Competing on price: the role of retail price advertisements in shaping store-price image.

Competing on Price: The Role of Retail Price Advertisements in Shaping Store-Price Image

Consumers often patronize stores based on perceptions of those stores' overall price levels; yet little is known about how such perceptions are formed. This paper presents the results of an experiment in which grocery shoppers are presented with alternative versions of an supermarket's advertising circular, and asked to judge that store's overall price level. The results suggest that a supermarket may create a lower price image if its advertised prices are presented as reductions from previous prices. The results also indicate that the brand and product category of merchandise featured in retail advertisements interact to influence a store's price image.

INTRODUCTION

Over the years, price has continued to be one of the most important bases upon which retailers compete. As originally noted by McNair (1958), many innovative retail institutions have entered the market emphasizing a low price appeal (e.g., department stores in the mid-19th century, supermarkets in the 1930s, and discount stores in the 1950s). When these institutions have subsequently de-emphasized price in order to provide various consumer amenities, they in turn have become vulnerable to newer breeds of price-oriented competitors.

Price image appears to be a particularly important competitive tool for retailers of packaged goods. For example, various studies have indicated that a store's perceived price level is either the first or second most important patronage criterion for both supermarkets (Arnold, Oum, and Tigert 1983; Progressive Grocer 1983) and drugstores (Nickel and Wertheimer 1971). However, price also plays an important role in the retailing of durables, as can be observed in the success in recent years of such cut-rate retailers as off-price apparel stores, catalog showrooms, and warehouse clubs (see e.g., Kaikati 1987).

If a new retailer wants to enter the market with a low price image, how does it create that image? Research by Buyukkurt (1986) indicates that consumers' first impressions of stores are very important. In a grocery shopping simulation, Buyukkurt found that consumers formed an initial impression of a store's overall price level that persisted even in the presence of subsequent, contradictory price information. This parallels a widely-reported phenomenon in social psychology, in which individuals form quick initial impressions of another person, and then tend to discount subsequent information that contradicts those initial impressions (e.g., Luchins 1957; Jones et al. 1968; Berman, Reed, and Kenny 1983).

From what sources do consumers form initial impressions of a store's prices? Perhaps consumers' most important source of information on retailers' prices is retail advertising. For example, Lynn (1981) found that over 60 percent of consumers list newspaper ads as their most important source of information concerning retail prices. In response to this demand for price information, retailers spend over $20 billion annually on consumer advertisements (Berman and Evans 1989; Advertising Age 1982), most of which are essentially lists of selected products' prices (Rosenbloom 1981).

Several researchers have examined consumers' responses to retail price advertisements (e.g., Bearden, Lichtenstein, and Teel 1984; Berkowitz and Walton 1980; Blair and Landon 1981; Della Bitta, Monroe, and McGinnis 1981; Liefeld and Helsop 1985; Urbany, Bearden, and Weilbaker 1988; Zeithaml 1982).

Most of this research has focused on how consumers perceive the prices of the particular products included in the ad. However, an issue of considerable importance to retailers has been virtually ignored: How does retail price advertising shape consumers' perceptions of a store's overall price level? When retailers place advertisements, their concerns should extend well beyond the relatively small handful of products advertised (Walters and Rinne 1986). For example, a supermarket ad may depict 10 or 15 products, but the supermarket manager must be concerned with the total performance of a store housing perhaps 15,000 products. He or she should be interested in the broad effects of an ad on the store's image, particularly its price image.

The importance of this issue has been noted by several authors. Years ago, Martineau (1957) observed that:

For all of the retailer's remarks that his advertising is measured

strictly in terms of immediate sales . . . it is perfectly

clear that every ad he runs is an institutional ad. Whether he

realizes it or not, all of his advertising is creating an image of

his store.

In a similar vein, Nystrom et al. (1975) noted that

In their pricing policies, stores . . . should not only consider

the pricing of individual items, but also the need for a favorable

overall price image.

Despite the acknowledged importance of this issue, the impact of retail-price ads on store-price image has attracted very little research attention. Walters and Rinne (1986) and Nystrom (1975) both note that the vast majority of pricing studies focus on brand-specific rather than storewide outcomes, perhaps reflecting the manufacturer-oriented bias that pervades much marketing research (Darden 1980). Buyukkurt (1986) states that in general ". . . systematic studies of the variables that affect [store price perceptions] have been scarce . . ."

FOCUS AND OBJECTIVES OF STUDY

This study will examine how retail item-price ads affect perceptions of a store's overall price level. An underlying premise of our work is that consumers have difficulty making direct assessments of store price level based on the advertised selling prices alone, and will therefore rely on other cues in the retail ad. (For a similar view, see Brown 1969; Brown and Oxenfeldt 1972.)

There are at least two reasons for this premise. First, many consumers have poor recall of the regular prices of frequently purchased products (e.g., Allen, Harrell, and Hutt 1976; Dietrich 1977). Though this may not prevent consumers from making point-of-sale price comparisons among brands (see Dickson and Sawyer 1986, 1990), it does hamper inter-store price comparisons, since it is difficult to make side-by-side comparisons among stores' prices. Second, even if consumers can evaluate individual prices in a retail ad, they are likely to have difficulty integrating these individual item judgments into an overall assessment (see Buyukkurt 1986; also see …