impact of psychological pricig

Impacts of Psychological Pricing on Firm’s Performance: A Case of IKEA, UK

Research Proposal

By

[Your Official Name]

[Degree Title], [University], 20XX

[Name of program]

[Name of University]

[Last month of quarter you plan to graduate] 20XX

Psychological Pricing and Firm’s Performance

Table of Contents

1. Contextual Background............................................................................................................1

2. Problem Statement...................................................................................................................2

3. Research Aims and Objectives.................................................................................................3

4. Research Questions..................................................................................................................3

5. Rationale of the Study..............................................................................................................3

6. Significance of the Study.........................................................................................................4

7. Literature Review.....................................................................................................................4

7.1 Impact of Pricing Strategy on Firm Performance..................................................................4

7.2 Factors Influencing Pricing....................................................................................................5

7.2.1 Corporate and Marketing Objectives..............................................................................5

7.2.2 Industrial Structure and Competition:.............................................................................5

7.2.3 Market Condition............................................................................................................5

7.2.4 Variation in cost of production........................................................................................5

7.2.5 Location...........................................................................................................................6

7.2.6 Marketing Mix Strategy..................................................................................................6

7.3 Consumer Psychology............................................................................................................6

7.3.1 Motivation.......................................................................................................................6

7.3.2 Perception........................................................................................................................7

7.3.3 Learning..........................................................................................................................7

8. Methodology............................................................................................................................7

References........................................................................................................................................9


Research Proposal: Impacts of Psychological Pricing on Firm’s Performance: A Case of IKEA,

UK

1. Contextual Background

According to Baker (2004), price point is usually motivated through psychological

pricing. Therefore, it is significant to comprehend the association between the psychological

impacts of pricing on the firm performance of the firm with regards to organizational

development. Generally, there is not much difference between $3.99 and $4.00, but with respect

to products pricing, consumers usually opt for odds digit like $3.99. The only justification for

this concept is that the customer interprets prices that are in whole numbers as regular prices, and

prices in odd numbers are seen as sale or bargaining prices. This phenomenon, called odd-even

pricing, is a psychological pricing strategy which enables customers to make a purchase decision

that results in a positive effect on the overall performance of the organization, as it adds to the

overall market share of the company (Burnett, 2012, p.16; Boundless, 2015).

According to Callwood (2013), majority of the customers are not attracted towards even-

digit pricing offered by the firms, rather they opt for the odd digit pricing. Different deals and

promotions such “buy one get one free” or “get two for the price of one” also act as

psychological pricing strategies which assist the company in enhancing company’s market share.

These specific and targeted pricing strategies implemented by various organizations have a direct

impact on the overall purchase decision of the customers and simultaneously contribute

positively towards organization’s profitability and growth. Past researches hasfound that many

marketers are emphasizing more on analysing the relationship between performance of the firm

and the psychological impact of pricing in order to implement effective strategies for the success

of the organization by attracting more customers (Bertini and Wathieu, 2010).

In today’s globalized environment, different organizations are trying hard to offer low

prices of goods and services to the consumers for the purpose of gaining competitive advantage

over others. However, there is also an increasing realisation that psychological needs of the

consumers affect their buying intention and decisions significantly (Cherry, 2015). The

traditional economic model reflects that purchases are made by the customers to fulfil their

personal, psychological and social needs. As consumer literacy has increased to a significant

level, it has also enhanced the competitive environment of the market. According to Blythe


(2008), consumers have now started to evaluate and compare the prices offered by different

companies producing homogenous goods and services. The customer also focuses on the quality

of the product along with its price offering. In other words, it means that if consumers are not

satisfied with product quality and price, they would not be willing to purchase the specific

product or service, which will affect the financial performance of the business. Thus, there is a

significant need to identify the psychological impact of pricing on the overall performance of the

organization. This research will focus on the impact of psychological pricing on organizational

performance, by studying the case of IKEA, UK.

2. Problem Statement

According to Ding (2012), different pricing strategies including extreme discounts and

price cuts are regarded as the unethical and inappropriate methods of attracting different

customers. These strategies are usually adapted by firm who wants to sell their out-dated or

about-to-expire products in order to generate room for its new product line. However, these

methods are regarded as illegal and unethical as it poses harm to the customers. When a

particular pricing strategy is implemented by an organization, it directly influences the

psychology of the consumers. When the purchasing intention of the consumer is directed towards

a certain product and service, then it directly impacts the performance and market share of the

company. Therefore it is very crucial for a firm to understand the psychological impact of pricing

on the performance of a firm, as it affects its development. IKEA is famous for developing and

implementing effective pricing strategies that assist the organization in differentiating its image

in the minds of its target population. Moreover, IKEA has focused on offering low prices of their

furniture and other products in order to attract more customers. This low pricing strategy has

enabled IKEA in enhancing its sales (IKEA, 2012). Therefore, IKEA has been used as the case

study for identifying the psychological pricing strategies used by IKEA and its impact on

organizational performance.


