How Much Is Enough? a Preliminary Empirical Study of the Price Tolerance Zone in Singapore

Citation:

Roger Marshall and Woonbong Na (2000) ,"How Much Is Enough? a Preliminary Empirical Study of the Price Tolerance Zone in Singapore", in NA - Advances in Consumer Research Volume 27, eds. Stephen J. Hoch and Robert J. Meyer, Provo, UT : Association for Consumer Research, Pages: 30-33.

Advances in Consumer Research Volume 27, 2000      Pages 30-33

HOW MUCH IS ENOUGH? A PRELIMINARY EMPIRICAL STUDY OF THE PRICE TOLERANCE ZONE IN SINGAPORE

Roger Marshall, Nanyang Technological University

Woonbong Na, Stilla University

PROBLEM FOCUS

Price discounts are commonly used to attract retail sales. Often these discounts are periodic rather than continuous in nature, and advertised as a "Sale" promotion. Sometimes the major reason for using such discounts is to move seasonal or fashion stock, or maybe the promotion is merely used as a device to perk up flagging sales. The problem faced by retailers on these occasions is to calculate the minimum discount necessary so that revenues are maximized yet the consumer is still attracted to consider purchasing the reduced items.

The subject was drawn to the researcher’s attention by apparently contradictory signs about the magnitude of the threshold level. Research reported in the academic literature suggests a price discount threshold level of around 15%, and that discounts over 20-30% have little effect (Bitta & Monroe; Gupta & Cooper); yet retailers in Singapore commonly advertise reductions of the usual retail price of up to 70 and even 80%. The reported research is from the USA, so the question that immediately comes to mind is whether or not this large difference is because price decreases (and increases) are perceived differently in the two countries, or whether the Singapore retailers have got it wrong?

In the work that follws, a brief discussion about the theoretical underpinnings of the price tolerance zone is first offered. This is followed by some predictions (encapsulated in hypotheses) regarding expected results of the study, and a description of an empirical study of the perceptions of both price rises and reductions in Singapore.

THEORETICAL UNDERPINNING

The Price Tolerance Zone

A price discount threshold is the minimum value of a price reduction (increase) required to alter a consumer’s purchase intentions. In a sense, this can be considered the Just Noticeable Difference for Price, in that price reductions less than the discount threshold are not considered significant enough by the consumer to alter their purchase behavior. This is quite different from the typical, non-price, Just Noticeable Difference concept, which notes a purely physical phenomenon describing the absolute amount of change required in a stimulus before an individual becomes aware of that changeBthe price threshold is a far more complex, psychological process.

Consumers evaluate and encode information in their environments and it is their perceptions of this information, rather than the information itself, which provides cues for behavior. Thus, when a retailer advertises a price as being reduced, consumers tend to calculate the reduction in terms of their own, internal perception of the usual price of the good rather than in terms of the stated "usual price". This perceived usual price is known as a reference price (Kalwani, Manohar & Yim). The perceived discount, then, is the advertised price in relationship to the reference price, rather than the advertised price. Bitta suggests, however, that consumers may believe that very large discounts are not bona fide and consequently shift their reference price downward from the claimed amount (1981).

The reference price seems to be more of a range than a point (Kalyanaram, Gurumurthy & Little). Thus a zone of tolerance is constructed around the reference price, delineated by the price threshold for increases and decreasesBwithin this zone it seems that most consumers do not perceive the advertised price to be significantly cheaper or more expensive than the reference price, and are therefore unlikely to change their purchase intentions. Where, exactly, these references prices and tolerance zones come from is not evident from a scrutiny of the relevant literature. It seems most likely, however, that consumers adopt both their reference price and the attached tolerance zones from their daily experience, both with actual purchases and with exposure to friends’ reports and advertising. Hence retailers are faced with a compounding of their problem, in that frequent high discounts may effect the target audience’s reference price perceptions so that their discounts are no longer as effective as they were. The implication is that discounts should be irregular and not too frequent, to avoid any speedy learning effects.

Variations in Price Tolerance Zone Magnitude

A second implication of the impact of frequent price reductions on reference prices is that they will not only differ over time but also on a local, regional and national level. Thus the high observed discounts in Singapore may simply reflect Singapore retailers’ acknowledgement that local zone of tolerance is wider than that in the USA. The first hypothesis follows this line of argument, and is based on the Gupta & Coopers’ (1992) finding that the lower limit of the tolerance zone, for price reductions, is between 15% and 20% in the USA.

H1: The tolerance zone for price reductions in Singapore is greater than 20%.

