Rajesh Chandrashekaran and Dhruv Grewal

The use of advertised reference prices (ARPs) by retailers to provide consumers external anchors on which to base their internal reference prices (IRPs) is quite common. These anchors are intended to raise consumers' IRPs and thereby influencing the way the offer is evaluated. However, if such techniques are to be effective, retailers must understand how consumers' perceive and process information related to advertised comparison prices. In addition, they must be aware of factors that make consumers more likely to assimilate a portion of the difference between the advertised reference price (ARP) and their initial reference prices to form a revised (higher) internal reference price. However, if the external anchor is too large and/or unbelievable, it may be altogether rejected, resulting in lower IRPs.

Retailers must also appreciate the role that personal factors such as involvement play in determining the influence of advertised reference prices on consumers' IRP. Over two decades of research demonstrates that involvement influences whether and to what extent consumers are likely to elaborate on and be persuaded by available information. In the context of comparative price advertising, involvement is likely to influence the extent to which consumers attend to and assimilate advertised reference prices. Therefore, different communications may be necessary across market segments to obtain optimum results.

The data for this study was obtained from 342 graduate business students. Two product categories (alkaline batteries and cameras) were selected. The main purpose was to investigate the nature of the assimilation process and how assimilation is related to the discrepancy between the perceived ARP and IRP. In addition the study intended to examine the role of involvement in the assimilation process.

The results are consistent with assimilation-contrast theory and strongly support a nonlinear assimilation process. That is, credible ARPs can be instrumental in raising consumers IRPs, but only up to a point. Beyond this point, the ARP is contrasted, which impedes assimilation and may even result in consumers lowering their IRPs. Furthermore, involvement plays an important role in determining the shape of the assimilation curve. In general, compared to those who are less involved, highly involved consumers are more skeptical of ARPs and are more resistant to changing their IRPs. Identical results were obtained in two different product categories.

Our findings suggest that retailers must be careful to select ARPs that are credible and, at the same time, large enough to yield optimum results (maximum increase in IRP). From a retailer's perspective, it is crucial to adopt an optimal price communication strategy to enhance consumers' assimilation of ARP and subsequent evaluations of sale prices against (higher) internal reference prices. The nonlinear response curve discovered in this study suggests that retailers must have adequate knowledge of the range of consumers' internal reference prices in the high and low involvement segments. This information will assist them in designing pricing and price communication strategies. More specifically, because the maximum assimilation in each segment is likely to occur at different ARP levels, retailers must be careful when choosing comparison price levels (relative to the IRPs of consumers).

One strategy is to use different types of ARPs in each segment. For example, in the low involvement group, retailers may use manufacturer suggested retail prices, which are typically higher than other forms of comparison prices, e.g., competitor's prices, which may be used to communicate with more involved consumers. Such a segmented price-communication strategy might be effective because highly involved consumers are more likely to be aware of competing prices.