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Impacts of Psychological Pricing on Firms 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 Firms 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

Psychological Pricing and Firms Performance


Research Proposal: Impacts of Psychological Pricing on Firms 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 evendigit 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 companys 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 organizations 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 todays 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

Psychological Pricing and Firms Performance


(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.

Psychological Pricing and Firms 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, consumers psychology and

organizations 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.

Psychological Pricing and Firms 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 firms 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 firms 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).

Psychological Pricing and Firms Performance


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 companys 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 industrys price scale serves as an integral part in determining the appropriate
pricing of the companys 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

Psychological Pricing and Firms Performance


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 individuals 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

Psychological Pricing and Firms Performance


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.

Psychological Pricing and Firms Performance


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.

Psychological Pricing and Firms Performance


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