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Expected product price as a function of factors of price sensitivity

Article  in  Journal of Product & Brand Management · July 2012

DOI: 10.1108/10610421211246702

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Jeffrey E. Danes Joan Lindsey-Mullikin

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 Pricing strategy & practice

Expected product price as a function of

factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
Orfalea College of Business, California Polytechnic State University, San Luis Obispo, California, USA

Abstract
Purpose – This paper aims to present a model relating Nagle and Holden’s factors of price sensitivity to expected price and willingness to pay. This
work presents various perspectives on price elasticity/sensitivity, empirically tests aspects of the influence of perception of the offer (product/service) on
expected price, and illustrates how the pricing methods developed within provide quantitative precision to the practice of price setting by capturing
perceptions important to consumers.
Design/methodology/approach – The authors used a within-subjects design to study four brands in two product categories, automobiles and
computers. Model evaluation employs ordinary least squares regression.
Findings – Ten qualitative factors were studied. Overall, the results show four factors predict expected price for the target market, product and brand.
The factors are perceived substitutes, quality, fairness, and unique value.
Originality/value – This research makes the following contributions. First, the authors are able to quantify ten factors of price sensitivity relevant to
the evaluation of product pricing. Second, they are able to identify the relevant factors of price sensitivity for two product categories specific to a given
target market. Third, they provide a data-driven model that enables translation of pricing variables into quantitative values to arrive at the price of a
product. The major theoretical contribution of this paper is to show that Nagle and Holden’s ten factors of price sensitivity may act in the following way:
the change in product/service perception may influence expected price, and then the change in expected price influences willingness to pay. The
empirical focus of the current research is on the first of these two changes.

Keywords Expected price, Fair price, Perceived substitutes, Pricing, Price sensitivities, Quality, Unique value

Paper type Research paper

Introduction
A critical activity for many marketing managers is to establish
product-pricing strategy. Current theory and practice favors
valued-based pricing over cost-plus methods (Monroe, 1973).
The current paper follows the new trends in pricing methods
based on insights into human behavior. There are many
important factors to consider when evaluating or setting price.
Examples include factors such as perceived quality, which
suggests a higher price, and perceived substitutes, which
suggest a lower price, etc. These factors affect price sensitivity
and reflect the value of the product for the consumer (Nagle
and Holden, 1995). The collection of these price-related
factors is important for managers to understand before
attempting to set a price for a new product or re-price an
existing product. This paper presents a new way to price
products based on value-based price perceptions.
The purpose of this paper is to:
.
present a model relating Nagle and Holden’s (1995)
factors of price sensitivity to expected price and
willingness to pay;
.
briefly review current definitions of price sensitivity;
. empirically test aspects of the proposed model of price
sensitivity: the influence of perception of the offer
(product/service) on expected price; and
.
illustrate how the pricing methods developed in this paper
provide quantitative precision to the practice of price
setting by capturing perceptions important to consumers.
Definitions of key variables
Below we define some key variables relevant to this paper.
The key variable of interest is price sensitivity; this is related
to the concept of price elasticity of demand defined as the
ratio of the percentage change in quantity such as units sold
or sales revenue Y relative to the objective price of the
offer, X.

The current issue and full text archive of this journal is available at ›Y X %DY
E x;y ¼ · < ð1Þ
www.emeraldinsight.com/1061-0421.htm ›X Y %DX
If the numerator of equation (1) is replaced with willingness
to pay, W, (Wertenbroch and Skiera, 2002; Miller et al.,
Journal of Product & Brand Management
21/4 (2012) 293– 300
q Emerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610421211246702] The authors are listed alphabetically.

293
 Expected product price as a function of factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
2011) and the denominator is replaced with the consumer’s
reference or expected price P, we then have price sensitivity
expressed as,
›W P %DW
E p;w ¼ · <
›P W %DP
Early research in behavioral economics relevant to marketing
by Gabor and Granger (1966) defined price sensitivity
relative to perceived quality, and argued that increasing price
may influence perceptions of increasing quality, and quality
perceptions may influence willingness to pay. Hence equation
(2) may be expressed as consisting as two components:
percent change in quality perceptions Q relative to percent
change in expected price P; and percent change in
willingness to pay W relative to percent change in quality
perceptions, Q:
›Q P ›W Q ›W P %DW
E p;q;w ¼ · · ¼ · <
›P Q ›Q W ›P W %DP
The insight provided by Gabor and Granger (1966), that
higher prices signal higher quality, spawned a spate of
research on relationships between price and perceived quality
(Rao and Monroe, 1989; Volckner and Hofmann, 2007).