3. Research Aims and Objectives

The main aim and focus of the study is to analyse the psychological impact of pricing on

the overall performance of the organization, by highlighting and discussing the case of IKEA,

UK. The specific objectives are as follows:

To analyse the impact of different pricing strategy on the psychology of the consumer

and the performance of the organization.

To analyse the relationship between firms pricing strategy, consumer’s psychology and

organization’s performance.

To examine the effective pricing strategy of IKEA, UK and how it influences the

psychology of the consumer in their purchasing behaviour

To recommend important strategies for IKEA to improvise its pricing strategy.

4. Research Questions

Following are the research question of the dissertation.

What are the different factors that have a direct impact on consumer psychology?

How do different pricing strategies impacts consumer psychology while purchasing a

product or a service.

What are the effective pricing strategies that can be adopted by the Ikea UK to increase

its growth and profitability?

What are the psychological impacts of pricing on the performance of Ikea UK?

5. Rationale of the Study

It has been researched that there is an utmost requirement to address the pricing strategy

issues in the UK industry as it would have a significant impact on the market share of growth of

IKEA in long run and to gain competitive advantage over other (Bertini&Wathieu, 2010; Blythe,

2008; Callwood, 2013; Cherry, 2015). Therefore, this current research discusses and analyses the

recent trends of the UK industry with regards to pricing strategy. During recent years, many

researches have been conducted on the related topic; however the relationship of the identified

variable with the UK industry has not yet been discussed in previous researches. The presented

study would build the understanding of the current pricing trend in the furniture industry of the

UK, to provide recommendations that will help IKEA to improve its performance.


6. Significance of the Study

Analysing the psychological influence of pricing on the overall performance is very important

for every firm as it enables the firm in adjusting its price as per the needs of the customers

(Callwood, 2013; Cherry, 2015). When a company adjusts the price of a product or service, it

directly influences its demand, depending on the elasticity of price (Baker, 2004, p. 12).

Adjusting the price and making it too high or too low would be having an adverse impact on

consumer purchase behaviour which would eventually restrict the growth of the organization

(Yan& Wang, 2010, 66; Yan, Myers& Wang, 2012, p. 485). Thus, ineffective pricing strategy

directly impacts the cash flow and sales of an organization. Since pricing strategy directly

impacts the revenue of the company; therefore, setting the right price for a product or service can

be critical for a firm’s success (Chen and Dubinsky, 2003, p. 323).

7. Literature Review

7.1 Impact of Pricing Strategy on Firm Performance

According to Elliott and Lukes (2008), pricing is regarded as the most important aspect

of the firm’s marketing strategy. The pricing phenomena is related with other various

components of marketing mix which focus on offering the effectiveness of marketing mix

variables. Larson (2014, p. 11) regarded pricing as an effective method used by different firms

for the purpose of meeting its strategic aims and objectives. However, there are various other

elements of marketing mix such as place, promotion, people, packaging, products, still the

element of price has the most significant impact on overall marketing and strategic objectives of

the organization. Pricing factors is also regarded as the most sensitive element for a firm in the

marketing context.

The importance and significance of pricing element can be comprehended with the fact

that it directly generates revenue for an organization, while other elements of the marketing mix

are related with cost only. Furthermore, price is also defined as an adjustable element that

responds and reacts to frequent market variation. It has also been researched that all markets are

subjected to frequentchanges; therefore there is an utmost requirement of a variable that could

react and respond positively towards these market changes and adjustments(Hameed and

Soomro, 2012).


7.2 Factors Influencing Pricing

According to Keller, Parameswaran& Jacob (2011, p. 65) there are different factors that

have an influence on the pricing strategy of the company’s products. These factors are elaborated

in the below section.

7.2.1 Corporate and Marketing Objectives

One of the factors that influence prices is corporate and marketing objectives of the

company. Hammond (2015) stated that corporate and marketing objectives have a direct

influence and impact on product pricing. The author also stated that pricing should be set in such

a manner that it successfully gets aligned the main aims and objectives of the company which

needs to be accomplished.

7.2.2 Industrial Structure and Competition:

According to Keller Parameswaran& Jacob (2011, p. 66), majority of the economists

have clearly understood the importance of industrial structure in formulating pricing model with

specific focus on competitive, monopolistic and oligopolistic market conditions. The competitors

price range and industry’s price scale serves as an integral part in determining the appropriate

pricing of the company’s product.

7.2.3 Market Condition

The variation of supply and demand has an important impact on the overall price of

services and goods. According to Yan (2010, p.66), when a demand for a certain product

increases, the price of the product also tends to increase. This is also known as the law of

demand. For e.g. in monsoon season, there is higher demand for knitted wear and umbrellas,

therefore their prices would be higher during this season.

