Journal of Business Research 67 (2014) 17331743

Contents lists available at ScienceDirect

Journal of Business Research

Pricing by intuition: Managerial choices with limited information

Alexander Rusetski
York University, School of Administrative Studies, 4700 Keele St., Toronto, ON M3J 1P3, Canada

a r t i c l e i n f o a b s t r a c t

Article history: In making pricing decisions, managers can chose from several pricing strategies. To ensure long-term business
Received 1 September 2013 success, pricing choices need to balance numerous requirements, from revenue streams to keeping customers
Received in revised form 1 December 2013 happy. The complexity of pricing decisions and time pressures that often accompany them prompt the need
Accepted 1 January 2014
for fast, simplied decision algorithms. The present exploratory study examines the ways in which consider-
Available online 20 March 2014
ations of price fairness and competitive strategy combine in managers' decisions regarding the price level.
Keywords:
Results of a survey of 116 brand managers provide no evidence of complex, compensatory decision algorithms.
Pricing Cluster analysis of managers' responses to hypothesized pricing scenarios shows that with limited information
Pricing strategies available, decision-makers tend to simply charge consistently higher, lower, or equal prices compared to their
Decision-making competitors irrespective of the quality of their products. Descriptive proles of the clusters suggest that brand
Heuristics strength has the strongest impact on managers' pricing choices, suggesting a brand heuristic as the main decision
Brand strength tool. Competitive intensity, organizational culture, and strategic orientation are also related to particular patterns
Cluster analysis of pricing decisions.
2014 Elsevier Inc. All rights reserved.

Introduction information analyzed (Gigerenzer & Brighton, 2009, p. 107), have

In running their businesses, managers can rely on intuitive or
technocratic decision-making styles (Covin, Slevin, & Heeley, 2001;
Khandwalla, 1977). A technocratic management style implies a heavy
reliance on quantitative decision making tools and an overall propensity
to be systematic, analytical, and scientic when making top-level busi-
ness decisions. A variation of optimization decision mode would be ex-
pected in technocratic management style: decision-makers evaluate all
attributes of alternatives, usually in a compensatory way. In very simple
terms, compensatory way of evaluating cues or attributes implies that
superior performance on one attribute can compensate the lack in
another attribute. For example, in the eyes of a customer, a lower
price of a product may compensate its lower quality. The choice is
then being made based on a more attractive, optimal combination of
cues (Katsikopoulos, 2011).
Executives' gut feelings about the appropriateness or inappropri-
ateness of decisions heavily inuence their choices in the intuitive deci-
sion mode (Covin et al., 2001, p.52). Intuitive style features attending to
fewer data and spending less time and effort processing these data and
often is dominant in fast-changing, competitive environments. The
intuitive decision-making style implies reliance on heuristics for choos-
ing between alternatives. Heuristics, described as cognitive processes
that allow making fast and frugal decisions by limiting the amount of
The author thanks Jonlee Andrews and the anonymous JBR reviewers for their helpful
comments and suggestions.
E-mail address: arusetsk@yorku.ca.
been studied in psychology for quite some time (Gigerenzer &
Brighton, 2009; Gigerenzer & Goldstein, 1996, 2011; Tversky &
Kahneman, 1974). Heuristics utilize fewer decision inputs and evaluate
them in a noncompensatory way. In other words, a decision maker
gives priority to a cue that has a stronger potential to indicate a better
decision and leaves the rest of the cues out of analysis even if they still
might have an ability to differentiate alternatives. (Gigerenzer &
Goldstein, 1996; Katsikopoulos, 2011).
The rationality of decisions based on heuristics is a subject of hot de-
bates. On the one hand is the argument that as not all available informa-
tion is being utilized in the analysis of alternatives, decisions inherently
carry a risk of systematic biases (Kahneman & Tversky, 1973, 1996). On
the other hand are compelling arguments that intuitive decisions can be
no less, and possibly more effective than those based on full-edged
analysis, as heuristics rely on past experiences and reect the best prac-
tices for a particular decision-making environment (Gigerenzer &
Brighton, 2009; Gigerenzer & Hoffrage, 1999) and therefore are ecolog-
ically rational (Goldstein & Gigerenzer, 2002; Smith, 2003).
While cognitive mechanisms behind heuristics receive a lot of atten-
tion in research in psychology, particulars of these processes are not
clear when applied to business environment. For example, a take-the-
best heuristic requires a search for cues, ordering them according to
their validity and then picking an alternative as soon as a cue differenti-
ates the alternatives. To understand and predict managerial decisions it
is important to understand what cues managers attend to, and which
ones they rank higher in terms of predictive validity (Brandsttter,
Gigerenzer, & Hertwig, 2006; Gigerenzer & Goldstein, 1996). Of course,
the answers to these questions will be specic to different business