The relationship between price and perceived quality is
complex. Most agree with the saying, “you get what you pay
for,” suggesting that one pays a higher price for better
products and services. However, when in doubt about the
differences between two or more products, a higher price
may signal higher quality. If the quality of a product is
revealed and the price is to be estimated, then equation (3)
may be expressed as:
›P Q ›W P ›W Q %DW
E q;p;w ¼ · · ¼ · <
›Q P ›P W ›Q W %DQ
In this case, expected price P is a variable intervening
between quality Q and willingness to pay, W. Quality
perception Q is only one of many other factors of price
sensitivity (Nagle and Holden, 1995). A general equation for
other possible perceptions S is given by generalizing equation
(4) above.
›P S ›W P ›W S %DW
E s;p;w ¼ · · ¼ · <
›S P ›P W ›S W %DS
In equation (5), S stands for any product/service perception
that may influence willingness to pay, W, such as Nagle and
Holden’s (1995) ten factors of price sensitivity.
The purpose of this paper is to study Nagle and Holden’s
ten factors as they influence expected price. Specifically, this
paper addresses only the first term of equation (5), the ratio of
change in product/service perception S relative to change in
expected price, P.
›P S %DP
E s;p ¼ · <
›S P %DS
This study is an exploratory study in that we do not make
explicit predictions of which S impacts expected price P for
the products and brands studied. The next section discuss the
empirical test of the influence of perception S on expected
price P, and then illustrates how the pricing methods
developed in this paper provide quantitative precision to the
practice of price setting by capturing perceptions important to
Journal of Product & Brand Management
Volume 21 · Number 4 · 2012 · 293 –300
consumers. Below we summarize the definitions of the factors
of price sensitivity as discussed by Nagle and Holden (1995).
Definitions of the factors of product/price
ð2Þ sensitivity
Nagle and Holden (1995) in their research suggest that many
factors have an impact on price sensitivity. They describe ten
factors that affect price sensitivity. These ten factors are
perceived substitutes, unique value, switching costs, difficulty
of comparison, price-quality, relative expenditure, end-
benefit, shared cost, perceived fairness, and inventory
effects. The discussion below discusses the ten factors and
stems from the work of Nagle and Holden (1995).
1 Perceived substitutes effect – refers to the alternative
products the buyer is aware of when making a purchase.
This also includes the consumers’ awareness of the price
of the alternatives. The consumers’ source of this
ð3Þ
knowledge could stem from the alternatives available at
the point of purchase, from shopping around, or from
the Internet. If the change in price in one product
(coffee) has an impact on the sales of another product
(tea) then the products are mutual substitutes (Shocker
et al., 2004). If a consumer perceives many substitutes
for a company’s brand then a company may be forced to
charge a lower price.
2 Unique value effect – stems from the unique attributes
that differentiate a product from its competitors. These
attributes can be tangible or intangible. These
differentiated attributes are relevant to product choice.
The more unique the brand is in important decision
attributes the higher the price can be (Nagle and
Holden, 1995).
ð4Þ 3 Switching costs effect – refers to onetime costs that
customers associate with the process of switching from
one provider to another (Burnham et al., 2003).
Switching costs influence buying decisions and include
“search costs, transaction costs, learning costs, loyal
customer discounts, customer habit, emotional cost and
cognitive effort, coupled with financial, social, and
psychological risk on the part of the buyer” (Fornell,
1992; Burnham et al., 2003). Switching costs make the
consumer less price sensitive to the current vendor. For
ð5Þ
example, increased costs involved with switching
suppliers tend to decrease price sensitivity to the
current supplier. When considering a switch to a new
vendor, the larger the switching cost, the greater the
gain from a careful evaluation of the cost, and thus the
greater the price sensitivity.
4 Difficult comparison effect – some products can be
compared by observation and thus are easy to compare.
Bar codes on grocery shelves provide unit pricing
making comparison very easy for many consumer
product goods. However, for some product categories,
ð6Þ consumers have difficulty in comparing products before
making a purchase. Products such as pharmaceuticals
are almost impossible to compare without using them.
Difficulties in comparing products lead to lessened
sensitivity to price (Nagle and Holden, 1995).
