Reference Price and Brand Loyalty

Brand loyalty is related to what the consumers are comparing the price to.  An External Reference Price comparison is "a comparison provided by...retailers or manufacturers".  Internal price references are "the price developed in the buyer's mind through experience with this product".
According to our book, frequent buyers are more likely to judge high prices because they have more experience and idea of what the product within a brand is worth.  This is important because companies which make products that are used often, like laundry soap or butter, should be careful with price increases as to not encourage frequent buyers to switch brands.  They should also try to foster brand loyalty through their advertising and marketing.  This is because one study found that the consumers who use use the current price, or External Reference to make decisions, are brand loyal and spend about 60% of their purchases to one brand.  The consumers who don't have brand loyalty use more Internal Reference - they think about what they have paid in the past for the product, and compare the current prices to that.  Therefore, managers should price so that the product is competitive with other brands to encourage external reference consumers to stick with their brand, while keeping prices fair over time to encourage internal reference shoppers to look at the price and brand favorably.

Article with study info:

Loyalty Differences in the Use of Internal and External Reference Prices

Tridib Mazumdar and Purushottam Papatla

Marketing Letters , Vol. 6, No. 2 (Apr., 1995), pp. 111-122

Published by: Springer

Article Stable URL: http://www.jstor.org/stable/40216365