http://dx.doi.org/10.1016/j.jbusres.2014.02.020
0148-2963/ 2014 Elsevier Inc. All rights reserved.
1734 A. Rusetski / Journal of Business Research 67 (2014) 17331743
tasks and the environment where a task is being performed. This study
focuses on the important task of pricing.
One of the four pillars of marketing, price plays multiple roles in
marketing strategy. Price positions a product to appeal to a certain seg-
ment. It provides a signal of a product's quality to a customer. Price plays
an important role in determining the revenue and is one of the most
exible marketing tools for responding to competitive threats. Pricing
decisions are typically under the control of brand or product managers
who can change prices without much investment. Results of price
changes reect almost immediately on a rm's bottom line (Marn &
Rosiello, 1992; Rao, 1984). The need to maintain a high level of revenue
and prot and at the same time keep consumers happy makes pricing
decisions inherently ambiguous, especially when it comes to pricing
new products (Monroe, 1990; Monroe & Della Bitta, 1978), and there-
fore, susceptible to intuitive decision making.
The goal of this exploratory study is to examine patterns of pricing
decisions made with limited information to nd out whether managers'
pricing choices show meaningful patterns and whether they reect any
identiable decision-making algorithms. Additionally the study investi-
gates how these patterns are related to the environment in which man-
agers operate. The third objective is to establish the extent to which
identied algorithms are rational. The paper is organized as follows:
rst, it reviews the decision inputs that can be expected to affect pricing
decisions. Second, the paper discusses environmental factors that can
affect pricing choices. Next, it presents the analysis of the data obtained
from the survey of brand managers and an illustration of the viability of
observed decisions based on the data from the US automotive market.
Finally, the paper discusses the implications of the ndings and the fu-
ture research opportunities.
Decision inputs: Keeping price fair
Erroneous pricing decisions can have both long- and short-term
negative consequences for a brand. Setting a price too low reduces a
rm's prots, drives down consumers' reference price points, and nega-
tively affects perceived quality of a product and its overall market posi-
tioning. At the same time, overpricing may have a negative impact on
consumers' perception of a brand repelling even loyal customers
(Fournier, 1998). There are numerous examples of pricing strategies
that consumers perceived as unfair and which had negative conse-
quences for the companies in question. For instance, just two months
after a successful launch of its iPhone in 2007, Apple drastically reduced
the price of the product. This decrease offended thousands of loyal cus-
tomers who waited in lines earlier to pay the original price that turned
out to be inated more than 30%! To moderate the situation, Apple had
to issue a public apology and compensate its disgruntled customers.
(Wall Street Journal, September 7 2007). Another case of public reaction
to unfair pricing is the CDN$2 billion class action lawsuit that has been
led in Ontario Superior Court in September 2007 alleging that major
car manufacturers and dealers in Canada articially inated prices
compared to the US at the same time conspiring to prevent Canadians
from buying cars in the US.
Both cases above represent examples of viable pricing strategies
price skimming and geographic pricing (Tellis, 1986) taken too far
and therefore backring on decision-makers. Understanding the factors
that lead to pricing actions that underestimate or ignore the possibility
of consumers' revolt is critical both for academics and practitioners.
While there exists a solid body of prescriptive research in pricing
(Rao, 1984), not much is known about the extent to which these
prescriptions are being utilized by practitioners (see Tellis, 1986 and
Cavusgil, Kwong, & Chun, 2003 for classications of pricing strategies
in the eld). Relatively few studies have explored subjective factors in-
volved in pricing decisions (see Armstrong & Collopy, 1996 and Keil,
Reibstein, & Wittink, 2001 for notable exceptions). So, while there exists
a considerable understanding of consumer behaviors related to various
aspects of price, the knowledge of decision-making algorithms and
inputs that managers utilize when setting prices is limited.
Managers face the need to balance competing demands in their pric-
ing decisions: a price can be expected to reect a rm's competitive
strategy but at the same time should accommodate customers' value
demands. Extant research points at three major approaches to pricing
(Dean, 1976; Rao, 1984): premium pricing strategies (price skimming,
price signaling, etc.), going-rate pricing (similar to the competition),
and discount pricing strategies (penetration pricing, experience curve
pricing, etc.). With premium pricing, rms offer a product at prices
higher than comparable competing products while discount pricing
implies lower prices (Dean, 1976; Monroe & Della Bitta, 1978; Tellis,
1986). Each of the above categories of pricing strategies aims at improv-
ing a rm's nancial performance through higher sales volume or
higher per-unit prot.
Together with nancial performance, managers should also consider
consumers' perceptions of price fairness (Shapiro & Jackson, 1978). The
idea of fairness is pivotal for lasting relationships between consumers
and brands (Campbell, 1999; Fournier, 1998). Breach of trust created
by unfair prices may result not only in alienating customers (Aaker,
Fournier, & Brasel, 2004) but in retaliatory actions (Xia, Monroe, &
Cox, 2004). Consumers arrive at an unfairness judgment by comparing
price levels to either their reference price or to the price of a substitute
product with comparable levels of benets (Campbell, 1999; Xia et al.,
2004). Thus, it is reasonable to expect that if a product is priced above
the competition, customers will perceive a price as more unfair if the
level of benets offered is the same or lower compared to a competing
product than if the level of benets is above the competition. While it
is possible to argue that a premium price can be justied by a stronger,
better recognized brand, this does not apply to inferior products.
Indeed, when physical characteristics of compared products are similar,
a stronger brand provides customers with an additional assurance of
quality and in many cases of the status associated with the brand.
But this does not mean that managers can abuse a brand name by
systematically offering consumers inferior products at a premium
price. Models of brand equity from classic Aaker's (1996) model to
the more recent Keller's (2003) model of brand resonance explicitly
include product quality or performance as a foundation of consumers'
loyalty and trust. Poor product quality can undermine even strongest
brands, especially when it is accompanied by unjustiable premium
price.
Managers who care about consumers' perceptions of price fairness
and at the same time about their company's revenues likley systemati-
cally follow one of the basic pricing strategies by favoring specic sce-
narios relating price levels to product benets:
1) Undercutting (penetration pricing, experience curve pricing): that
is, pricing products with benets inferior or equal to competitors'
at the level lower than competition and superior products at the
level equal to the competition. Managers are expected to avoid
scenarios with superior products being priced below the competi-
tion as such choices would unnecessarily hurt protability of the
business unit.
2) Premium pricing (price skimming, image pricing, price signaling):
pricing inferior products on par with competition and products
with equal or superior benets at a premium. Again, managers are
likely to avoid pricing inferior product at a premium as such strategy
