Promotion thresholds : price change insensitivity or risk hurdle?

Threshold effects in consumer response to price promotions have been conceptualized as reduced customer sensitivity to differences between an observed price and an internal reference price when those differences are small. In this research, we develop an alternate mechanism whereby the threshold effect arises from consumer uncertainty of reference price, rather than from insensitivity to small gains and losses. We compare two variations of this mechanism with the usual insensitivity-based promotion threshold mechanism. We find that one of the uncertainty mechanisms, where the threshold results from a history-dependent risk hurdle, has particularly desirable theoretical and empirical characteristics. The implications are, first, that apparent threshold effects may arise more from uncertainty of the reference price and risk aversion than from insensitivity to small price changes. Promotion strategies that assume insensitivity to small changes may therefore be problematic. Second, for both positive and negative transaction utilities, the consumer may feel overall gain when making a purchase even if there is a transaction loss. Finally, customers' purchase timing histories may have an impact on deal response through risk-hurdle induced threshold levels