RETAIL PRICING STRATEGY: HOW DOES CORPORATE REPUTATION IMPACT CONSUMERS' REACTIONS TO PRICE INCREASES?

From the perspective of the firm, corporate reputation is one of the most valuable assets in achieving and securing competitiveness. Among other positive outcomes, a favorable reputation is assumed to increase willingness-to-pay of customers. Customers compare costs incurred for obtaining a product or service and the anticipated benefits received in return; the perceived net benefit from the transaction determines a customer's preference for and evaluation of the product. A company with a favorable reputation can normally charge more for its products and services, directly contributing to its financial success. However, price increases ceteris paribus decrease customers' net benefit leading to negative consequences such as customer dissatisfaction, complaints, or defection. Consumer reactions to prices and price increases are subjective in nature because price perception is relative to other product attributes, such as product quality. This implies that the identical price can seem expensive and unfair to one consumer but adequate and fair to another. With few exceptions, price increases will be viewed negatively by consumers, though. Therefore, factors that impact or attenuate consumers' negative reactions toward price increases are of theoretical and practical interest. Some of these factors are included in our study, specifically price fairness, anger as an emotional reaction, the size of the price increase, and the reasons and motives for the price increase. To optimize pricing strategies it is important to understand how corporate reputation affects these different consumer reactions to price increases. Therefore, this study focuses on the research question: How does perceived corporate reputation affect consumers' reaction to price increases? In order to answer the research question, we are drawing on the theory of cognitive dissonance, equity theory, and attribution theory. To test our hypotheses, we conducted an experiment choosing a 2x2 between-subjects design. We manipulated "corporate reputation" (favorable versus unfavorable) and "price increase" (high versus moderate). All groups were completely randomized. We used airline services as the study setting. In total, 276 business students from two German public universities participated in the study. Results confirm that perceived corporate reputation plays an important role in understanding consumer reactions to price increases. First, we could establish that the more favorably reputation is perceived, the less likely are consumers to attribute negative motives of the company for the price increase. In turn, perceived motive and reputation were found to impact perceived price fairness: if consumers perceive a negative motive for the price increase, perceived price fairness decreases. Moreover, we found that if companies with a favorable reputation are raising prices, consumers are more likely to accept this as a fair move compared to companies with an unfavorable reputation. Anger as an emotional reaction to price increases is affected by perceived price fairness meaning that the more positive the cognitive appraisal of a price increase, the less likely are consumers to become angry. Most importantly, perceived reputation and price fairness directly and significantly affect purchase intentions. However, we could not establish a moderating effect of the size of the price increase: neither the relationship between perceived reputation and perceived price fairness nor the impact of reputation on purchase intentions were affected by the size of the price increase, just the price increase in general. This means that even if consumers perceive a price increase as larger, this does not affect the impact reputation has on perceived price fairness and purchase intentions. The study results indicate that it pays off for companies to have a favorable reputation. We could show that a favorable reputation enables firms to command higher prices without having to face the negative reactions a badly-reputed company would have to fear. Although pricing has to be modified very carefully, a company with a good reputation has more leeway in raising prices. This also means that marketers need not only investigate "hard figures" when reconsidering prices but also the soft factors such as reputation of the company and emotional reactions of their customers. Subjective price perceptions are important to know in order to correctly forecast consumer reactions to price variations. It might be tempting to maximize the short-term profits resulting from exploiting a favorable reputation, but the study results indicate that this would be short-sighted in terms of ensuing negative customer reactions. Managers should take the company's reputation into account before establishing price increases which requires measuring corporate reputation before and after price variations. As reputation is notoriously hard to measure, this raises the bar for managers in charge of managing the company's reputation and corporate profitability for long-term success. Price increases that affect broad segments of the population as for instance in travel and mobility, food, insurance, or health care are widely discussed by the media and the people. Here, favorable corporate reputation can help reducing negative repercussions. In the long term however, reputation is also likely to be affected by pricing decisions, calling for a careful approach in communicating price changes. Here, it is important to note that the reason consumers perceive as underlying the price increase has a strong impact on perceived price fairness. If consumers think that price increases serve profit maximization goals, they find that unfair. However, our study implies that the motive for the price increase is affected by corporate reputation granting "good" companies the benefit of the doubt when increasing their prices. [ABSTRACT FROM AUTHOR]