What is a Reference Price?

A reference price is the price that a customer considers to be reasonable to pay for a product or service. A business should be aware of the reference price perceptions of customers when setting price points for company products. For example, if the reference price used by customers is the pricing range for a competitor's product line, a business could set its prices slightly lower than the competitor's prices. Customers will perceive these prices to be a good deal in relation to the reference prices, and so will be more likely to buy from the company. A variation on the concept is for the originator of a product to initially set a high price, which customers will adopt as the reference price for that product. The firm can subsequently offer a variety of discounts, which are perceived as excellent prices, thereby boosting sales volume. Yet another variation on the concept is to place a lower-priced product next to a higher-priced product, so that the lower-priced product will appear to be a good deal, thereby spurring sales.

Reference pricing is considered to be a variation on psychological pricing, where prices are manipulated to attract the attention of consumers.

Historical Reference Price

A historical reference price is the price paid by a customer at some point in the past for a similar product. If the price has increased since then, the customer may feel that the new price is overly expensive in comparison to the old price, and so will not purchase it. For example, a customer has been paying $40/year for a GPS mapping app on her phone. The price for the current year has increased to $48/year. Based on her reference price, she considers this to be a bad deal. If the seller were aware of this issue, it would use marketing tools to explain the increased benefits that come with the increased price of the product.

Internal Reference Price

An internal reference price is a price that you have developed based on your own experiences or expectations. For example, if you are accustomed to buying a chocolate bar at the local store for $1.50, this becomes your reference price for a chocolate bar. If you then see a $1.00 chocolate bar in a store, you would be more likely to decide that it is a good deal, since it is lower than your internal reference price.