A test of this simple hypothesis will reveal whether there is a large variation and will also indicate whether Singapore retailers are miscalculating the discounts necessary to attract custom and, consequently, having an effect upon the range of the tolerance zone in the Country.

It also seems likely that different product categories may have wider or narrower tolerance zones, depending upon the recent history of their treatments. Thus products that are frequently subject to discounting will have a zone with a wider range attached than other product categories which are less frequently discounted. These product categories are likely to vary with time (maybe over the product or fashion life-cycle) and in some instances, with seasonality. The authors have no guide with regard to expectations except their own, Singapore, experiences. Recent history in Singapore has seen heavy price discounting of nearly all product categories except top-end luxury items and some services, where price is one of the few indicators of quality. The hypothesis here, then, is equally general, reflecting the lack of specific expectations on the researchers’ part:

H2: There is some difference in the range of price tolerance zones between product categories.

Price Rises and Falls

With regard to the relationship between perceptions of price discounts and rises, at least, there is a solid body of theoretical work to guide researchers’ expectations. The Prospect Theory (1979) advocates that people value gains and losses differently depending upon their frame. The hypothetical value function relating actual values to psychological values of decision outcomes is skewed accordingly, so that consumers are more sensitive to gains than to losses. This makes intuitive good sense in a pricing context; both authors subjectively feel that price rises only need be a fraction of the equivalent price reduction to affect our perceptions, and, probably, our purchase intentions. Hence a further hypothesis:

H3: Price rises are perceived as significant more readily than discounts.

TABLE 1

MEANS AND STANDARD DEVIATIONS FOR PRICE INCREASE AND DISCOUNT PERCEPTIONS

METHOD

A simple survey was performed to allow a test of the hypotheses. Data was collected from a convenience sample, using a custom-designed questionnaire. First the sample is discussed below, then the research instrument and, finally, the details of procedure.

The sample is composed of undergraduates at a leading university in Singapore. This is a convenience group that does not represent Singapore consumers; yet all respondents are Singaporean (rather than American) and it was thought that undergraduates should be fairly price sensitive, so any results obtained might be conservatively biased. 114 good responses were obtained.

The questionnaire is contained on two sides of an A4 sheet of paper, with 10 products pictured and named on it. High-quality graphics and color printing were used to make the instrument look more attractive and the products more recognizable. Products were selected to give a wide range of prices and product categories and all were thought to be high-involvement products known to students. The products are a Swatch watch, Levi 501 jeans, Nike Air Max sneakers, Hewlett Packard Deskjet 720C printer, Comaq Presario notebook, Sony Diskman D-F415, Designer haircut, Tefal electric frying pan, Braun Oral-B Ultra Plaque toothbrush and a 30-minute neck massage. This latter item may sem odd to non-Southeast Asians, but is not uncommon in the region. Respondents were asked to indicate a dollar value representing a price at which the product would be considered significantly cheaper or significantly more expensive.

Great trouble was taken to ensure that all respondents held a common reference price. This is important as the responses were given in dollars and not percentages. First, a reference price was provided on the questionnaire; this price was assessed by survey of local stores. Moreover, in the verbal instructions to the group it was emphasized that they should use this as their reference priceBwords similar to this were used; "even if you think the article is actually dearer or cheaper, in fact we have done a thorough survey and are quite sure that this price is the current retail price in Singapore". The survey was administered to a test group first to make sure that the instructions were clear enough, and then administered in a lecture situation.

ANALYSIS

A one-sample t-test of the mean of discount thresholds for all products, using a test value of 25, shows that the difference of 11.59 is, indeed, significant (t=10.86, p<0.001). There is no significant between-genders difference in perceptions.

In order to check for differences between product categories, a Factor Analysis was performed on the price perceptions of all ten products. The KMO measure of sampling adequacy is 90%, suggesting that the data set is amenable to such analysis. Principle Component analysis was used, with a Varimax rotation. Two factors emerged, with eigenvalues of 5.20 and 1.24, that together explain 64% of the variation in the data set. Factor loadings are displayed in Table 2.

The mean values for Factors 1 and 2 are 32.49% and 41.89% respectivelyBthe means are different from each other statistically (t=7.44, p<.001). The factor solution seems reasonable, in that it is probable that Singapore students would not know about electric frying pan prices (most live in university hostels with canteens, the rest at home with parents) and the other two items represent services rather than products.

TABLE 2

FACTOR LOADINGS FOR PRICE DISCOUNTS

Finally, the overall mean perceived amount at which discounts are recognized is 36.59% whilst for increases it is 23.51%. The mean difference, of 13.08%, is statistically significant (t=15.56, p<.001). Even the mean level at which discounts are recognized in Singapore for Factor 1 (32.49%) is significantly larger than the reported US mean PDT of 15%B20% (mean difference=7.6%, t=5.79, p<.001).

