A Methodology for Estimating the Maximum Price ...

Journal of International Food & Agribusiness Marketing

ISSN: 0897-4438 (Print) 1528-6983 (Online) Journal homepage: http://www.tandfonline.com/loi/wifa20

A Methodology for Estimating the Maximum Price Consumers Are willing to Pay in Relation to Perceived Quality and Consumer Characteristics Jan-Benedict E. M. SteenKamp & Hans C. M. van Trijp To cite this article: Jan-Benedict E. M. SteenKamp & Hans C. M. van Trijp (1989) A Methodology for Estimating the Maximum Price Consumers Are willing to Pay in Relation to Perceived Quality and Consumer Characteristics, Journal of International Food & Agribusiness Marketing, 1:2, 7-24, DOI: 10.1300/J047v01n02_02 To link to this article: http://dx.doi.org/10.1300/J047v01n02_02

Published online: 18 Oct 2008.

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Date: 02 April 2017, At: 13:02

A Methodology for Estimating the Maximum Price Consumers Are Willing to Pay in Relation to Perceived Quality and Consumer Characteristics Jan-Benedict E. M. Steenkamp Hans C. M. van Trijp

ABSTRACT. For an agribusiness company, the delivery of high uality products may be an effective strategy to differentiate itself from competitors. However, since production costs are usually higher for higher quality products, a high-quality strategy is on1 profitable when consumers are willing to pay more for better ity. In this article, a methodology is described that can be used to estimate the maximum price consumers are willing to pay for a food product in relation to its perceived quality, and the characteristics of the consumer. The methodology is empirically illustrated for meat cuts of varying perceived quality.

I . INTRODUCTION

The issue of product quality has come to the forefront in U.S. and- European agribusiness. Many agribusiness companies face saturated markets. For most food products consumer demand inJan-Benedict E. M. Steenkamo is Assistant Professor and Hans C. M. van Trijp is Research Associate, in thd Department of Marketing and Marketing Research, Agricultural University, Hollandseweg 1, 6706 KN Wageningen. Journal of International Food & Agribusiness Marketing, Vol. l(2) 1989 7 O 1989 by The Haworth Press, Inc. All rights reserved.

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Journal of International Food & &business

Mai-krirg

creases slowly and competition is intensifying. Many firms therefore, search for profitable ways to differentiate themselves from their competitors. A strategy that has been related to success in agribusiness and other industries is the delivery of high quality products (Phillips, Chang, & Buzzell, 1983; Gale, 1987). The validity of a high-quality strategy is supported by a distinct consumer trend to attach more importance to quality in purchasing food products (e.g., Verhallen & DeNooy, 1982; Sloan, Leone, Powers, & McNutt, 1984; Steenkamp, 1987, 1989). It has been argued that the search for quality is the most important consumer trend of the 1980s (Rabin, 1983). Consumers are now demanding higher quality than ever before (Parasuraman, Zeithaml, & Berry, 1985). It is expected that quality will remain of paramount importance in purchasing food products to the year 2000 and beyond (Gfk-Marktforschung, 1986). However, since production costs are usually higher for higher quality products, a high-quality strategy is only profitable when consumers are willing to pay more for better quality. This surplus value will only be achieved if a firm adopts a consumeroriented perspective on quality because ultimately it is the consumer who decides which food products to buy. The consumers' decision is largely based on the perceived quality of the product alternatives. A consumer-oriented strategy requires that the agribusiness firm has insight into both the consumers' perception of quality and their willingness to pay for higher perceived quality. The issue of the formation of quality perceptions is not addressed in the present article. For information on this subject the reader is referred to Jacoby and Olson (1985) and Steenkamp (1989). This article will focus on the maximum price consumers are willing to pay for higher perceived quality. Such information provides the firm with the data necessary for deciding whether quality enhancement through product development and marketing communication pays off. In this article, we describe a methodology that can be used to

Jan-Benedict E. M. Steenkamp and Hans C. M. van Trijp

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estimate the maximum price consumers are willing to pay for a food product in relation to its perceived quality and the characteristics of the consumer. The results of an application of this methodology involving meat cuts of varying perceived quality are also reported. The following section describes methodology. Data collection and method of analysis are discussed in Section 3, the results are presented in Section 4, and Section 5 presents conclusions. 2. METHODOLOGY