5 Price-quality effect – the price quality relationship asserts
a positive relationship between price and perceived
quality, as price goes up quality goes up (Rao and
Monroe, 1989). This effect has received extensive
294
 Expected product price as a function of factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
research attention (Volckner and Hofmann, 2007). This
is magnified for image products, exclusive products, and
products without any other cues to suggest relative
quality. Price is a signal of value that the consumer will
receive (Nagle and Holden, 1995).
6 Expenditure effect – occurs for buyers when the cost of a
purchase is significant compared to their total
household income. The effect of the expenditure size
on price sensitivity is confounded in consumer markets
by the effect of income (Micu and Micu, 2007). The
expenditure effect causes buyers to be more price
sensitive when the expenditure is large, either in dollar
terms or as a percentage of income. The larger the
expenditure is, the greater the gain from a careful
evaluation of the expenditure, and the greater the price
sensitivity (Nagle and Holden, 1995).
7 End benefit effect – refers to the relationship a given
purchase has to a larger overall benefit, and may be
viewed as two components: derived demand and total
cost (Nagle and Holden, 1995). For example, a
purchase of cream cheese must be made to achieve
the benefit of making a cake. The derived demand is the
relationship between the ultimate goal of a purchase, the
desired end benefit, and the buyer’s sensitivity for
something that contributes toward achieving that end
benefit. The purchase of gasoline is a classic example of
a product purchased specifically for highly sought after
end benefits.
8 Shared cost effect – if another pays for a product in full or
in part, consumers tend to be less sensitive to the full
price. For example, insurance companies often pay for
doctor visits and for pharmaceuticals. Student
consumers often have the assistance of their parents
when making purchases. Tax deductions help to cover
the costs of educational seminars and business expenses.
Scholarships and other forms of financial aid help to
cover the costs of tuition. These shared-cost effects are
often taken into account when firms calculate pricing
strategies (Nagle and Holden, 1995).
9 Fairness effect – refers to the perception of what prices
are most reasonable to the consumer. Fairness
perceptions are affected by prices paid in the past, in
similar situations (Bolton et al., 2003). The perceived
fairness of price has been identified as an important
psychological influence on consumers’ reactions to price
(Campbell, 1999). In specific, recent research suggests
that consumers are concerned with the fairness of
increases, they are often unwilling to pay a price that is
perceived as unreasonably high (Campbell, 1999).
Perceptions of fairness are also related to whether the
product is necessary to maintain a previously enjoyed
standard of living; consumers consider over priced
necessities to be unreasonable and thus tend to be price
sensitive (Nagle and Holden, 1995).
10 Inventory effect – refers to the influence of inventories on
price sensitivity. This effect appears to depend on the
buyer expectations about future prices (Nagle and
Holden, 1995). Buyer’s ability to hold an inventory of a
product for later use substantially increases their
sensitivity to temporary price reductions/increases.
When products are easily inventoried, consumers tend
to be more price sensitive; if there is a price increase,
they may simply wait for the price to drop.
295
Journal of Product & Brand Management
Volume 21 · Number 4 · 2012 · 293 –300
The research study
The study was designed to evaluate the first term in equation
(5) denoted as (6) above,
›P S %DP
E s;p ¼ · <
›S P %DS
By evaluation we seek to estimate the size and direction of the
elasticity, E s;p . This current research is part hypothesis testing
and part exploratory for we do not make specific, directional
hypotheses for any of the ten factors of price sensitivity. We
believe that Nagle and Holden’s (1995) factors may be both
product/service and target market dependent. We anticipate
that the ten factors operate differently with different products
and different market segments. We suspect this may be the
case even with the same product but with different market
segments. In brief, we do not expect to find all ten factors to
apply to all offers. As such, we rely on empirical discovery for
specific products and specific markets.
In this paper, we make a key assumption regarding the
efficiency of the firm; specifically we assume the firm is
deliberate in setting prices. For example, if the firm knows it
has a uniquely valued product, then under ideal conditions, it
would set prices higher than the competition. Under ideal
conditions, when the firm is operating efficiently and is
capitalizing on their differential advantage, favorable
sensitivity of expected price should lead to higher prices.
Data collection
In this study 82 junior and senior year undergraduate
business students from a major west coast university
participated in the study. The products and brands studied
were passenger vehicles (Toyota Corolla and Lexus GS
Hybrid) and computers (Apple MacBook and Dell Inspirion).
