Does reference pricing work?

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We’re confronted with them every day and everywhere: retail reference prices flashing on everything from boots to boats. But a question worth asking is: do reference prices really provide consumers with any informational value and, if so, how?

Pricing, of course, is one of the most vital and demanding decisions in the marketing mix. All decisions made at the dealership on pricing will impact the prospect’s decision to buying. Reference pricing really refers to how much prospects expect to pay for a boat or accessory in relation to another competitor’s prices and/or any previously advertised price.

Today, thanks to the Internet, price comparisons can be easily done by prospects online. Consumers give importance to comparing with a “reference price” that sets the price they would usually expect to pay or the price they think the good is worth using all the data they’ve found. But when it comes to reference prices, questions easily arise about believability of any pricing.

David Streitfeld recently reported in The New York Times that there is a prevalence of misleading retail reference prices, i.e. list price, MSRP, original price and so on. It’s an example of why reference prices might have little true informational value or impact on a prospect’s buying decision these days. Right?

The reality is dealers often use a reference price and a much lower “our price.” This is particularly evident at boat shows. The reason this comparison is offered, of course, is to convince prospects that they’re getting a good deal. But this comparison is only meaningful when a reference price reflects the true market value. Moreover, it’s clearly misleading to purposefully inflate a reference price to trick consumers into believing they are getting a bargain. And that’s why many consumers say they simply don’t trust the reference price.

But the fact that retailers in nearly all fields regularly use a reference-vs.-our-price strategy suggests that, even if consumers claim they suspect reference prices, the strategy is effective in swaying purchases. So says Rafi Mohammed, a pricing strategy consultant and author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow,” writing last month in the Harvard Business Review. Why else would retailers show comparisons, he asks?

He cites the classic failed attempt by J.C. Penney’s to end so-called puffed-up discounts. Ditching its longstanding practice of having big markdowns from inflated reference prices, the department store chain moved to an everyday low pricing strategy in 2012. The result: revenue plummeted 25 percent the first year, the CEO was fired and the store returned to boosting reference prices.

“Even though Penney’s strategy shift unabashedly told us that reference prices are exaggerated, its reversion suggested consumers remain more willing to buy from retailers who engage in the charade,” Mohammed said.

Overall, then, some price comparisons are generally well accepted as real — closeouts are a good example. On the other hand, Mohammed cautions, we should be aware the full value of a true discount can be lost amid the cynicism about reference prices.

The Federal Trade Commission has applicable regulations on the books, albeit they’re not rigorously enforced. But regulations shouldn’t be where this subject is anyway. In the end, there is good reason to employ a reference pricing strategy. It can work.

That said, as should be the case in all dealings with prospects and customers, integrity in whatever price comparisons are put forward should be the gold standard of a dealership. When reference prices are used as a comparison to a current price, efforts need to be taken to ensure the contrast is valid for customers. Then it’s a real win-win.


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