Using external reference price to reduce resistance to leisure service pricing increases

Abstract

Zone of tolerance has emerged as a key concept for guiding pricing decisions. It directs that user resistance to prices for new services or price increases to existing services will be minimized if they are within this zone, and that if discounts are to be effective in inducing additional use they should be of sufficient magnitude to be outside this zone. External reference prices can be used to influence users' perceptions of the parameters of the zone of tolerance. Four contexts in which this principle may be effective in the context of leisure services are discussed and illustrated: (i) the use of discounts to induce trial or re-engagement with an activity; (ii) comparative pricing with competitors; (iii) offering a high priced service so the other services' prices are perceived to be relatively low; and (iv) facilitating acceptance of price discrimination.

Keywords:

• zone of tolerance
• latitude of acceptance
• external reference prices
• discounts
• surcharges
• prospect theory