Prior to the administration of the study questionnaire, the
subjects received extensive training in the meaning of Nagle
and Holden’s ten factors of price sensitivity. They also
received training on how to use the sensitivity scales.
All administration was done in a lab setting. All descriptions
included photographs along with the following written
descriptions:
Toyota Corolla Base Model: 1.8 Liter, 4 Cylinder, 132 HP [Total Output].
Lexus Base Model: GS Hybrid 2010, 3.5 Liter Hybrid V-6, 340 HP [Total
Output],Rear-Wheel Drive.
Apple MacBook: 2.4 GHz Intel Core 2 Duo, 2GB DDR3 memory, 250GB
hard drive, 8x double-layer SuperDrive, NVIDIA GeForce 320M graphics,
Built-in 10-hour battery, Polycarbonate unibody enclosure.
Dell Inspiron 560: Enhanced Entertainment with HDMI, Media Card
Reader and 24” Monitor,Intel Dual Core E5400 (2.7 GHz. 2MB L@
800 MHz),Genuine Windows 7 Home Premium. 64 Bit, Monitor: Full HD
Monitor with VGA Cable, Hard Drives: 640 GB Serial ATA Hard Drive
(7200 RPM) with Data Burst Cache, One year Basic Service Plan.
First the automobile (Toyota and Lexus) and computer
(Apple and Dell) product descriptions were read by the
participants, then a questionnaire was administered.
The set of questions included the scales for the ten factors
of price sensitivity and measures of expected price for each of
the four brands studied. The respondents were rewarded with
extra credit points for their performance; this was done to
motivate thoughtful participation. Following an defining
example, the sensitivity questions were asked. An example
for perceived substitutes is given below.
 Expected product price as a function of factors of price sensitivity Journal of Product & Brand Management
Jeffrey E. Danes and Joan Lindsey-Mullikin Volume 21 · Number 4 · 2012 · 293 –300

A “substitute” product is a suitable replacement for a desired product. For Table II Mean scores, correlations and beta coefficients (computer)
example, if one desires to purchase Coca Cola but cannot obtain it, one
might instead purchase Pepsi Cola if available. For the product described Apple Dell
assume you seek this product but cannot obtain it.
Mean SD Mean SD Corr Signif Beta
How likely (in percentage terms) is it that you could obtain a suitable
replacement product for Dell Inspiron? Perceived substitutes 51 35 94 09 20.460 , 0.001 2 0.233
Estimate a percentage % to reflect your chances of finding a suitable Unique value 78 23 24 24 0.512 , 0.001 0.219
replacement, where 0% means not a chance and 100% means a sure thing. Switching cost 55 28 29 23 0.127 0.106
Write a number that best reflects your estimate between 0% to 100%: Difficult comparison 46 35 21 25 0.142 0.070
_______%. Perceived quality 80 19 48 25 0.405 , 0.001 0.134
Relative expenditure 41 30 27 26 0.113 0.148
An example expected price question using Dell Inspirion is: End benefit 73 22 64 26 0.103 0.188
Refer to the product descriptions when responding to the following question. Shared cost 18 30 18 30 20.112 0.154
Note: there are no absolute (true) answers for these questions, but please
give your best response even if you have to guess. Perceived fairness 61 21 77 17 20.329 , 0.001 2 0.209
Inventory 27 31 25 32 20.030 0.706
If you or someone you know, were to purchase the Dell Inspiron, how much
to you think it would cost? If not sure, please give your best guess (not a Multiple R 0.610 0.591
range, but your best price estimate). $_________
Notes: n ¼ 82 for means and SD; n ¼ 164 for correlation and regression
This research employed a within-subjects design; that is, each
respondent answered both sets of product questions. An
extensive meta analysis of the price quality effect was substitutes: “. . . estimate a percentage % to reflect your
conducted by Volckner and Hofmann (2007). Using chances of finding a suitable replacement where 0% means
literature from 1991 to 2006 and using the correlation not a chance and 100% means a sure thing”, the mean S
between price and quality as their metric they found stronger scores for Lexus and Toyota are 62 and 90 (Table I). The
effects for within-subjects designs than for between-subject respective S mean scores for Apple and Dell are 51 and 94
designs. (Table II). Respondents believe there is a much higher
probability to find a substitute product for Toyota versus
Results and discussion Lexus, Dell Versus Apple.
