Not Just About Price: Whether Consumers Seek Quality or Taste Determines Their Response to Retailer Pricing Strategies

Abstract

Recent research has highlighted a dichotomy in the way consumers approach differentiated choice sets. Some consumers focus on quality and tend to construe choice sets in terms of vertical differentiation: their selection is driven by the level of quality obtained in relation to the price paid. Other consumers focus on taste and tend to construe choice sets in terms of horizontal differentiation: their selection is driven by proximity to personal taste in relation to price paid. The purpose of this paper is to investigate how this dichotomy drives consumer preferences between retailers that adopt different pricing strategies. We concentrate on the preference between stores that feature few discounts, i.e., “every-day-low-price” (EDLP) stores, and stores that feature frequent discounts, i.e., “high-low” (Hi-Lo) stores. We hypothesize that, all else equal, consumers who focus on taste benefits will prefer EDLP stores while consumers who focus on quality benefits will prefer Hi-Lo stores. Findings from five experiments and an analysis of consumer panel data corroborate this relationship. These experiments also show the mediating role of perceived value and the effect of several moderators: the strength of the relationship between regular prices and quality, the patterns of discounts (across items of similar quality or of similar taste), and the level of cherry-picking costs.

Keywords: taste, quality, value, benefits, pricing, retail pricing strategy, EDLP, Hi-Lo, vertical, horizontal