DISCUSSION

The main drive of this research has been to compare the mean price discount threshold in Singapore to that reported in the USA. This is a rough comparison only, because the research methods used were different and the US data is old. Nevertheless, there is a significant difference of some 11% noted here, which does seem quite a large difference. In addition, an investigation of the levels at which a significant price reduction has been made for different products shows that there is an expectation that services are less likely to be discounted. Finally, the level at which price rises are recognized was found, as expected, to be closer the reference price than the level at which prices are considered significantly discounted.

Implications for theory

One of the most interesting findings to the researchers has not been reported thus far. This finding refers to the extreme reluctance of respondents to abandon their reference prices and adopt those suggested by the researchers (which are firmly based on current, local pricing practice). This became evident from boththe administration of the questionnaire and from eyeballing the data set. In the lecture room as many as a dozen students raised a question about the given reference price, saying that it was either too high or too low, whilst a couple of extreme response sets show that the given reference price was still totally ignored and a high price given, for instance, that was below the given reference point! This point does not detract from the research, merely demonstrates the power of subjective perceptions and should wave a warning flag at retailers who seem bent on changing reference prices down, to their own detriment.

The research is comparative and uses correlational techniques, causality here can only be inferred from logic. Thus, the fact that the price tolerance zone in Singapore is probably higher than in the USA is fairly clear, even with the differences in research method taken into account; but the reasons for the difference can only be hypothesized. The assumption made by the researchers is that it is the continuous, large, advertised discounts in Singapore which is driving reference prices down and thresholds up. This seems reasonable but certainly has not been proven in any way. It is quite possible that there is some other factor involved, that has not been included in the research design. Indeed, even the samples and the timing of the between-cultures tests are different, so the way is clear for a more rigorous cross-cultural test to be undertaken.

That price tolerance zones are not evenly spaced around the reference price, but are wider on the discount side that for rises, does not surprise (see Table 1). What was a little surprising was the absolute magnitude of the price risesBthe implication is that a price rise of under 20% would not have much effect upon purchase intentions. Possibly it is the legacy of the 10% benchmark provided by Just Noticeable Difference researchers, but this figure seemed (subjectively) high to the researchers and of some interest in itself. Once again, it could relate to the variation in reference prices between individuals. A further topic of research leading from here would be a cross-cultural comparison of reference prices, to see if reference prices vary in conjunction with price tolerance zones.

Implications for pricing practice

The first, and major, implication for Singapore retailers is that there is quite possibly no need for 70% discounts, 35-40% is probably enough. Again, although there is no direct evidence in the data, but it does seem reasonable that expectations are driven by pricing practice. Thus Singapore retailers could be making a whip for their own backs and may find it hard to bring discounts back to a more reasonable level. If a few leading retailers started advertising 40% instead of 80% discounts it would be a good start, however.

The second implication is that it seems possible, at least, that prices are less sensitive to rises than might be expected. This may simply be caused by confusion about the subjective reference price, bought about by reluctance to believe the large discounts genuine. That a 20% threshold for increases should exist for fashion items such as Levi jeans and Swatch watches is surprising and shows how well these companies have managed to compete on factors other than price (Table 1). The ratio of perceived discount level to the rises is much less favorable for Nike sneakers in Singapore which, if the argument above is sound, could indicate over-discounting for this product category to the extent that prices are now expected to be far more downward than upward flexible.

REFERENCES

Bitta, Della, John Albert and Kent B. Munroe (1980). "AMultivariate Analysis of the Perception of Value from Retail Price Advertising", Advances in Consumer Research, Vol 8. Association of Consumer Research.

Bitta, Della, John Albert, Kent B. Monroe and John M. McGinnis (1981), "Consumer Perceptions of Comparative Price Advertisments", Journal of Marketing Research, Vol.18, (November), 416-427.

Kahneman, Daniel and Amos Tversky (1979), " Prospect Theory: An Analysis of Decision under Risk", Econometrica, Vol. 47, (March), 263-291.

Kalyanaram, Gurumurthy and John D.C. Little (1994), "An Empirical Analysis of Latitude of Price Acceptance in Consumer Package Goods", Journal of Consumer Research, Vol.21, (December), 408-418.

Kalwani, Manohar U. and Chi Kin Yim (1992), " Consumer Price and Promotion Expectations: An Experimental Study", Journal of Marketing Research, (February), 90-100.

Gupta, Sunil, Lee G. Cooper (1992). "The Discounting of Discounts and Promotion Thresholds", Journal of Consumer Research, Vol. 19, Dec.

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