For simplicity, we refer to the base Toyota Corolla product as
“Toyota”, the base Lexus GS Hybrid product as “Lexus”, the Correlation and regression
Apple MacBook as “Apple”, and the Dell Inspiron as “Dell” The goal of the regression analysis is to identify the size and
in the discussion below. The mean expected price for direction of the elasticity, E s;p this was done by regressing the S
Toyota ¼ $17,794, Lexus ¼ $47,090, Apple ¼ $1,212, and scores onto expected prices P via ordinary least squares
Dell ¼ $721. regression. The combined (pooled) data for Lexus with
Overall, the results of the analysis show that four factors Toyota and for Apple with Dell, respectively, n ¼ 164, are
predict expected price, the main results are reported in Tables referred to as Automobile and Computer in the correlation
I and II. and regression analyses. The pattern of expected price
Overall, the pattern of results in Tables I and II for the two correlations for the two product categories is very similar.
product categories is very similar, except for a slight variation For example, the correlation of the perceive substitutes with
in the perceptions of quality and uniqueness as discussed price is 20.483 for the automobiles and is 20.460 for the
below. As noted above, S stands for any factor of price computers. In both cases, an increased perception of available
sensitivity. The first two columns of Tables I and II report the substitutes is associated with lower price. Similarly, the
mean S scores, n ¼ 82, standard deviations are given in the correlation of the perceived quality with price is 0.649 for the
parentheses. For example, to the question of finding automobiles and is 0.405 for the computers. The pattern is
consistent with only a few deviations (see Tables I and II).
Table I Mean scores, correlations and beta coefficients (automobile) Graphical results of the mean S scores are presented in
Figures 1 and 2.
Lexus Toyota
MeanSDMeanSD Corr Signif Beta
Figure 1 Mean S Scores for Dell and Apple
Perceived substitutes 62 27 90 15 20.483, 0.0012 0.199
Unique value 66 23 25 22 0.583, 0.001 0.131
Switching cost 65 26 30 21 0.504, 0.001
Difficult comparison 49 29 26 25 0.341, 0.001
Perceived quality 83 11 48 24 0.649, 0.001 0.426
Relative expenditure 75 28 54 27 0.302, 0.001
End benefit 76 17 70 21 0.169 0.030
Shared cost 28 32 26 29 20.005 0.948
Perceived fairness 57 20 79 17 20.456, 0.0012 0.147 0.147
Inventory 20 27 26 32 20.062 0.428
Multiple R 0.728 0.718
Notes: n ¼ 82 for means and SD; n ¼ 164 for correlation and regression

296
 Expected product price as a function of factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
Figure 2 Mean S Scores for Corolla and Lexus
Figure 3 presents a graphical display of the correlations
between the factors and price perception.
The means and correlations reported in Tables I and II and
Figure 3 suggests several factors have influence on perceived
price. The next set of analyses sought to identify the unique
effects of the factors on price perception via Ordinary Least
Squares linear regression. For this purpose, the incremental
F-test was used to compare the full set of ten variables – the
full model with a smaller subset of variables – the reduced
model. Variable selection was done with SPSS 16; and over
both product categories, a four-variable reduced model was
identified, perceived:
1 substitutes;
2 unique value;
3 quality; and
4 fairness.
For the automobiles, the full model gave an R2 ¼ 0.530 and
the four variable reduced model gave an R2 ¼ 0.516, p ,
0.05. The DR2 ¼ 0.014 is not statistically significant,
F(6,153) ¼ 0.760, p . 0.05. For the computers, the full
model gave an R2 ¼ 0.372 and the four variable reduced
model gave an R2 ¼ 0.349, p , 0.05. The DR2 ¼ 0.023 is not
statistically significant, F(6,153) ¼ 0.934, p . 0.05. In
general, the regression analysis found four factors to have
unique influence on the perceived automobile prices,
perceived: substitutes, unique value, quality, and fairness.
All are significant at the 0.05 level expect for automobiles
where the unique value effect is marginally significant,
p ¼ 0.107 and for computers were the perceived quality
effect is marginally significant, p ¼ 0.141. Perceive quality and
unique value is modestly correlated, for automobiles
Figure 3 Correlations of price with S scores for computer and
automobile
297
Journal of Product & Brand Management
Volume 21 · Number 4 · 2012 · 293 –300
r ¼ 0.661 and for computers r ¼ 0.691. Co-linearity
diagnostics found negligible influence of correlated
independent variables. Variance Inflation Factors were very
small, the ranged from 1.40 to 2.14 for the automobile data;
from 1.13 to 2.59 for the computer data. The relationship
between perceived quality and unique value is considered in
the discussion section below. The descriptive and regression
results are interpreted below.