can alienate consumers.
3) Going rate pricing: setting the price equal to the competitors'
irrespective of the level of a product's benets. Such scenarios are
characteristic to markets where products are commoditized and
differentiating of an offering is difcult.
4) Fair pricing: pricing products according to their relative benets
(pricing products with equal benets on par with the competition;
pricing products with lower benets at a point less then competition;
pricing products with greater benets at a point above competition).
 A. Rusetski / Journal of Business Research 67 (2014) 17331743
Note, that to adopt a strategy from the list above, managers would
have to weigh and combine available information (price level vs. prod-
uct quality) before choosing a scenario that they feel is appropriate.
In other words, they would have to use a compensatory optimization
decision algorithm.
If these expectations are valid, analyzing pricing decisions made
with limited information when decision-makers have to rely mostly
on their intuition should produce identiable groups of similar pricing
choices. Additionally, it should be possible to prole groups demon-
strating similar decision patterns based on environmental variables
that may affect pricing decisions (Cavusgil et al., 2003). As this is an
exploratory study in the early stage of pricing heuristics research, the re-
sults will be used to infer decision algorithms that could bring about the
observed decisions, rather than to test particular heuristics (Gigerenzer
& Brighton, 2009).
Pricing choices and the operating environment
The operating environment in which managers make decisions
should affect the way they frame the tasks and ultimately how they
make strategic decisions. The operating environment can be described
by several characteristics that affect the way managers perceive a situa-
tion and respond to it: (1) characteristics of the rm, reecting general
features such as its strategic orientation or organizational culture;
(2) characteristics of the workplace such as career advancement policies
or compensation mechanisms; and (3) characteristics of the environ-
ment, such as competitive intensity and competitive position.
As rm-related variables, strategic orientation (e.g. Gatignon &
Xuereb, 1997; Moorman, 1995; Narver & Slater, 1990) and organiza-
tional culture (e.g., Deshpand, Farley, & Webster, 1993) affect manage-
rial motivation and decision-making direction. These variables describe
the immediate business environment in which brand managers operate
and as such should have an important impact on their cognitive state and
strategic preferences. Three types of strategic orientations are suggested:
technology, customer, and competitor, reecting the main strategic focus
of a rm's operations. A concept of organizational culture deals with
shared values and beliefs within an organization that guide its em-
ployees' behaviors (Deshpand et al., 1993, p. 4). Four cultures have
been identied and studied: hierarchy, market, clan, and adhocracy.
Clan and adhocracy rely on organic (intuitive, spontaneous) internal pro-
cesses, while hierarchy and market emphasize order and control through
mechanistic processes. At the same time, market and adhocracy cultures
focus on external performance of a rm, as opposed of the internal main-
tenance focus of clan and hierarchy cultures.
A rm's internal policies that are related to likelihood of career ad-
vancement can affect managers' motivation and cause differences in
pricing choices (e.g., Gavino, Wayne, & Erdogan, 2012). Specically,
this study looks at average intervals between managers' rotations
among different brands within a multi-brand rm, between promotions
within a rm, and between managers' performance evaluations; and at
the extent to which managers' salary and annual bonuses are driven by
a rm's short term performance.
Strategies implemented by stronger and larger brands are different
from those utilized by smaller challengers (Chandy & Tellis, 2000;
Christensen & Bower, 1996; Ferrier, Smith, & Grimm, 1999). This in-
cludes pricing decisions, which may be partly explained by the impact
that a brand's strength has on managers' pricing preferences. Strong
brand can provide justication for charging premiums while weaker
brands are more suitable for discount pricing.
Competitive intensity can create additional cognitive pressures on
managers, which may prompt their reliance on heuristics (Chaiken,
1980; Petty & Cacioppo, 1984). On the other hand, alertness of man-
agers to competitive pressures may prompt a careful consideration of
possible outcomes of their choices leading to more in-depth processing
of available information.
1735
Data collection
To classify managers' pricing patterns and to see whether they
follow the suggested logic, this study uses the data collected through a
survey of brand and product managers of U.S. consumer goods rms.
A sample of 307 brand managers received e-mail invitations to par-
ticipate in online survey investigating pricing practices in consumer
packaged goods rms. Eleven respondents indicated that they were
not involved with brand management and pricing. Of the remaining
296, 116 completed the survey for a 39.2% response rate. Sixty nine
percent of respondents are female, 71% were between 25 and 30 years
of age, with the average experience in brand management of 5.3 years.
Respondents received a set of questions asking them to rate the
likelihood of their brand management team following different new
product pricing scenarios. They were asked to imagine a situation
when they were to launch a new product right after their most impor-
tant competitor launched a similar one. Although the scenarios were
hypothetical, the survey asked respondents to make their decisions in
the context of their actual brands and actual competitors.
The task contained nine scenarios with two varying factors: 1) prod-
uct price and 2) product benets relative to the similar product that the
closest competitor just launched. Each factor had three levels: products
could be priced lower, equally, or higher than the competitor's; and the
level of product benets could be equal to, inferior to, or higher than
that of the competitor's.
Responses to the 9 scenarios were analyzed as a 3 3 full factorial
conjoint experiment, and for each respondent utilities of every pricing
scenario were calculated using the SAS TRANSREG procedure. Scenario
utilities represent the value that respondents placed on each scenario
based upon utilities (part-worths) of each level of each manipulated
factor (Table 1). In essence, the utilities reected the extent of man-
agers' preferences toward each scenario. The research used scenario
utilities as inputs for the cluster analysis.
In addition to the data on pricing scenario utilities, the survey
contained measures of the characteristics of respondents' operational
environment. This research operationalizes rm strategic orientation
as the manager's perception of the strategic direction (consumer,
technological, competitor) implemented by a rm. The instrument
from Gatignon and Xuereb (1997) measures the extent of consumer,
technological, and competitor orientations in the respondent's rm.
Multiple-item measures of all three orientations displayed satisfactory
reliability: Cronbach's alphas were .82 for Customer orientation, .71
for Competitor orientation, and .75 for Technology orientation.
Organizational culture is operationalized as a respondents' percep-
tion of the business unit along four dimensions: the nature of the rela-
tionships within the unit, the role of a unit's head, the glue that
holds the unit together, and internal conditions emphasized in the
unit. This study uses the 16-item instrument from Moorman (1995)
which is a modication of the original measure from Deshpand et al.
(1993). White, Varadarajan, and Dacin (2003) suggested that it makes
