Individual Differences in Latitude of Acceptable Prices

ABSTRACT - This research tested the impact of individual differences on consumers' latitude of acceptable price and on actual price paid for durable goods. The width of the latitude was positively correlated with perceived brand differentiation but not with price consciousness. The magnitude of the upper threshold of latitude was found to be the best predictor of actual price paid.

Citation:

Patricia Sorce and Stanley M. Widrick (1991) ,"Individual Differences in Latitude of Acceptable Prices", in NA - Advances in Consumer Research Volume 18, eds. Rebecca H. Holman and Michael R. Solomon, Provo, UT : Association for Consumer Research, Pages: 802-805.

Advances in Consumer Research Volume 18, 1991      Pages 802-805

INDIVIDUAL DIFFERENCES IN LATITUDE OF ACCEPTABLE PRICES

Patricia Sorce, Rochester Institute of Technology

Stanley M. Widrick, Rochester Institute of Technology

ABSTRACT -

This research tested the impact of individual differences on consumers' latitude of acceptable price and on actual price paid for durable goods. The width of the latitude was positively correlated with perceived brand differentiation but not with price consciousness. The magnitude of the upper threshold of latitude was found to be the best predictor of actual price paid.

How do buyers use price in making a purchase decision? Price information is encoded and interpreted by the consumer within a frame of reference of acceptable prices (Monroe 1973; Jacoby and Olson 1977; Dodds and Monroe 1985; Winer -1986; Lichtenstein, Bloch and Black 1988; Zeithaml 1988; Lattin and Bucklin 1989). Price acceptability is the judgment of price of a product as acceptable or unacceptable based on the comparison of the price cue in the environment to a range of acceptable prices stored in memory (Lichtenstein, Bloch & Black 1988). Consumers encode price information by comparing prices against their internal range of acceptable prices; the degree of discrepancy between the actual price and the acceptable price range results in a judgement of acceptable or unacceptable, which affects the probability of purchase (Winer, 1986).

The existence of latitude of acceptable prices has been well-documented (Gabor and Granger 1964; Monroe 1971; Lichtenstein, Bloch and Black 1988). It is the goal of the present research to extend our understanding of the impact of individual differences on latitude of acceptable prices for a wide range of durable goods.

Theoretical Foundations and Development of Hypotheses

The notion of an internal reference point such as the latitude of acceptable prices is an extension of Helson's adaptation level theory (1964). The adaptation process describes how a consumer will respond to an external stimulus. The encoding of the stimulus depends on an adaptation level which can be viewed as a continuum of acceptance and rejection, with a wide neutral zone where uncertainty prevails.

Adaptation level is formed through prior experiences (Sherif 1963; Della Bitta and Monroe 1973) and is influenced by individual differences. One important area of individual difference in buyer behavior is involvement. Sherif and Hovland (1961) theorized that involvement with an issue was associated with narrower latitudes of acceptance. This can be interpreted to mean that high involvement with price in terms of its financial sacrifice (price consciousness) should be negatively correlated with latitude of acceptable price. Lichtenstein, Bloch & Black (1988) found support for this hypothesis where price consciousness (defined as involvement with price in terms of its sacrifice) was negatively correlated with latitude of acceptable prices for running shoes. The present study was designed to extend our understanding of the impact on price consciousness on latitude acceptable prices by measuring its effects across a wide range of products rather than a single product.

In addition, the study assessed the impact of a second individual difference variable, perceived brand differentiation, on latitude of price acceptability. Lichtenstein, Bloch, and Black (1988) found that perception of quality variations between a low and high priced running shoes was positively correlated with price acceptability (measured by a point estimate), but was not related to the width of the latitude of acceptable prices. Possibly, differences in brand differentiation affects both the upper t lower price acceptability thresholds an equivalent amount, resulting in latitudes of similar magnitude for both high and low differentiation subjects. In order to better understand the relationship between perceived brand differentiation and price acceptability, the present study measured the upper and lower thresholds of the latitude of acceptable price as separate dependent variables. This was warranted since Gabor and Granger (1964) found individual difference variables affected the upper and lower thresholds independently. Lastly, the study examined the association between price acceptability and buyer behavior. Berkowitz and Walton (1980) found that price acceptability was positively correlated with willingness to buy (as measured by purchase intention). In more recent research, the magnitude of the discrepancy between actual retail price and the consumer's reference price was related to purchase probability: the greater the discrepancy, the lower the probability of purchase (Winer 1986; Lattin and Bucklin 1989). In most prior research, the dependent variable price was operationalized by stating a purchase intention or by a self report of price paid on a recent purchase. The present study was designed to test the impact of price acceptability on the observed price paid.