Computer data set
.
Perceived substitute: Dell scores 43 points higher than
Apple and Dell is lower priced. This higher score suggests
that the respondents believe there are more substitute
brands for Dell than for Apple. The slope of perceived
substitutes on expected price is 22.63 suggesting that a
one-point increase in the S scale decreases expected price
by $2.63. The beta coefficient of 20.233 for perceived
substitutes on price suggests that a variety of similar
products lead to downward pressure on perceived price.
The corresponding correlation coefficient is 2 0.460.
.
Unique value: Apple scores 54 points higher than Dell and
Apple is higher priced. Apple has positioned itself has
producing “insanely great products”, as producing unique
products. The slope of unique value on expected price is
2.31 suggesting that a one-point increase in the S scale
increases expected price by $2.31. The beta coefficient of
0.219 suggests that Apple as a unique product has
influence on expected price; products higher in unique
value leads to higher expected prices. The corresponding
correlation coefficient is 0.512.
.
Perceived quality: Apple has much higher perceived quality
than the Dell and the difference in means is 32 points.
The slope of perceived quality value on expected price is
1.82 suggesting that a one-point increase in the S scale
increases expected price by $1.82. Perceived product
quality drives price upward, the beta coefficient for the
computer products is modest is 0.134 and is not
significant at the 0.05 level. The corresponding
correlation coefficient is 0.405. This anomaly is
discussed below.
.
Fair price: Dell is viewed as more fairly priced than Apple,
with a difference of 16 points, which is smaller than the
other factors, but is statistically significant. The higher
priced Apple is viewed as priced slightly more unfairly
priced, as is Dell. The slope of fair price on expected price
is 23.77 suggesting that a one-point increase in the S
scale decreases expected price by $3.77. The beta
coefficient for fair price is 2 0.209 suggesting in general
that lower prices are perceived as fairer prices. The
corresponding correlation coefficient is 20.329.
Table III presents the unstandardized regression coefficients
for the computer products.
Table III Regression of S scales on automobile prices
Variables Coeff. SE t Sig. VIF
(Constant) 28,492 6,296 4.53 ,0.001
Substitutes 2133.99 44.06 2 3.04 0.003 1.40
Unique value 74.24 45.82 1.62 0.107 2.14
Perceived quality 286.92 50.32 5.70 ,0.001 1.83
Fair price 2117.55 51.33 2 2.29 0.023 1.35
 Expected product price as a function of factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
Automobile data set
.
Perceived substitute: Lexus scores 43 points lower than
Toyota and is seen as higher priced. The lower score for
Toyota suggests there are more substitute brands for
Toyota than for Lexus. The slope of perceived substitutes
on expected price is 2 133.99 suggesting that a one-point
increase in the S scale decreases expected price by
$133.99. Similar to the computer products, this is
evidence to suggest that a variety of substitutes lead to
downward pressure on price, the corresponding beta
coefficient is 2 0.199. The corresponding correlation
coefficient is 2 0.483.
. Unique value: the hybrid luxury vehicle Lexus scored 41
points higher than Toyota. The slope of unique value on
expected price is 74.24 suggesting that a one-point
increase in the S scale increases expected price by $74.24.
However, the beta coefficient is only 0.131 is modest and
is not significant at the 0.05 level. The corresponding
correlation coefficient is 0.538. This anomaly is discussed
below.
.
Perceived quality: Lexus is 35 points higher in perceived
quality than the Toyota. The slope of perceived quality
value on expected price is 286.92 suggesting that a one
point increase in the S scale increases expected price by
$286.92. Perceived product quality drives price upward,
the beta coefficient for the automobile products is 0.426.
The corresponding correlation coefficient is 0.649.
.
Fair price: Toyota is viewed as more fairly priced than
Lexus, with a difference of 22 points, which is smaller
than the other factors, but is statistically significant. The
slope of fair price on expected price is 2 117.55 suggesting
that a one-point increase in S scale decreases expected
price by $117.55. The beta coefficient for fair price is
2 0.147 suggesting lower prices are perceived as fairer
prices. The corresponding correlation coefficient is
2 0.456.
Table IV presents the unstandardized regression coefficients
for the automobile products.