more sense to treat items in this instrument as formative rather than re-
ective. Following this suggestion this study uses sums of items as var-
iables for the analysis.
To measure brand strength operationalized as perceived competi-
tive advantage of a brand relative to its direct, most important compet-
itor, this study uses a modied scale from Deshpand et al. (1993) that
assesses a manager's perception of brand size, market share, protabil-
ity and growth rate compared to the largest competitor. The original
item asking for brand size was omitted as it seemed to duplicate the
market share question. Items were summed to form a brand strength
variable.
The instrument from Cavusgil and Zou (1994), Moorman (1995),
and Morgan, Kaleka, and Katsikeas (2004) measures competitive
intensity operationalized as a manager's perception of the nature of
the competition in the market along ve dimensions: 1) viciousness;
2) promotion intensity; 3) offerings similarity; 4) price competition
1736 A. Rusetski / Journal of Business Research 67 (2014) 17331743
Table 1
Part-worths' means and standard deviations.
Level of product benets compared to competition
Less Equal
Mean 0.12 0.08
Standard deviation 0.53 0.42
intensity; and 5) frequency of competitive moves. The data collected
shows acceptable reliability (Cronbach's alpha 0.70, Nunnally, 1978,
p. 245). Following Morgan et al. (2004) this research uses a factor
score of the 5 items as a variable in the analysis.
Single questions measured workplace characteristics that included
intervals between promotions, evaluations, and rotations, and the im-
pact of a rm's short-term performance on managers' salary and bonus.
Grouping pricing choices
To determine whether 116 respondents form distinct groups in
terms of utilities of specic pricing scenarios, this study uses a two-
stage clustering approach (Cavusgil et al., 2003; Lim, Acito, & Rusetski,
2006; Punj & Stewart, 1983). The approach calls for determining the
number of clusters using a hierarchical clustering method that usually
gives the best external separation among clusters. The second stage
includes an actual clustering task that uses an iterative algorithm. This
algorithm provides better internal cohesion within clusters and overall
gives more reliable results when it uses non-random starting points
(Punj & Stewart, 1983, p. 144). This research used Ward's method for
initial clustering with the goal to determine the number of clusters
and to estimate initial values of clusters' centroids. Several techniques
exist to determine the number of clusters from the hierarchical cluster-
ing output: inspection of the dendrogram, pseudo-F statistics, cubic
clustering criterion (CCC), and changes in agglomeration distance
obtained through SAS CLUSTER and FASTCLUS procedures (Ketchen &
Shook, 1996; Lim et al., 2006; Milligan & Cooper, 1985).
While the pseudo-F statistic did not provide a clear indication of the
best solution (see Table 2), the CCC peaked at the ve-cluster solution
and agglomeration distance started to increase more rapidly after
reaching ve clusters as well. Inspection of the dendrogram (Fig. 1)
also suggested four or ve clusters as possible solutions. The four cluster
solution seemed incomplete as no clusters showed preference toward
lower prices. Yet research demonstrates that managers are often more
inclined to drop prices rather than increase them (e.g., Armstrong &
Collopy, 1996). As the absence of such a cluster could be an artifact of
the clustering procedure, this study uses the ve-cluster solution.
With the number of clusters determined, an iterative K-means clus-
tering procedure was used to assign respondents to a predetermined
number of clusters using cluster centroids obtained in the rst stage
as seeds. The resulting clusters represent groups of managers that are
similar in their patterns of utilities for various pricing scenarios. The
plot of cluster centroids' values allows to interpret the common patterns
of pricing choices (Fig. 2).
The expectation was to see groups that would correspond to the
known pricing strategies suggested in prior literature (e.g., penetration
pricing, skimming, etc.) and at the same time, favor pricing levels that
Table 2
Clustering statistics.
Statistic Number of clusters
2 3 4 5
Pseudo-F 77.17 66.67 59.92 56.39
CCC 37.436 39.302 39.289 40.300
Agglomeration distance-changea 835.51 306.44 270.49 134.06
a
Each column refers to the number of clusters prior to joining neighboring clusters.
Price level compared to competition
Greater Less Equal Greater
0.04 1.04 0.25 0.79
0.47 1.11 1.31 1.60
reect a product's relative benets. Instead, the following clusters
emerged:
Cluster 1 (18 members, 15% of all respondents) Only Equal! Shows
strong preference to prices equal to the competition, irrespective of
their own product benets, and clearly dislike pricing practices
that are higher or lower. This pattern represents an example
of a Going rate pricing strategy characteristic of commoditized
markets.
Cluster 2 (31 members, 27%) Never Lower! Managers in this group
favor higher or equal prices and show low utility for prices lower
than competition.
Cluster 3 (36 members, 31%) No preference Managers in this cluster
do not show extreme preferences, but demonstrate a slight inclina-
tion toward higher prices with lower utility of the most unfair
scenario pricing an inferior product above the competition.
Cluster 4 (25 members, 22%) Only Higher! Members of this cluster
clearly favor higher prices with low utility for everything lower
or equal.
Cluster 5 (6 members, 5%) Only Lower! Clearly favors lower prices.
Note that from a strategic standpoint, a particular price level can
have different connotations depending on the relative quality of a prod-
uct. For instance, equal price can reect fair pricing (if product benets
are on par with competition), discounting (if benets are above the
competition), or premium pricing (if benets are below). Yet the choices
of members of 4 out of 5 clusters (about 69% of respondents) are related
strictly to the price level, and ignore product quality. It is also surprising
that there was no indication that respondents consistently avoided
two potentially damaging pricing scenarios: scenario 2 (less benets,
higher price) where low quality and unjustied premiums threaten
to offend customers and damage brand image, and scenario 7 (more
benets, lower price) where substantial prots can be lost for a rm
and a brand may lose the opportunity to strengthen its image.
Respondents had only limited information to base their decisions
upon, so it is reasonable to expect that they relied on heuristics to arrive
at their choices. Because relative quality of a new product was provided,
the expectation was that the relationship between price and quality
would be the most recent and therefore salient. Instead, respondents
seemed to rely on other factor(s) which I will discuss in a subsequent
section.
Proling pricing clusters
To better dene clusters of pricing preferences and to investigate
possible drivers of respondents' choices this research compares descrip-
tive data collected from respondents with regard to their business units'
organizational characteristics, workplace requirements, and competi-
tive situation. This study employs ANOVA with post-hoc Tukey HSD
comparisons to see whether selected variables that were not used in
the clustering procedure are signicantly different among clusters
(Cavusgil et al., 2003). Table 3 presents the summary of standardized
proling variables.
The only signicant differences among clusters were in terms
6 of brand strength (F = 5.78, p = 0.0003), competitive intensity
52.40 (F = 4.52, p = 0.0021), and adhocracy culture (F = 3.96, p = 0.005).
40.296 ANOVA for technology orientation was marginally signicant (F = 2.36,
85.35
p = .058) which prompted further investigation using Tukey HSD
contrasts. Table 4 and Fig. 3 show the results of the test.
 A. Rusetski / Journal of Business Research 67 (2014) 17331743 1737