In sum, the research was designed to extend previous research on latitude of acceptable prices by examining the impact of individual difference variables on latitude of price acceptability. The major contributions of the present study will be the inclusion of a wide range of durable goods in the data collection, the isolation of the upper and lower thresholds in the measures of latitude, and the inclusion of observed price paid as a dependent variable.

METHOD

The method used was to intercept and interview customers immediately following their purchase. A total of 323 customers of 16 durable product lines were interviewed and asked questions about their product purchase.

The interviews were completed during January and February 1989 in 30 different durable goods retailers (including chain department stores, appliance specialty stores, and off-price appliance retailers) in Monroe County, New York. At each store, all customers within the time period sampled were intercepted immediately after they paid for one of the 16 product categories (87% of those approached agreed to cooperate).

The variables collected on each subject were defined and operationalized as follows:

Independent Variables:

Price consciousness -- relative importance of price in the selection of the durable good; measured on a scale of 1 - 6 where 6 = most important and 1 = least important.

Perceived brand differentiation--customer perceived similarity of choices available, measured on a five point scale where 1 = all choices the same and S = all very different.

Dependent Variables: All dependent variables were transformed into index scores (referenced to the product category prices) due to the wide range of products, and hence prices, used in the study. Price paid (indexed to SKU range) - this decimal measured the observed price consumers paid in relation to the SKU prices available at that retailer for the product category where the purchase was made, and was calculated using:

Paid = Actual price paid by the customer

High = Highest priced SKU for that product category at that retailer

Low = Lowest priced SKU for that product category at that retailer

Price paid index = Paid - Low

                             High - Low

Lower threshold - this decimal number measured the customer's lower acceptable price threshold within the range of prices available at retail for that product category. This variable required the High and Low SKU values discussed above in addition to Least:

Least = Lowest price the customer actually considered paying

Lower Threshold = Least - Low

                              High - Low

Upper threshold - this decimal number measured the customer's upper acceptable price threshold within the range of prices available at retail for that product category. This variable required the High and Low SKU values discussed above in addition to Most:

Most = Highest price the customer actually considered paying

Upper Threshold = Most - Low

                              High - Low

Latitude of acceptable price--the difference between the lowest price and the highest price they considered paying for the product category, indexed to the price range.

Latitude = Upper threshold - Lower threshold

See Table 1 for the list of products used in the study and the absolute values of the SKU ranges and latitudes of acceptable prices.

RESULTS

Table 2 presents correlation matrix for the variables used in the study. The first hypothesis tested the relationship between price consciousness and the width of the latitude of acceptable prices. From Table 2, latitude was not found to be significantly correlated with price consciousness. However, price consciousness was negatively correlated with both the upper and lower thresholds (r = -.113 and -.102 respectively) and price paid (r= -.145). Consumers who were very price conscious had lower values of the upper and lower thresholds (and paid lower prices) for durable goods than those who were less price consciousness.

The second hypothesis tested the relationship between perceived brand differentiation and price acceptability. Table 2 again presents the results, where all four dependent variables were significantly correlated with brand differentiation. Consumers who perceived a wide variation among brands had wider latitudes, higher upper thresholds, higher lower thresholds, and paid more for their durable goods than consumers who perceived brands as all the same.

To determine the relative impact of each of the independent variables on the four dependent variables, four step-wise regressions were computed, with price consciousness, brand differentiation, and their interaction, as the independent variables. Brand differentiation was the first to enter the three equations for latitude (beta = .19), upper threshold (beta = .225), and price paid (beta = .205) dependent variables. Price consciousness was the first to enter the equation predicting the lower threshold (beta = .178). The interaction effect was not significant in any of the analyses.

Lastly, the relationship among the dependent variables was explored. If price acceptability is a useful construct, it should be positively related to the price paid. A regression analysis using upper and lower thresholds as independent variables predicted 62% of the variance in price paid. Moreover, the upper threshold explained more variance in price paid (R2 = .54) than the lower threshold (R2 = .06).

