Reference Price: Definition & Examples

What is reference price? In retail, reference price refers to the cost at which a store owner or merchant sells a particular product, often offering a significant discount compared to its previously advertised price.

This pricing strategy, also known as competitive pricing, involves setting the product’s price just below that of a competitor’s product to make it more appealing to consumers. There are two types of reference prices: internal and external.

Internal reference prices are formed by consumers based on their past experiences and knowledge about the product. For example, if a consumer expects a sandwich to cost around $5 based on their previous purchases, that would be their internal reference price.

Another example, is a clothing store introduces a new dress at a high price of $100, then offers a 50% discount after a few weeks. Customers perceive the discounted price of $50 as a good deal compared to the initial reference price of $100 when they first saw it at the store…