Brand strength appears to be the strongest driver of pricing choice.

Cluster 4 Only higher serves brands that are signicantly stronger
than those served by Clusters 1, 3, and 5 that show preference toward
lower prices or no preference. Indeed, as a fast and frugal decision tool
brand strength provides sufcient justication for price premiums. For
a signicant proportion of managers (75 out of 116 respondents) the
relationship between price and brand strength appears to be more
predictive of a positive outcome of their pricing choice than the rela-
tionship between price and product quality and therefore takes the
leading role in intuitive selection of a pricing strategy. This suggests
managers' reliance on a take-the-best heuristic, where to compare
alternative price levels a decision-maker uses a cue with the largest pre-
dictive validity rst and as long as the cue differentiates the alternatives
ignores the rest of the cues (Gigerenzer & Goldstein, 1996).
Clusters showing preferences for charging premium prices also
seem to include organizations characterized by a greater technology
orientation and operating in conditions of low competitive intensity.
Conversely, discounting is a strategy of choice in businesses with less
of a technology orientation and a strong adhocracy culture that operate
in conditions of high competitive intensity. Organizations where
managers demonstrated a preference toward going-rate strategies
also have a lower technology orientation, but also a weak adhocracy
culture.
These relationships likely result from the ways organizational
characteristics make the brand cue more salient and more predictive
of the outcome. For example, increasing competitive intensity makes
the brand cue less predictive: high competitive intensity is character-
ized by offerings similarity which makes the brand less of a differenti-
ating factor. Competing on price becomes a viable choice especially for
weaker brands. Technology orientation implies advanced standing in
research and development, justifying premiums especially when brands
are strong. Lower technology orientation is indicative of market
followers who also traditionally compete on price rather than brand.
By denition, an adhocracy culture would rely on gut-feeling manage-
ment style, thus justifying the application of a brand heuristic.

