Dual effect-based market segmentation and price optimization ☆ Sven Theysohn a, 1 , Kristina Klein b, 2 , Franziska Völckner b, ⁎, Martin Spann c, 3 a Department of Marketing, Johann Wolfgang Goethe-University Frankfurt, Mertonstr. 17, 60054 Frankfurt am Main, Germany b Department of Marketing and Brand Management, University of Cologne, Albertus-Magnus-Platz 1, 50923 Köln, Germany c Institute of Electronic Commerce and Digital Markets, Munich School of Management, Ludwig-Maximilians-University, Geschwister-Scholl-Platz 1, 80539 München, Germany abstract article info Article history: Received 1 April 2011 Received in revised form 1 August 2011 Accepted 1 November 2011 Available online 16 December 2011 Keywords: Preference measurement Price–quality beliefs Dual effect of price Market segmentation Conjoint analysis Price has two distinct effects on consumers' evaluations of products, namely sacrifice and informational effects. No pricing models exist that explicitly account for this dual effect of price. This article combines insights from behav- ioral research on the dual effect of price with a model of market segmentation and price discrimination among segments. The authors propose a method for market segmentation that is based on the degree to which con- sumers attend to the informational and sacrifice effects of price and combine the segment-level parameter esti- mates with a model of price optimization. An empirical study using seven different product categories provides evidence in support of the robustness and relevance of the proposed approach. The results show that the dual effect-based approach captures consumers' price preference structures more precisely than a segmentation on the basis of the commonly measured total effect of price and thereby enables sellers to increase their profits. © 2011 Elsevier Inc. All rights reserved. 1. Introduction Setting prices for products represents one of the most critical deci- sions for both manufacturers and retailers (Gijsbrechts, 1993). In order to set prices optimally, marketers must account for consumers' (hetero- geneous) price reactions on the basis of economic and behavioral con- siderations, product costs, and—if applicable—competition (Estelami & Maxwell, 2003; Levy, Grewal, Kopalle, & Hess, 2004). Therefore, devel- oping an appropriate pricing strategy is both crucial and highly complex and has prompted an extensive stream of research on pricing principles, strategies, and tactics. To increase profitability, marketers typically en- gage in some form of price discrimination, that is, they attempt to ex- ploit consumer heterogeneity through differential pricing strategies (Gijsbrechts, 1993). Most pricing models take as an essential input consumer response to changes in price. Two distinct effects, discussed as the “dual role of price” by previous research (e.g., Erickson & Johansson, 1985; Lichtenstein, Ridgway, & Netemeyer, 1993; Voelckner, 2008), drive this price re- sponse, namely, sacrifice and informational effects of price. The sacrifice effect, which stems from classic economic theory, refers to a consumer's evaluation of the amount of money that he or she must sacrifice to satisfy his or her consumption needs. In this respect, price generates disutility, and higher prices decrease consumer surplus because consumers must pay more for the product. Previous research suggests two potential sources of the sacrifice component of price: allocative effects and transac- tion utility. The former indicates the basic way of viewing price as a monetary constraint and varies, among others, with consumers' price consciousness and price mavenism (e.g., Erickson & Johansson, 1985; Lichtenstein et al., 1993). The latter represents the incremental utility as- sociated with a “good deal” which varies, among others, with consumers' value consciousness as well as sales and coupon proneness (Lichtenstein et al., 1993). Contrary to classic economic theory, however, consumers do not always buy the lowest priced product in a category, even when the products are otherwise similar. One behavioral explanation, supported by empirical evidence, is that consumers perceive prices as quality cues and assume a positive association between price and quality. Thus, higher prices may indicate higher quality and thereby increase consumers' per- ceived utility, which in turn results in a positive price elasticity of demand (Rao & Monroe, 1989). Other potential, but usually less significant sources of the informational effect of price relate to feelings of prestige and status higher prices signal to other people and egocentric desires to make one- self a present (e.g., Lichtenstein et al., 1993; Voelckner, 2008). Despite strong empirical evidence that both sacrifice and informa- tional effects drive consumer response to changes in price, pricing litera- ture has not discussed the implications of this dual effect of price for price discrimination and optimization decisions (Dixit, Whipple, Zinkhan, & Gailey, 2008; Monroe, 2003; Nagle & Hogan, 2006; Phlips, 1989). This gap in the literature may be because no (empirical) price optimization models exist that explicitly account for the dual effect of price (i.e., the Journal of Business Research 66 (2013) 480–488 ☆ The authors thank the anonymous reviewers and the editor for their many helpful comments. The authors are also grateful to Marc Fischer, Karen Gedenk and Henrik Sat- tler for their helpful comments to previous versions of this manuscript. ⁎ Corresponding author. Tel.: + 49 221 470 7886; fax: + 49 221 470 5648. E-mail addresses: k.klein@wiso.uni-koeln.de (K. Klein), voelckner@wiso.uni-koeln.de (F. Völckner), spann@spann.de (M. Spann). 1 Tel.: +49 69 798 22377; fax: +49 69 798 28973. 2 Tel.: +49 221 470 2036; fax: +49 221 470 5648. 3 Tel.: +49 89 2180 72050; fax: +49 89 2180 72052. 0148-2963/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2011.11.007 Contents lists available at SciVerse ScienceDirect Journal of Business Research