In this section, the methodology that is used for estimating the maximum price a consumer is willing to pay for a food product in relation to the perceived quality of the product and the characteristics of the consumer (income, age, etc.) is described. The most straightforward procedure for estimating the maximum price consumers are willing to pay for a product would obviously be to ask the consumer directly about the highest price at which s h e would be prepared to buy. However, the validity of this approach is limited. People often have considerable difficulty in quoting realistic prices (Monroe, 1979) and consumer knowledge of prices is limited (Dickson & Reitsch, 1978; Shamir, 1985). Further, the direct approach creates strong demand bias since the respondents easily recognize the purpose of the questioning (Marbeau, 1987). A more realistic approach, followed here, is to ask the respondent indirectly about the maximum price s h e is willing to pay. In the indirect approach a number of prices are presented to the respondent in a randomized order and s h e is asked to indicate whether or not s h e will buy the product at that price. The maximum acceptable price is the highest price at which the respondent is still indicating a willingness to buy the product. The use of explicitly formulated prices solves the problem of the low

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Journal of Intemafional Food & Agnbwiness Marketing

price awareness mentioned above and by presenting the prices in a random order, demand bias is reduced. One aspect of the indirect method deserves particular mention. That is, the fact that two reasons may underlie the consumer's decision not to buy the product at a particular price (Scitovszky, 1945; Stoetzel, 1954; Adam, 1958; FouilhC, 1960; Gabor & Granger, 1966). On the one hand, price is a cost factor as it represents the sacrifice a consumer must make to obtain the product. A price that is considered too high may be a reason for the consumer not to buy the product. It is this reason which we are interested in. On the other hand, a price that is too low may also keep the consumer from buying the product. As consumers are usually imperfectly informed about the quality of the product, they might use price as a quality index (Monroe, 1973; Olson, 1977). A low price would then be an indication for low and possibly unacceptable quality. As only one of the two possible reasons is relevant for the question whether consumers are willing to pay more for higher quality we need to know the reason why a consumer does not buy a product at a particular price. Is it because the price is too high or because it is too low? Only by explicitly asking the consumer to explain hisher decision not to buy, can erroneous conclusions about the consumer's willingness to pay be avoided. The indirect approach proceeds as follows (cf. Gabor & Granger, 1966). A number of prices are called out to the respondent one after another and for each price the respondent is asked whether s h e is willing to buy the product alternative at that price. If the answer is affirmative the interviewer proceeds with another price. If the answer is negative, the respondent is asked for the reason; is it because the price is too low or because the price is too high? In order to avoid rationalization, the prices are presented in a randomized order. Experience has shown that respondents are comfortable in performing the task up to ten prices (Gabor, 1977). If the number of prices to

Jan-Benedict E. M. Steenkamp and Hans C. M. van Tnjp

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be investigated exceeds ten, a subset of prices is presented to each respondent using blocking designs. The maximum price a consumer is willing to pay for a product alternative is expected to be related to its perceived quality. In general, the maximum acceptable price will increase with the product alternative's perceived quality since quality is positively valued by the consumer. When information is available for each respondent on the perceived quality of the product alternative as well as on the maximum price s h e is willing to pay for the product, it is possible to estimate the surplus value of higher perceived quality. Regression analysis is particularly suited for this purpose. Irrespective of the perceived quality of the product alternative, consumers vary in the maximum price they are willing to pay. Thus, in the model's general formulation both perceived quality level and characteristics of the consumer are hypothesized to influence the maximum price a consumer is willing to pay. In this context the term "consumer characteristic" is used in a broad sense to denote socioeconomic variables such as income, demographic variables such as age and the number of persons in the household, and personality variables like quality-consciousness and perceived quality risk. The relative contribution of each of the consumer characteristics in explaining the maximum price consumers are willing to pay will vary among different products. Income for instance may be expected to influence the maximum price a consumer is willing to pay for a new car but will hardly be of importance in explaining the maximum price a consumer is willing to pay for potatoes. For that reason a set of consumer characteristics relevant to the study has to be specifically formulated for each separate study. A consumer characteristic that may be of particular relevance in explaining the maximum price consumers are willing to pay is quality-consciousness. Quality-consciousness is a "new" concept proposed by Steenkamp (1986,1989). He hypothesized that