Discussion

While research in marketing focuses on developing and rening nor-

mative pricing models, the extent to which these models are utilized by
practitioners receives much less attention. The present study illustrates
how a signicant proportion of managers 69% rely on an identiable
heuristic in making their pricing decisions. The results of the study are
indicative of a non-compensatory decision model, where just a single
parameter brand strength supersedes other cues including even
such an important cue as a product's relative quality. But why the
brand cue? In the current study it is not more salient or immediate:
the information about the relative product quality was the part of the
question and was immediately available to participants at no cost. The
questionnaire included the question about the brand strength, but in
the introductory part so there was at least some cost to retrieving that
cue. Still the preference has been given to the brand cue, indicating
that for many respondents its perceived predictive validity is substan-
tially larger than that of the quality cue.
The nature of the data collected does not allow us to infer with cer-
tainty the specic cognitive process behind observed decisions. But as
the task presented to participants in the study belonged to the category
of preferential choice decisions (Brandsttter et al., 2006), it is possible
to hypothesize that respondents utilized a priority heuristic to compare
outcomes of different possible pricing decisions. The priority rule sug-
gested in Brandsttter et al. (2006) posits that in a two-outcome gam-
bling game, the reasons (cues) are selected in the following order:
minimum gain, probability of minimum gain, maximum gain (p. 412).
A decision-maker does not have to analyze all three cues. The stopping
Fig. 1. Dendrogram of the hierarchical clustering procedure.
rule suggests that the analysis stops as soon as a cue differentiates the
alternatives enough, after which a more attractive alternative is being
1738 A. Rusetski / Journal of Business Research 67 (2014) 17331743
Fig. 2. Five-cluster solution.
selected (see Fig. 4). It is possible to apply this logic to the pricing choice
that respondents were facing. Given limited data, we can only speculate
what gains or losses managers consider when comparing pricing alter-
natives. Yet it appears that a) strong brand makes probability of nega-
tive outcomes (minimum gains) lower when high prices are
considered; and b) weaker brand makes either negative outcomes or
their probabilities smaller when low prices are considered.
Table 5 shows a conguration of reasons that can lead to what can be
called a brand heuristic in determining price levels for superior and infe-
rior products. In the case of overcharging (pricing an inferior product at
a premium), the most salient negative outcome is consumer rebellion
and defection (Fournier, 1998). The positive outcome is an increased
prot per unit. For the underpricing scenario (pricing a superior product
at a lower price) the negative outcome is the loss of prot per unit and
the positive outcome is increase of market penetration.
Studies in marketing demonstrated that consumers tolerate price
hikes by strong brands better than by weaker brands (Keller, 2002).
Therefore in the case of overcharging the probability of the negative
outcome (consumer defection or rebellion) for stronger brands is
lower than for weaker brands. This explains higher utility of the over-
charge scenario for managers of strong brands. Similarly, when
underpricing, the loss of prot is less likely for weaker brands (as higher
prices are most likely to repel potential customers anyway) and there-
fore managers of mostly weaker brands selected this strategy. So even
if the size of minimum gains might be ambiguous, the probabilities of
minimum gains are evident enough to differentiate the alternatives.
That allows managers to make decisions even before evaluating maxi-
mum gains that may be ambiguous as well.
The observed heuristic goes against the mainstream recommenda-
tions to balance value creation with value appropriation (Mizik &
Jacobson, 2003) and from the constructivist point of view its rationality
is questionable. Yet, as Smith (2003) suggests, the notion of rationality
is not limited to constructivist norms. Human decisions may stem
from individual and societal past experiences and lead to desired
outcomes as, if not more, effectively than constructivist models. To un-
derstand the rationality of the brand heuristic it is important to establish
the extent to which it is appropriate to apply it in deciding the price
level and the appropriate contexts for this heuristic.
Rationality of the brand heuristic
An analysis of the actual relationship between products' prices
(relative to the competition) and relative quality can illustrate whether
a consistent overcharging and underpricing happen in real markets and
what kinds of brands utilize these pricing strategies. The data from
Consumer Reports' 2009 annual car report provide such an illustration
(Consumer Reports, Issue 4, 2009). Cars represent a signicant purchase
for a household and potential buyers consider multiple features, brand
and price being among the most important. Consumer Reports provides
information about cars' recommended prices together with ratings
(on the scale from 5 to 1) of four quality metrics road test perfor-
mance, expected reliability, safety, and cost of ownership collected
from 2004 customers. Additionally, the publication reports fuel econo-
my measured in miles per gallon (MPG). Within each vehicle category
(from subcompact hatchbacks to ultra-luxury sedans, overall 26 cat-
egories) prices and quality metrics were standardized to represent devi-
ations from the category mean and then averaged to get a summary
quality metric for each brand. In reality, it is quite possible that cus-
tomers may weigh individual metrics differently, but for the sake of il-
lustration a simple average was used to represent a variation of the
tallying heuristic which based on the extant research has strong predic-
tive power (Gigerenzer & Brighton, 2009). A difference between the
price and summary quality metric z-scores is an indication of the fair-
ness of the price: a difference close to 0 indicates a product whose rela-
tive price reects its relative quality. A positive difference points to an
overpriced car, and a negative difference indicates an underpriced vehi-
cle. Table 6 shows the average values of the pricequality difference for
each brand. Consumer Reports also collects consumers' ratings of brands,
but in 2009 it only reported scores for ve best and ve worst brands.
The table includes brand ratings where available with higher numbers
indicating stronger, more favored brands.
First, the data show that brands differ in the way they set prices rel-
ative to the quality of their cars. There are brands whose relative prices
are consistently higher than the relative quality of their cars, and there
also are brands whose relative prices are lower than the relative quality
of their products. In other words, the pricing strategies observed in the
survey of managers pricing consistently at a premium or consistently
at a discount irrespectively of relative product quality are present in
the marketplace. It is interesting to note that among the brands prone
to overcharge are not only luxury labels like Mercedes Benz, Cadillac
or BMW, but also Saturn, Chrysler and Dodge. On the other side are
brands that underprice their products. These include not only relatively
weak brands like Hyundai, Kia, and Suzuki, but also strong brands like
Toyota and Honda and luxury brands like Lexus, Acura, and Inniti.
Although the prices that Consumer Reports cite most likely result
from extensive analytical decision processes, the ndings indicate that
 A. Rusetski / Journal of Business Research 67 (2014) 17331743 1739

