Customers' Reactions to Price Increases: Do Customer Satisfaction and Perceived Motive Fairness Matter?

Headnote

Most of the previous research on price changes has focused on price decreases. This article investigates the effects of price increases at an individual level. The authors argue that customers' reactions to price increases (i.e., repurchase intentions) are strongly driven by two factors: the magnitude of the price increase and the perceived fairness of the motive for the price increase. In this context, the authors examine the role of customer satisfaction in influencing the impact of these two variables on repurchase intentions after a price increase. Their findings reveal that as satisfaction increases, the negative impact of the magnitude of a price increase is weakened. Furthermore, the results suggest that satisfaction moderates the impact of perceived motive fairness. The authors also find that the level of satisfaction can influence the valence of the perceived motives in response to a price increase.

Keywords: pricing; price increases; customer satisfaction; fairness; experiment

Over the years, the topic of pricing has clearly been of great interest in marketing strategy and research. To effectively set price levels as well as to change prices, companies need to understand customers' reactions to these strategies. Most of the previous research on pricing activity, however, has focused on price decreases (e.g., Hoch, Drèze, and Purk 1994; Kalwani and Yim 1992). The reason for this emphasis is relatively straightforward since it is generally assumed that decreasing price will increase customer demand.

Fewer studies have focused on price increases. Although there are several important studies (e.g., Campbell 1999; Kahneman, Knetsch, and Thaler 1986a, 1986b) that examine antecedents of price fairness perceptions in the context of price increases, there are still major gaps in our knowledge in this area. In judging previous work, Sivakumar and Raj (1997) stated that although "studies make inferences about how consumers respond to price decreases, they do not examine the implications for price increases" (p. 72). Nevertheless, there are situations when price increases are advisable or needed. For example, a price increase might be needed to increase revenues or because of higher labor costs. Furthermore, high-priced or premium brands may need a price increase to maintain their image. It is important to note that "improvements in price typically have three to four times the effect on profitability as proportionate increases in...