Customer choices of manufacturer versus retailer brands in alternative price and usage contexts

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Abstract

This article offers a context-dependent theory of how price changes influence consumer purchase choice for fast moving consumer goods (FMCGs) for manufacturer (large household share) and retailer (small household share) brands. The theory proposes that the influence of price on demand is systematically very sensitive to context effects; more specifically, the theory includes the hypothesis that elasticity is much greater when the price change results in the manufacturer and retailer brands having the same price compared to when the price change keeps the manufacturer brand price above the retailer brand price. The implicit and/or explicit association with higher quality with the manufacturer versus retailer brand may be the main reason for buying the higher priced manufacturer brand. Decreasing the price of the manufacturer brand to equal the retailer brand's price takes away the primary reason for buying the retailer brand (i.e., saving money); increasing the price of the retailer brand to equal the manufacturer brand's price has the same effect. The empirical findings in the studies that this article reports support the hypothesis and confirm Scriven and Ehrenberg's [2004. Consistent consumer responses to price changes. Australas. Mark. J. 12(3), 21–39] major conclusion that relative order of price is more important than relative distance.

Introduction

Gabor (1988) and others (e.g., Benson, 1955; Griffith and Rust, 1997; Pessemier, 1960; Scriven and Ehrenberg, 2004) question whether or not the proposition that a brand has a single elasticity at all times is in any way accurate. Using in-home consumer-simulated shopping trips at fortnightly intervals, Scriven and Ehrenberg (2004) report the elasticity of Maxwell House (a manufacturer's brand) instant coffee varying from −1 to −4 across ten studies. They ask, “Why is that? Are there consistent factors underlying such differences?”

Against this background, we are not aware of any study that looks systematically at variation in elasticities across brands and circumstances with a view to isolating conditions that may lead consistently to different levels of price response and which might eventually lead to conclusions about the hierarchy and magnitude of effects in general… Our broad hypothesis is that generalities can be found. (Scriven and Ehrenberg, 2004, p. 21)

Pauwels et al. (2007) do provide a systematic examination of variations in price elasticities across brands and circumstances that supports and extends Scriven and Ehrenberg's (2004) findings. Pauwels et al. (2007) show that “price thresholds do matter for the majority of the analyzed brands and categories. Moreover, in the case of historical benchmarks, we find evidence for asymmetric thresholds, and for different sign and magnitude of elasticity transitions, signaling the need to consider a broad framework of threshold-based price elasticities. For historical benchmark prices, the threshold size is larger for gains (23%) than for losses (15%) and the assimilation/contrast effects for gains (−0.91) are larger than the saturation effects for losses (0.32). For competitive benchmark prices, the threshold size is similar for gains (15%) and losses (17%), and saturation effects emerge both for gains (0.49) and for losses (0.63).” (italics in the original).

The present article extends the theory and insights of Scriven and Ehrenberg (2004) and others (Anselmsson et al., 2008; Bolton, 1989; Grewal et al., 1998; Krishnamurthi et al., 1992; Lowengart, 2002; Tellis, 1988; Pauwels et al., 2007; Putler, 1992; Zenor et al., 1998) for conditions where reference prices affect consumer brand choices. In their simulated consumer shopping studies, Scriven and Ehrenberg (2004, p. 28) report, “The biggest effect we found was when passing a locally defined reference price.” They report that the average elasticity equaled −5.6 for smaller brand shares when their prices pass the price of the brand leader (i.e., largest share) versus an average equal to −2.8 when the price change does not pass the leader's price. Scriven and Ehrenberg (2004) also report elasticities were consistently bigger for smaller (i.e., retailer) brands: elasticities averaged −4.2 for brands with shares less than 10% and −1.9 for brands with shares 50%+. Similarly, Anselmsson et al. (2008) report that retailer brands’ market shares do have a significant impact on consumer prices and expenditures. Using consumer panel data for 3000 Swedish households, Anselmsson et al. (2008) identify a statistically significant negative relation between changes in retailer brands’ (RB) market share and price changes, implying that the more the RB market share increases within a category, the more the average prices decrease or are held back.