Table 3
Standardized means of proling variables and results of ANOVA test.

Variable Cluster Mean Standard deviation F-value Signicance

Competitive characteristics
Brand strength 1 0.17 1.11 5.78 0.0003
2 0.16 0.79
3 0.41 1.04
4 0.56 0.79
5 1.05 0.9
Competitive intensity 1 0.61 0.87 4.52 0.0021
2 0.28 1.11
3 0.25 0.83
4 0.42 0.89
5 0.66 0.66

Workplace characteristics
Period between evaluations 1 0.16 0.94 0.38 N.S.
2 0.04 0.95
3 0.09 0.95
4 0.1 1.12
5 0.38 1.5
Interval between promotions 1 0.11 0.8 0.56 N.S.
2 0.07 1.35
3 0.14 0.65
4 0.19 0.98
5 0.36 0.26
Interval between rotations 1 0.11 1.14 2.22 0.0716
2 0.17 1.05
3 0.43 0.89
4 0.23 0.74
5 0.12 1.56
Salary dependence on short-term performance 1 0.08 0.95 1.13 N.S.
2 0.07 0.97
3 0.13 0.98
4 0.19 1.02
5 0.83 1.48
Bonus dependence on short-term performance 1 0.02 1.16 0.39 N.S.
2 0.16 1.07
3 0.07 0.88
4 0.14 0.99
5 0.05 0.94

Organizational characteristics
Customer orientation 1 0.1 0.96 0.38 N.S.
2 0.04 1.1
3 0.1 0.74
4 0.03 1.18
5 0.5 1.22
Competitor orientation 1 0.01 1.05 0.83 N.S.
2 0.1 1.02
3 0.15 0.94
4 0.22 0.94
5 0.51 1.54
Technology orientation 1 0.53 0.88 2.36 0.0583
2 0.04 1.08
3 0.05 0.86
4 0.34 1.04
5 0.55 0.8
Clan culture 1 0.29 1.31 1.24 N.S.
2 0.18 0.83
3 0.05 0.88
4 0.32 0.98
5 0.01 1.87
Adhocracy culture 1 0.64 0.99 3.96 0.0050
2 0.16 0.94
3 0.03 0.85
4 0.38 1.03
5 0.93 1.02
Hierarchy culture 1 0.23 1.13 1.12 N.S.
2 0.1 0.85
3 0.23 1.02
4 0.19 1.09
5 0.44 0.68
Market culture 1 0.35 0.69 0.08 N.S.
2 0.16 1.24
3 0.1 0.9
4 0.12 0.85
5 0.01 1.48
1740 A. Rusetski / Journal of Business Research 67 (2014) 17331743

Table 4
Tukey test results for proling variables.

