Effect of Customer Heterogeneity on Online Pricing: Just Noticeable Differences in a Competitive Service Industry
Online sales for both products and services are on the rise globally and are projected to increase by 10% annually to $370 billion by 2017 (Lomas 2013). Price is a key management lever for firm performance (McKinsey 2002) and key determinant of purchasing decision for a consumer (Bishop 1984, Doyle 1984, Sawyer and Dickson 1984, Schechter 1984). However, customers do not remember exact price but have a band of prices that are acceptable (Monroe 1973) (Olson 1976)(Monroe 1969).
This research uses Just Noticeable Difference (JND) theory as the theoretical lens to study online pricing thresholds in a retail service industry. This quantitative field study uses three and half years of non-contractual transactional and customer level data from a B2C company to evaluate the hypotheses. Two phased investigations are conducted. Study 1 empirically determines the pricing threshold range for the service industry. Study 2 examines the effect of pricing action on purchase frequency based on customer heterogeneity and competitive prices.
Contributions are three-fold. Theoretically, the study furthers the conceptual understanding of the pricing thresholds in the digital marketplace by using real customer level data. Second, the application of JND theory in a non-contractual B2C sector confirms that pricing thresholds for the service industry are higher than consumer goods industry. Third, this research confirms the varying effects of customer attributes (loyalty, motivation, and online purchase channel) on pricing thresholds. These findings are key to implementing a differentiated pricing strategy across channels and customer types to maximize firm performance and increase customer retention.