The Online Medium and Customer Price Sensitivity

Authors: Venkatesh Shankar, Arvind Rangaswamy, Michael Pusateri

Many managers fear that the Internet will increase customer price sensitivity and intensify price competition. There is, however, very little conceptual or empirical research on this topic. In this paper, we use the information search literature to develop a conceptual framework and a set of hypotheses, comprising factors characterizing the online medium, customers, and intermediaries, to explain the main and moderating effects of the online medium on customer price sensitivity. We test the hypotheses using two sets of data from the hospitality industry: (1) separate samples (demographically matched) of both online and offline customers and (2) the same sample of customers, who purchased from both the online and the offline media. We examine two important aspects of price sensitivity: the weight a customer attaches to price relative to other attributes (price importance), and customer’s proclivity to undertake a search for better prices (price search). Our results from both sets of data indicate that the online medium does not have a main effect on price importance, but it increases price search. However, some aspects of the online medium and the web site can actually dampen price sensitivity. Specifically, web sites can reduce price sensitivity by providing in-depth information (both price and non-price) that is available through a highly interactive interface. Interestingly, the perceived content of the site (in terms of price versus non-price orientation) does not influence price sensitivity. In addition to these main effects, the online medium also moderates the effects of several other factors, helping to dampen price sensitivity. These moderating effects are different for the two aspects of price sensitivity. Compared to the offline medium, the online medium: (1) accentuates the effects of the range of products and prices offered, and product/price bundling by an intermediary in reducing price importance, and (2) accentuates the effects of brand loyalty in decreasing price search and dampens the effects that intermediaries have in increasing price search by facilitating price comparisons. We outline the implications of our results for developing web site design, targeting, distribution and alliance strategies.