Discussion
This research studied ten factors of price sensitivity in two
product categories: computers and automobiles. In general,
we identified a four-variable subset consisting of perceived
substitutes, unique value, quality, and price fairness.
However, there were slight differences between the two
categories: unique value has less impact for automobiles and
quality has less impact for computers. The data suggests that
unique value and perceived quality may be aspects of a more
general, multidimensional perception of product quality; as
noted above quality and unique value are modestly correlated,
automobiles r ¼ 0:661 and computers r ¼ 0:691. For the
Table IV Regression of S scales sensitivity on computer prices
Variables Coeff. SE t Sig.
(Constant) 1,179 135 8.71 ,0.001
Substitutes 22.63 0.94 22.79 0.006
Unique value 2.31 1.09 2.13 0.035
Perceived quality 1.82 1.23 1.48 0.141
Fair price 23.74 1.22 23.08 0.002
Journal of Product & Brand Management
Volume 21 · Number 4 · 2012 · 293 –300
automobile data set, unique value was marginally significant
(Table III); but for the computer data set perceived quality
was marginally significant (Table IV).
Research by Stone-Romero et al. (1997) suggests that
product quality is multidimensional; as such, we suspect that
unique value and perceived quality are aspects of this
multidimensional construct: unique value is a competitive or
relative advantage, a distinctive product feature and perceived
quality in simple terms is being better on some common but
desirable attribute. Stone-Romero et al. (1991) who
systematically studied perceived product quality found four
general dimensions, which they called flawlessness (lack of
defects), durability (life expectancy), appearance (aesthetics),
and distinctiveness (uniqueness). In the currently study,
Apple is viewed are more distinctive than Dell and Lexus is
seen as higher quality than Toyota, perhaps more flawless,
durable, and aesthetically appealing.
For both the automobile and computer product categories,
the other two variables that were identified in the regression
analysis are perceived substitutes and fair pricing. The
perceived substitute effect suggests that consumers are more
price sensitive the higher the product’s price relative to
substitutes. Our research findings indicate that as substitutes
increase, expected price decreases. One would expect
perceived substitutes and unique value would be inversely
correlated; indeed, they are; r ¼ 2 0.508 for automobiles and
r ¼ 2 0.661 for computers. The correlation between
perceived quality and substitutes is r ¼ 2 0.379 for
automobiles and r ¼ 2 0.519 for computers. This research is
consistent with past research (Xia et al., 2004). For both
product categories, the research shows that lower prices are
associated with greater perceptions of price fairness. The
correlation between fairness and perceived quality
r ¼ 2 0.417 for automobiles is substantial but is negligible
for computers, r ¼ 2 0.042. The correlation between fairness
and unique value r ¼ 2 0.459 for automobiles is also
substantial but is somewhat less so for computers,
r ¼ 2 0.248. Clearly, there are some interesting causal
relationships among these variables that deserve further
future research attention.
Theoretical contribution
The contribution of this paper stems from the insight
provided by Gabor and Granger (1966), that higher prices
signal higher quality. However, the relationship between price
and perceived quality is complex. If the quality of a product is
revealed and the price is to be estimated, then the relationship
between quality and willingness to pay may be expressed as:
›P Q ›W P ›W Q %DW
E q;p;w ¼ · · ¼ · <
›Q P ›P W ›Q W %DQ
Expected price P is a variable intervening between quality, Q,
and willingness to pay, W. A general equation for other
possible perceptual variables S is given by generalizing
VIF equation the above.
›P S ›W P ›W S %DW
1.72 E s;p;w ¼ · · ¼ · <
›S P ›P W ›S W %DS
2.59
2.00 S stands for any product/service perceptual variable that may
1.13 influence willingness to pay W, such as Nagle and Holden’s
(1995) ten factors of price sensitivity.
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 Expected product price as a function of factors of price sensitivity
Jeffrey E. Danes and Joan Lindsey-Mullikin
Managerial implications
Setting prices is a critical activity for the success of a product.
Tools are needed to capture the consumers’ perceptions of
factors related to expected price. This research makes an
important managerial contribution. We demonstrate how to
quantify the ten factors of price sensitivity, relevant to the
evaluation of product pricing; we provide a tool set for
managers. Managers now have a set of questions and a
method to capture the qualitative components of pricing
considered important for their product by their consumers.
For example, within the limits of the brands studied, the
regression analysis identified four variables relevant to pricing
and re-pricing products in the automobile and computer
markets:
1 perceived substitutes;
2 quality;
3 fairness; and
4 unique value.