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Journal of International Food di Agribusiness Marketing

consumers differ in the degree to which they are "quality-conscious." Some consumers attach more importance to quality than others. Quality-consciousness was defined as "a mental predisposition to respond in a consistent way to quality-related aspects which is organized through learning and influences behavior." Thus, quality-consciousness is regarded as a mental predisposition, in that it is viewed as an underlying latent variable. We do not regard quality-consciousness as a generalized variable but as a domain specific concept. A consumer may be quality-conscious with respect to cars but not with respect to foods. This view on quality-consciousness is in line with current sociological and psychological literature which suggests that attitudes, values, and personality variables should be operationalized within a limited domain when the purpose is to use them as predictors of specific behavior (Schuman & Johnson, 1976; Verhallen & Van Raay, 1986). Following Steenkamp (1989), quality-consciousness is expected to exert a positive influence on the maximum price a consumer is willing to pay, possibly through an interaction with perceived quality. The methodology described in this section may be used to estimate the maximum price consumers are willing to pay in relation to the perceived quality of the product alternatives and the characteristics of the consumer. In the remainder of this article, an application of the methodology will be reported. The application involves consumers' willingness to pay for meat cuts that differ in perceived quality. 3. DATA COLLECTION AND METHOD OF ANALYSIS

3.1. Data Collection

The data were collected in a nationwide sample of 384 respondents during March and April 1987. Respondents were only sampled when they used the meat cuts in question (see below) regu-


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larly. The respondents were the main purchasers of meat in a particular household. Nearly all respondents were female. They varied in age between 19 and 69, and the number of persons in the household (including the subject) ranged from one to seven. Household income varied considerably between respondents. Half of the sample evaluated fore roast (M. triceps brachii) and pork rib chop. The other 192 respondents evaluated blade steak and sirloin steak. Real product samples were used in the study. The product samples covered the quality range of the respective meat cuts on the Dutch market. Sampling of meat cuts was carried out in cooperation with the Dutch Commodity Board for Livestock and Meat, and the Research Institute for Animal Production "Schoonoord." See Steenkamp and Van Trijp (1988a) for details. Each respondent evaluated one sample of either fore roast and pork rib chop, or blade steak and sirloin steak. Two measures of overall quality were collected: a statement "Is of good quality," measured on a seven-point Likert scale ranging from "completely disagree" ( = 1) to "completely agree" ( = 7), and a seven-point differential scale with the poles "poor quality" ( = 1) and "good quality" ( = 7). The choice of the scales employed in this study was based upon a pretest of six different scales involving a convenience sample of 40 homemakers. The respondent evaluated the quality of a sample on both scales. The average of these two ratings was used as a measure of overall perceived quality. Two measures were used to obtain a more reliable perceived quality rating (cf. Nunnally, 1967). In order to reduce halo effects, the respondent performed other tasks, not of interest here, in between the two judgments of perceived quality. For each meat cut, the respondent also carried out the indirect procedure described above in order to identify the maximum price s h e was willing to pay for the product alternative described above. The price levels used are shown in Table 1. The price

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Price levels ( i n Ofl. per 500 grams) used in the empirical

Table 1.

study of fore roast, pork rib chop, blade steak. For sirloin steak price levels are expressed in Ofl. per 100 grams. --

--

-

--

- -

Fore roast

Pork rib chop

Blade steak

Sirloin steak

4.50

3.75

6.25

2.00

levels are stated per 500 grams for fore roast, pork rib chop, and blade steak. In the case of sirloin steak, the prices are expressed per 100 grams because in the store the price of this meat cut is usually given per 100 grams. In one aspect the procedure used here differs from the traditional, indirect procedure. For each price level, the respondent was asked whether s h e would be willing to buy the meat cut with a certain regularity. In the "traditional" phrasing the frequency aspect is not included. The traditional formulation is less appropriate for the study of food products where repeat purchases are essential for the firm's survival (see also Section 5). Data were also obtained for a number of consumer characteristics including perceived quality risk and quality-consciousness. The perceived quality risk score represents the risk that is perceived with respect to a particular meat cut in general. Perceived quality risk measures were secured for each meat cut separately, using a modifiedversion of Cunningham's (1967)model (see Steenkamp, 1989). Cunningham conceptualized risk as a two-dimensional


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structure, involving the uncertainty about the outcome and the extent of possible negative consequences resulting from an erroneous choice. The uncertainty about the outcome consists of two components: the perceived differences in quality between product alternatives and the consumer's perceived competence in judging these differences. Three types of consequences were distinguished: financial, physical, and social. All five aspects were rated on a five-point Likert scale. The uncertainty rating was computed by multiplying the rating on the perceived quality differences measure by the rating on the perceived competence measure. An overall perceived consequences measure was obtained by adding the ratings on the three consequences measures. The overall perceived quality risk score was computed by multiplying the overall uncertainty rating and the consequences rating. For each respondent two overall perceived quality risk scores were obtained, one for each of the two meat cuts slhe evaluated. The reader is referred to Steenkamp (1989) for a detailed discussion of the theoretical underpinnings of this procedure for measuring perceived quality risk. The quality-consciousness of the respondent with respect to food products was based on seven items. These items were chosen from a pool of 53 items on the basis of a procedure proposed by Churchill (1979), see Steenkamp (1989) for details. The items were: "1 usually mean to eat natural food"; "I am willing to pay somewhat more for a product of better quality"; "quality is decisive for me in purchasing foods"; "in choosing food products, on principle I only buy products that do not contain residuals of herbicides and antibiotics"; "I always aim at the best quality"; "I am willing to pay somewhat more for food containing natural ingredients"; "for me, wholesome nutrition begins with purchase of high quality foods." The quality-consciousness rating of a respondent was computed by adding the ratings on these seven items. The higher a respondent's summed rating on the