TABLE 1

PRODUCT PROFILE, AVERAGE PRICE PAID, LATITUDE OF ACCEPTABLE PRICE AND RETAIL SKU PRICE RANGE

TABLE 2

CORRELATION MATRIX

DISCUSSION

The present study extends previous research by documenting the correlates of price acceptability across a wide range of durable goods. Price consciousness was found to be negatively correlated with the upper and lower thresholds of price acceptability, but not with the width of the latitude. In essence, the width of the latitude remained the same for high versus low price conscious consumers, but the upper and lower thresholds were lower for the high price conscious versus low price consciousness consumer. This finding is contrary to that of Lichtenstein, Bloch and Black (1988), who found a significant negative correlation between price consciousness and width of the latitude. The failure to replicate the price consciousness/latitude correlation could be explained by a number of factors, ranging from the nature of the products under study to the nature of the measures of price consciousness. Further investigation of the relationship between these variables is warranted.

Latitude of acceptable prices was positively related to perceived brand differentiation, where consumers who perceived many differences among brands had wider latitudes than consumers who perceived fewer differences. The wider latitude was a function of the higher upper threshold for consumers who perceived a large variation between brands. The present results contrast with previous results of Lichtenstein, Bloch and Black (1988) who found significant correlations between brand differentiation and the point estimate of price acceptability but not with the width of the latitude. Again, further research into these relationships is warranted.

Lastly, the predictive validity of price acceptability on buyer behavior was tested by the regression analysis between the upper and lower thresholds and actual price paid. The results showed that the magnitude of the upper threshold explained more variation in price paid than the lower threshold. This result suggests the powerful role that price acceptability has on buyer behavior. Moreover, it reinforces the notion that upper and lower thresholds are important dependent variables to include in further studies in price acceptability.

REFERENCES

Berkowitz, Eric and John Walton (1980), "Contextual Influences on Consumer Price Responses: An Experimental Analysis," Journal of Marketing Research, 17 (August) 349 - 58.

Della Bitta, Albert and Kent B. Monroe (1973), 'The Influence of Adaptation Levels on Subjective Price Perceptions," Advances in Consumer Research S. Ward and P. Wright (eds), Volume 1, (Urbana, Ill: Association for Consumer Research) 359 - 369.

Dodds, William and Kent Monroe (1985), 'The Effect of Brand and Price Information on Subjective Product Evaluations", Advances in Consumer Research Elizabeth Hirschman and Morris Holbrook,eds. Provo, Utah: Association for Consumer Research, 85-90.

Gabor, Andre and Clive Granger (1964) "Price Sensitivity of the Consumer" Journal of Advertising Research, 4 (December) 40-44.

Helson, Harry (1964). Adaptation -Level Theory. New York: Harper and Row.

Jacoby, Jacob and Jerry Olson (1971) ,"Consumer Response to Price: An Attitudinal, Information Processing Perspective," Moving Ahead with Attitude Research, Yoram Wind and Marshall Greenberg eds, Chicago, IL: American Marketing Association, 73-86.

Lattin, James M. and Randolph E. Bucklin (1989) "Reference Effects of Price and Promotion on Brand Choice Behavior" Journal of Marketing Research. (August) 299-310.

Lichtenstein,Donald R., Peter H. Bloch and William C. Black (1988) "Correlates of Price Acceptability" Journal of Consumer Research, 15 (September) 243-252.

Monroe, Kent B. (1971), "Measuring Price Thresholds by Psychophysics and Latitudes of Acceptance," Journal of Marketing Research, 8 (November) 460-464.

Monroe, Kent B. (1973), "Buyers' Subjective Perceptions of Price" Journal of Marketing Research, 10 (February) 70-80.

Monroe, Kent B and Susan Petroshius (1981), "Buyers' Perceptions of Price: An Update of the Evidence," Perspectives in Consumer Behavior Harold H. Kassarjian and Thomas S. Robertson (eds) (Glenview, Illinois: Scott, Foresman) 4355.

Sherif, Carolyn (1963), "Social Categorization as a Function of Latitude of Acceptance and Series Range," Journal of Abnormal Psychology, 67 (August) 148-156.

Sherif, Muzafer and Carl Hovland (1961). Social Judgment: Assimilation and Contrast Effects in Communication and Attitude Change. New Haven: Yale University Press.

Winer, Russell S. (1986), "A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, 13 (September) 250-256.

Zeithaml, Valerie A. (1988), "Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence" Journal of Marketing, (July) 2-22.

----------------------------------------