For example, for the two computer brands studied,
consumers see an abundance of perceived substitutes in the
Dell computer market, which drives expected price down.
Indeed there are many players in the PC desktop market
competing for the same consumer dollar. Unique value comes
into play especially due to our inclusion of the Apple Mac
Book computer in the model. The Apple brand stands for a
unique value and perceived quality and commands a higher
price for its branded products thus driving price higher. The
same is true regarding perceived fairness. Fairness is an
important issue in buying a computer and withstood the
regression model test. Fairness may be used to evaluate an
existing price for an existing brand. Fairness is a response to a
pre-set price and cannot be used to set prices for new
products; however, unique value, quality, and perceived
substitutes maybe used for new product pricing.
Practical applications of the current method would require
marketing managers to collect primary data on brands of
interest. For example, if one desires to validate current pricing
or consider re-pricing one’s product line in light of competing
brands, one would need to use the type of research questions
described above to the corresponding brands; then perform
the analytics also as described above.
For purposes of pricing, managers may use the regression
equations in Tables III and IV above. For example, the Dell
computer may be priced by the intercept as shown in Table IV
at $1,179. The $1,179 then would be adjusted downward for
example, as shown in Table IV for perceived substitutes by
2 $2.63 per scale unit. The price is then adjusted upward for
the unique value it possesses by $2.31 per scale unit.The price
is adjusted upward again for perceived quality by $1.82 per
scale unit. There is another downward adjustment for fair
price of 2$3.74 per scale unit. That is, including the
intercept, each variable’s coefficient is multiplied by their
respective mean S scores (see Table II). This results in the
following applied regression equation:
Dell Computer Price ¼ $1; 179
¼ 2$2:63 ð94Þ þ $2:31 ð24Þ
þ $1:82 ð48Þ 2 $3:74 ð77Þ
¼ $786:60
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Volume 21 · Number 4 · 2012 · 293 –300
Table V Mean expected, objective, and predicted price
Mean expected Objective Predicted
price SD price price
Apple MacBook $1,212 352 $999 $1,142
Dell Inspiron $721 201 $699 $787
Lexus GS Hybrid $47,090 12,283 $57, 450 $42,198
Toyota Corolla $17,794 45 $16,279 $22,775
The above equation predicts expected price ¼ $786.60, given
current perception. If perception were to change then
expected price would also change. If the perception of
unique value for Dell were to change from 24 (Table II) to say
74, then the predicted expected price for Dell would be
$902.10, an increase of $115.50. Table V reports mean
expected prices, the objective market price, and the predicted
prices of the four brands studied in this research. Objective
market prices were obtained directly from each
manufacturer’s web sites each on the same date immediately
prior to administering the study.
The pricing methods developed in this paper provide
quantitative precision to the practice of price setting by
capturing variables important to consumers. Extant literature
has looked at these variables independently but this
manuscript is the first investigation to study the relationship
of Nagle and Holden’s (1995) sensitivity factors to expected
price.
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Jeffrey E. Danes and Joan Lindsey-Mullikin
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About the authors
Jeffrey E. Danes (PhD Michigan State University) is Professor
of Marketing in the Orfalea College of Business, California
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Journal of Product & Brand Management
Volume 21 · Number 4 · 2012 · 293 –300
Polytechnic State University. He is co-author of Mathematical
Models of Attitude Change, Academic Press. His work in MDS
is published in Multivariate Techniques in Communication
Research, Academic Press. His work in Bayesian conjoint
analysis is published in the Journal of Marketing Research.
Danes is also published in World Wide Web Journal, Journal of
Product and Brand Management, Journal of Business Research,
Journal of Sales and Personal Selling, Qualitative Market
Research, Human Communication Research, Communication
Yearbook, and the Journal of Consumer Research. Danes is an
occasional reviewer for Marketing Science. Jeffrey E. Danes is
the corresponding author and can be contacted at:
jdanes@calpoly.edu
Joan Lindsey-Mullikin (PhD Arizona) is an Associate
Professor of Marketing in the Orfalea College of Business at
California Polytechnic State University. Her research interests
focus on pricing, retailing, and consumer behavior. She has
published in journals such as the Journal of Retailing, Journal
of the Academy of Marketing Science, Journal of Consumer
Affairs, Journal of Social Psychology, and the Journal of Product
and Brand Management. She served on the Review Board for
the Journal of Product and Brand Management.
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