7.2.4 Variation in cost of production

Moreover, the cost of production has a direct influence on the price of the products.

According to Kotler andKeller(2005, p. 123), if the production cost is higher, the product price

would also be increased.


7.2.5 Location

Another important factor that influences the pricing strategy is the location of the

products. Goods that are sold in a marketplace are comparatively cheaper than the goods sold in

specialized boutiques.

7.2.6 Marketing Mix Strategy

As mentioned above, price is one of the elements of marketing mix tools through which a

firm successfully achieves it corporate and marketing objectives. The decision pertaining to price

is largely dependent on promotion, product design and distribution.

7.3 Consumer Psychology

According to Callwood (2013), consumer psychology includes a broad range of

conceptual and theoretical framework for comprehending and understanding the needs of the

consumers. Consumer psychology is also regarded as the sub category of industrial psychology

and is known as the psychology of consumer behaviour and marketing. The buying patterns and

buying intentions are based on the perception of the consumers regarding the goods and services.

Moreover, consumer psychology analyses the different drivers and factors which directly and

indirectly influences the buying patterns. Different attributes of the consumer including thoughts,

beliefs, feelings and perceptions have a significant role in the purchase decision the consumer. In

the contemporary era, it is very important for businesses to study and evaluate different factors

influencing consumer psychology and his buying behaviour patterns for effective marketing of

their products and boosted sales.

According to Chen and Dubinsky (2003), there are four important factors that have an

impact on consumer psychology and behaviour. These factors are identified as social factors,

cultural factors, psychological factor and personal factors. Moreover, the psychological factor

that influencesthe consumer decision to purchase a product are known as individual perceptions,

motivations, learning, attitudes and beliefs.

7.3.1 Motivation

According to (Cherry, 2015), motivation is defined as internal needs which are

dependent on the goal oriented behaviour for the purpose of satisfying the individual’s needs and


desires. The need recognition is defined as the initial point of the whole buying process.

According to Bertini and Wathieu (2010), a need is defined as a deficiency or insufficiency of

some element. An individual can be motivated to purchase a product for utility, self-pride,

prestige and for being different from others. If marketers study the factors which are motivation

drivers, it can help in developing better marketing tactics for consumer engagement and

involvement with their brands and ads.

7.3.2 Perception

Perception is regard as the capacity and capability of an individual to view his or her

surroundings in a different manner. The main reason behind specific purchases is the consumer

perception towards the specific product. Moreover, perception is defined as how individuals

witness and thinks about the world around them which eventually impact their senses.

Consumers subconsciously identify their needs, evaluate its value and importance; and on the

basis of their evaluation, make a buying decision (Ding, 2012).

7.3.3 Learning

On the other hand, learning is defined as a process of enhancing knowledge due to past

experiences and behaviours. In other words, perceptions are developed on prior experiences, that

established framework and assumption through which new stimuli is introduced. According to

Kotler (2006), an individual learn from prior experiences and situation and tries to maintain

equilibrium by analysing new stimuli with regards to learned stimuli. Moreover, it is significant

for marketers and business strategist to analyse the learning theory for the purpose of developing

a product demand.

8. Methodology

Methodology is regarded as the most important part of conducting a research. It provides

an overall framework and direction of the research study. For this particular research, the

researcher has adapted quantitative and qualitative research method in order collect reliable and

relevant data. It can be said that researcher has used mixed method approach for conducting the

research. Moreover, the quantitative data will be gathered through questionnaire survey from the

customers of IKEA UK. On the other hand, qualitative data is collected through interview from


IKEA managers. The combination of these two different data sets will improve the authenticity

and credibility of the research.

Furthermore, primary data will be collected from the consumers and mangers of IKEA,

UK. The purpose of selecting managers for interview sessions is because they have the expertise

and vast knowledge of the research topic. However, secondary data was also collected via

publications, newspapers, books, peer-reviewed journals and online sources from credible

websites and publications.

As mentioned above that questionnaire will be distributed to consumers and interviews

will be taken from the managers. Therefore, the accurate sample size for questionnaire is 100

consumers of IKEA, UK through convenience sampling technique. The major reason behind

convenience sampling is that it requires low amount of financial resources. Moreover, a total of

10 managers belonging to IKEA, UK are selected through the help of snow ball sampling as

there a significant requirement of expertise to provide relevant answers and information

regarding the research topic.

The research approach used in this study is deductive approach because of the nature of

the study which deals with the pricing strategy and its impact on consumer decision making

process. In the deductive approach, the relationship between consumer psychology, pricing

strategy and firm performance is analysed. The association between the variables such as firm

performance and psychological pricing are analysed through the help of hypothesis development.

This hypothesis development is then evaluated at the end of the study through help of the data

collected from questionnaire. The impact of one variable will be tested over the other by using

regression analysis.


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