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There is a psychological theory that states that people for perceptions based on present and past stimuli Helson 1964 This has been extended by marketing academics to include the concept of reference pricing They do this by stating that consumers based on their previous exposure to products and their promotion - have an internal learnt pricing level that they believe is equitable for a given product Jacobson Obermiller 1990 This essay examines the role of reference pricing in the pricing decision and particularly the evidence on which this theory is based It will be concluded that although the reference price provides a starting guideline for making the price decision - there is little evidence to support the theory in actually setting price structures Put simply a reference price is a standard against which observed prices are compared Biswas Blair 1991 There are two types of reference price internal and external External reference prices are ones that exist in the environment and are used by consumers to assess the value of an item Examples of these reference prices include reduced promotional prices and a competitors price Biswas Wilson Licata 1993 The second major type of reference price is the internal reference price These exist in the consumers mind as either a point or a range of points Putler 1992 In either case the reference price is used to evaluate the value of a price under consideration The concept of the reference price is consistent with a number of psychological theories including adaptation level theory and assimilation-contrast theory Kalyanaram Winer 1995 Two important sides to the reference-pricing debate have emerged Gijsbrechts 1993 takes a cognitive-based approach by saying he believes that it is important to examine three key areas First whether the reference price is a point or range Second determining how a consumer formulates the reference price that is whether it is based on the highest lowest median etc
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