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Raising Prices? Read This Study on How to Do It Well

Zhiyong Yang, Sijie Sun, Ashok K. Lalwani and Narayan Janakiraman

Price increases is one tool in a marketer’s toolkit that can help drive revenues and profitability. However, it can be difficult to increase prices in the digital marketplace because of the Internet’s radical pricing transparency, consumers’ deal-seeking attitudes, and global product availability. Netflix recently faced a huge uproar when it tried to raise prices without modifying consumers’ perceptions of value, such as by improving product performance.

However, consumers are not a single voting bloc. Consumers’ attitudes in Mumbai vary from those in Manilla, Melbourne, Mexico City, and Montreal. However, to date, managers have a limited understanding of how local-global identity influences consumers’ price perceptions and behavior.

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A new study in the Journal of Marketing proposes that consumers’ local (vs. global) identity leads to a greater tendency to make price-quality associations and that perceived quality variance among comparison brands is a key mechanism underlying these effects. Past research has found that individuals from more globalized countries, such as the United States and Canada, tend to have a stronger global identity because they are more likely to meet different types of people, encounter different cultures, and access stories and news from other countries. In contrast, those from more localized countries, such as China and India, tend to have a stronger local identify because of their restricted access to other cultures.

Our research team used two field studies, seven experiments, and a review of secondary data to provide converging and robust evidence for the effect of local-global identity on price-quality associations. Consistent with the “perceived quality variance” account, when quality differences among the brands are made salient, price-quality associations of consumers high in global identity (but not local identity) significantly increase compared to baseline conditions. However, when perceived quality similarities are made salient, price-quality associations of consumers high in local identity (but not global identity) significantly decrease. Product type and distribution of customer ratings represent natural boundaries for the relationship between local-global identity and price-quality associations.

We discovered that when promoting high-price products, marketers can situationally activate consumers’ local identity because consumers tend to use price to judge a product’s quality when their local identity is salient. Communication appeals or contextual cues, such as a “Think Local” movement or T-shirt, can be used to achieve this goal. Ads or messages that feature local cultural symbols may enhance the accessibility of the local identity. TV channels that feature local traditions can be effective as well. Conversely, when promoting low-price products, marketers can activate consumers’ global identity to reduce price-quality associations. Contextual cues (e.g., ads that feature multi-cultural symbols and globalization) may enhance the accessibility of global identity.

Another approach is to alter consumers’ perception of dissimilarity among brands. For products that charge a premium price over competing products, marketers can use situational cues (e.g., expert opinion, distribution of customer ratings) to increase perceived quality variance and facilitate consumers’ associations between price and product quality. In contrast, for products that take a low-price strategy, marketers can use these situational cues to reduce, rather than increase, perceived quality variance.

Our findings on how product type (service vs. goods, hedonic vs. utilitarian products) affects customers’ perceived quality variance shed insight into marketing strategies associated with services, hedonic products, and new products. Marketers of these products can capitalize on our findings by wisely allocating their ads budget: There is not much to be gained by building up price-quality associations among consumers of services or hedonic products, which naturally enhance price-quality associations.  However, for goods and utilitarian products, marketers can activate a local (global) identity to enhance (reduce) reliance on price to infer quality.

We are the first to show the important role that distribution of customer ratings plays in influencing consumers’ price-quality associations. When people post similar ratings for products in a category, potential buyers may have an impression that products in that category are of similar quality. In contrast, when people’s opinions are all over the place and there is lack of a dominant view, potential buyers tend to perceive high quality variance among the products in that category. Armed with this information, marketers using skimming pricing should welcome, rather than suppress, different opinions from previous users, as divergent online reviews can actually enhance consumers’ price-quality associations. However, firms with penetration pricing may need to strive for consumers’ convergent opinions, as similar customer ratings can reduce consumers’ tendency to view the product’s low price as an indicator of its low quality.

Our findings also provide useful guidelines for firms to adapt their strategies to different regions and address the question about whether companies should be more locally or globally oriented. For products to be marketed to the places where people tend to have a salient local identity (e.g., rural areas), local flavors and ingredients can be used in the products. Also, as these consumers are more likely to make price-quality associations, marketers may not need to allocate much ad budget to convince consumers about price-quality associations. However, when marketers enter places in which people are high in global identity (e.g., metropolitan areas), they should know that consumers in these places do not have an established mental connection between price and quality. Thus, additional effort is needed to increase perceived dissimilarity among brands in the marketplace to enhance price-quality associations. Similar strategies can be used for international marketing strategies.

Read the full article.

From: Zhiyong Yang, Sijie Sun, Ashok K. Lalwani, and Narayanan Janakiraman, “How Does Consumers’ Local or Global Identity Influence Price-Perceived Quality Association?Journal of Marketing, 83 (May).

Go to the Journal of Marketing

Zhiyong Yang is Professor of Marketing, University of North Carolina at Greensboro.

Sijie Sun is Assistant Professor of Marketing, University of Hawaii at Hilo.

Ashok K. Lalwani is Associate Professor of Marketing, Indiana University.

Narayan Janakiraman is Assistant Professor of Marketing, University of Texas at Arlington.