom Rack are in perfect conditions, Nordstrom would never sell a damaged product even if it’s at a clearance division. Therefore, products are never discounted for the lack of quality. Basically, every Nordstrom Rack products have a price tag that list the original price of the merchandize and the reduced price that the buyer would have to pay. This is a great example of reference price because it tells the buyer directly how much he or she is saving by buying the product (it does not say how much you save on the price tag but the buyer can just subtract the new price from the original price). Any rational buyers would feel like he or she is getting a bargain and this obviously would be a strong influence in buyer’s purchase decision. Many Nordstrom Rack products are still relatively expensive. For example, a Hugo Boss tie might cost $49.99, but it does not match up to the perceived value for a buyer since the very same product might cost as much as up to $129.99 at a Hugo Boss department store. Once again, a rational buyer would recognize that this price is a bargain and that might very well influence his decision to purchase the product. Other times, the buyers might not have a perceived value set in mind for a product (like I wouldn’t know how much a Calvin Klein dress would normally cost). In this case, the reference pricing strategy would assist the buyer by letting him or her know what the perceived value is from the original retailer’s perspective and how much of a bargain the buyer would gain.

nordstrom rack price tag Pictures, Images and Photos

Jason Lao, Section E

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