Using cross-sectional (non-experimental) data, Zenor et al. (1998, p. 31) demonstrate the substantial impact of baseline sales in moderating the influence of price on demand. “According to our framework, a brand's baseline sales is smaller in the face of a marketing policy that allocates large percentages of the budget to promotional activity. Hence, the traditional allocation rule's blindness to the impact of the allocation rule on future response can lead to a policy that drives out high margin, unpromoted sales… . We have attempted to model the effects of marketing policy on promotional price elasticities and baseline sales. Due to data limitations and pending unresolved issues in intertemporal aggregation, we are unable to test our framework with time-ordered descriptors of causes and effects. This inability is a potential limitation of the study because cross sectional associations between variables do not rule out reverse causation or constant elasticities.”

Using multiple treatment scenarios in a true experiment design, the study that this present article describes operationalizes reference price as it occurs during a purchase occasion within the context of the prices observed for manufacturer (large baseline sales) and retailer (small baseline sales) brands. Therefore, this study focuses on external reference prices as similarly done by Scriven and Ehrenberg (2004) rather than an internal reference approach since external reference price approach captures the cross-sectional effect of reference price among multiple brands (Mazumdar and Papatla, 2000).

The present article further probes the differential price change influences on consumer purchases of brands in different contexts. The goal of this article is to build and empirically test a theory of the impacts of price changes on demands for manufacturer versus retailer brands for FMCGs. The theory includes predictions of systematic effects for the relative brand pricing contexts of manufacturer (leading share) and retailer (small share) brands as well as systematic product use contingency effects for these brands. Empirical studies that this report includes support the theory.

Following this introduction, this article has the following organization. Section 2 describes the theory. Section 3 describes the method (between-group experiments) to test the theory. Section 4 presents the findings from the experiments. Section 5 provides a general discussion that includes an elaboration of how the findings and theory relate to relevant literature, limitations, and implications for theory, research, and pricing strategy. Finally, Section 6 offers conclusions.

Section snippets

Theory of context-dependent price change influences on consumer demand

For ease of discussion and empirically testing, the theory focuses on FMCGs for the context that includes a leading manufacturer brand competing against a smaller share retailer brand. While the theory is expandable to include more complex market contexts, the main hypotheses are unaffected by such expansions.

H1

In consumer usage contexts that favor the manufacturer brand (i.e., household meal preparation for major manufacturer holidays), the biggest price change effect on demand for the

Method

A between groups experiment was used to test the hypotheses. In a manufacturer sample of US households, each of 1440 households was assigned randomly to one of 36 groups. Each household in the sample received a letter and a one-page shopping list questionnaire plus two additional pages of demographic and meal preparation questions. The shopping list included five product categories with two to three brands to choose from for each category along with the option of “Would not buy [category].” The

Findings

The findings confirm H1. In the consumer usage context favoring the manufacturer brand (i.e., household meal preparation for the Thanksgiving manufacturer holidays), the biggest price change effect on demand (share jump from 53 to 81 points) for the manufacturer brand occurs when the manufacturer brand's (NB) price decreases from it's higher reference price to a price equal to the retailer brand's (SB) price (e=−4.3). Price change effects for prices that shift the NB price even higher than the

General discussion

The findings in the experiments described in this article strongly extend the findings and observations in Scriven and Ehrenberg's (2004) study. A manufacturer brand price change effects are much bigger in the specific contexts of decreasing price to eliminate the main reason for buying a competing retailer brand versus increasing price further away from the retailer brand's price. For the retailer brand, the price change effect for moving its price to equal the manufacturer brand is larger

Conclusion

The present study provides additional evidence that price elasticity varies consistently within the competitive contexts of brands—such as the proximity of competitors’ prices and the usage contexts the consumer associates with the shopping experience. The theory and findings in this study support the proposal for further development of a contingent contextual theory of price change effects on purchase shares for manufacturer and retailer brands. While Moscati and Ivan, 2004a, Moscati and Ivan,

Acknowledgment

The research grant provided by a fast moving consumer goods manufacturer for the empirical study this article reports is gratefully acknowledged.

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