Pricing in the Digital Economy: A Quantitative Study of Just Noticeable Differences in the Services Industry

Abstract

Price is a key management lever for firm performance (McKinsey 2002) and a key determinant of purchasing decision for a consumer (Bishop 1984, Doyle 1984, Sawyer and Dickson 1984, Schechter 1984). However, customers do not remember the exact price but have a band of prices that are acceptable (Monroe 1973) (Olson 1976) (Monroe 1969). Globally, online sales for both products and services are on the rise and are projected to increase by 10% annually to $370 billion by 2017 (Lomas 2013). This quantitative field study uses three and half years of online non-contractual transactional and customer level data from a B2C company in the service industry. Two phased investigations are conducted. First, we determine the pricing threshold range using price increase and decrease. We then examine the difference in price threshold between service and consumer goods industry. Theoretically, the study furthers the conceptual understanding of the pricing thresholds in the service industry. The use of real customer level data is a methodological contribution of this study. Third, this research confirms that customer purchase frequency does not have a linear relationship to price and that certain magnitude of price change results in higher magnitude customer losses. These findings are key to predicting demand post pricing action and understanding consumer behavior to maximize profitability.

Keywords: Pricing, just noticeable differences, services industry, threshold, price bands