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Journal of International Food & Agribusiness Marketing

quality-consciousness scale the more quality-conscious s h e is. Cronbach's alpha (Cronbach, 1951) of the quality-consciousness instrument was 0.79 which indicates that the scale is reliable (Nunnally, 1967).

3.2. Method of Analysis The effect of perceived quality and the consumer characteristics on willingness to pay was investigated formally using regression analysis. The dependent variable was the highest price a respondent was willing to pay for the meat sample in question. In addition to quality-consciousness and perceived quality risk discussed above, the set of consumer characteristics used in this study included: number of persons in the household, annual household income after taxes, and the age of the respondent. The variable "annual household income" was recoded as a 0-1 dummy variable. As a cut-off point, the annual household income of a typical Dutch wage earner was used. For household incomes below this cut-off point, the dummy variable takes the value zero. Household incomes equal to or above the cut-off point were denoted by the value one. For most independent variables, a hypothesis can be developed about the direction of the variables' effect on willingness to pay. It is expected that perceived quality and quality-consciousness have a positive effect on willingness to pay. The rationale for these hypotheses is described above. Willingness to pay is expected to increase with income. For respondents with higher household incomes, the monetary sacrifice of a higher price might be smaller. It is further hypothesized that perceived quality risk and the size of the household are negatively related to willingness to pay. The higher the risk inherent in a product, the less a consumer is willing to pay for a product because s/he does not know whether s h e gets value for money (cf. Bearden & Shimp, 1982). For a given income, the larger the size of the household

Jan-Benedict E. M. Steenkamp and Ham C. M. van Tnjp

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the smaller the financial potential and this, in turn, has a negative effect on willingness to pay. The direction of the effect of age was not hypothesized. The effects of perceived quality and the consumer characteristics on the maximum price a respondent was willing to pay was estimated for each meat cut separately using the following regression model:

where MAXPRijdenotes the maximum price (expressed in cents) a respondent i is willing to pay for meat sample j, PQijis the perceived quality rating of meat sample j given by respondent i, QC,is the rating of respondent i on the quality-consciousness scale,' PQRISK, is the perceived quality risk score of i for the meat cut in question, AGE, is the age of respondent i, NUMBER, is the number of persons in the household of i, INCOME; is the dummy variable of the annual household income of i, and eijis the error term with the usual assumptions of zero mean and independence. The regression coefficients for the variables for which the direction of the effect was hypothesized were tested one-tailed. AGE was tested two-tailed (cf. Ferguson, 1981). 4. RESULTS

The results of the regression analysis are reported in Table 2. Both the unstandardized regression coefficients (b's) and the standardized regression coefficients (P's) are reported. Standardized regression coefficients are scale-free and can therefore be compared across variables. The relative magnitude of the p's can be used as a measure of the relative importance of the variables with which they are associated. An unstandardized regression coefficient represents the effect of a variable on MAXPR in the original units and therefore can be used directly for policy deci-

Table 2. Regression analysis r e s u l t s with the maximum p r i c e a respondent i s w i l l i n g t o pay as a dependent v a r i a b l e .

Indep. Hypoth.

Fore r o a s t

Pork r i b chop

dir.

b

P

PQ

+

4.901

0.064

20.173~ 0.231

Qc

+

2.955-

0.120

3.93Zb 0.146

NUMBER

-

-1.796 -0.020

AGE

NH

INCOME

+

var.

Intercept

b

B

Blade steak

b

b

0

9.531C 0.210

0.097

2.350c 0.205

-4.363 -0.044

-30.160~ -0.226

-8.O3Eb -0.159

-1.307- -0.164

-0.436 -0.049

-0.256 -0.021

-0.139 -0.031

15.384

28.154b

96.0755 0.296

14.076- 0.117

609.687-

0.077.

413.5776

0.132

3.008

699.385-

pc.10 p