Characteristic Cluster (I) Cluster (J) Mean difference (I J) Standard error Signicance

Technology orientation 1 4 0.87 0.31 0.043

Adhocracy culture 1 4 1.02 0.31 0.011
1 5 1.57 0.53 0.032
Brand strength 1 4 0.73 0.28 0.076
3 4 0.97 0.24 0.001
4 5 1.61 0.5 0.013
Competitive intensity 1 2 0.89 0.29 0.026
1 4 1.02 0.31 0.01

at least for strong, luxury brands overcharging is a viable pricing
strategy just like underpricing is a viable and widely used strategy for
brands that are weaker. There exist different pricing strategies as well,
but while underpricing by strong brands (e.g. Toyota, Honda) generally
results in positive perceptions by customers, overcharging by weaker
brands (Hummer, Chrysler/Dodge or Saturn) can lead to very negative
consequences: General Motors phased out Hummer and Saturn
brands in 2010, and Chrysler went through exceptionally hard times
in 200910 applying for bankruptcy protection and changing owners
twice.
The analysis above suggests that with minimum information avail-
able, using brand strength to decide on the level of price relative to
the competition is not only fast and frugal, but also can be a valid deci-
sion strategy resulting in appropriate choices. This supports the ecolog-
ical rationality of the brand heuristic when decision-makers correctly
assess the strength of their brands. Weak brands charging premiums
can end up in a serious trouble. In other words, while from the construc-
tivist standpoint brand heuristic may not look rational, its simple rule of
Strong brand high premium, weak brand discount appears quite
common and ecologically rational in the actual marketplace.
While the study focused on pricing decisions, the fact that managers
rely so heavily on their brands' strength when making pricing decisions
suggest additional, less studied effect of brand strength on a rm's per-
formance. Not only a brand affects consumer choice, it also impacts
managerial decisions. And this impact may not always be positive.
Over-reliance on brand heuristic in determining price levels can
easily result in managers charging premiums for inferior products and
risking ruining the brand as a result. The ndings of the current study
suggest that together with benets, strong brand carries certain risks
(Rusetski, 2012) and therefore should be handled carefully.
Limitations and further research
While researchers in marketing focus on developing and rening
normative pricing models, the literature devotes much less attention
to the extent to which these models are utilized by practitioners. The
present study shows how a signicant proportion of managers 69%
rely on an identiable heuristic in making their pricing decisions in
conditions of limited information. The brand heuristic goes contrary to
mainstream pricing norms that require the price to be reective of a
product's benets. Yet even a quick analysis of pricing strategies in the
eld suggests that the heuristic can result in a viable decision with
minimal effort.
The important contribution of this study is in suggesting the brand
heuristic in pricing and in illustrating its applicability in the eld. The re-
sults also demonstrate the need for more exploratory and explanatory
studies that look into psychological processes that are involved in pric-
ing decisions. This study looked at product quality and brand strength as

Fig. 3. Comparison of the means of environmental variables among 5 clusters.

 A. Rusetski / Journal of Business Research 67 (2014) 17331743
Fig. 4. A fast and frugal tree for priority heuristic.
two possible inputs into intuitive decision making algorithms. Other
aspects of a rm's strategy can inuence managers' choices. Also, the
brand heuristic does not explain a substantial proportion 39% of
pricing choices in the present study, suggesting that other decision
strategies may have been utilized by managers.
The study has several limitations that future research should ad-
dress. First, a limited number of respondents could result in unequal
representation of all possible clusters of pricing choices. Indeed, the
Only lower cluster in the present study has only 6 members. Larger
samples will provide more ways to meaningfully compare and prole
clusters.
Second, in setting up the scenarios the assumption was that man-
agers' view of product benets is no different from the customers'
view. In the context of the present study such an approach could be jus-
tied as it looked specically for managers' decision-making and thus
for their perceptions as drivers of their choices. Collecting the data on
actual products and actual pricing decisions can provide additional
insights.
Although heuristics are dened both by decision process and the
outcome (Brandsttter et al., 2006) this study looked strictly at out-
comes to infer the heuristic. We still don't know for sure whether
decision-makers ordered cues by validity or availability and we can
only guess how many cues they actually attended to. Now, when
the heuristic has been identied, more detailed and rigorous study of
the actual cognitive process is needed (Johnson, Schulte-Mecklenbeck,
& Willemsen, 2008) where decision models will be developed and
tested.
Table 5
Priority of outcomes in brand heuristic.
Strategy Cues
Overcharging Minimum gain
Probability of minimum gain
Maximum gain
Underpricing Minimum gain
Probability of minimum gain
Maximum gain
1741
Brands are increasingly managed by teams rather than individuals,
so pricing decisions are in many cases done by groups of managers:
only 11% of our respondents indicated that they are solely responsible
for setting prices in their business units. The questionnaire addressed
the team context (How likely is your team to follow a scenario?),
but the study analyzes responses of single informants. It can be expect-
ed that these responses reected individual choices much more than
group ones. This does not diminish the value of the ndings: if similar
pricing patterns (apparently related to a particular heuristic) appear
among individual respondents across multiple rms and competitive
situations, they can be even more likely among team members who
all operate within the same organizational context. Still, further re-
search is needed to see the extent to which the team environment im-
pacts intuitive decision-making.
Finally, the ndings of this study prompt further investigation into
the impact of managers' pricing heuristics on rms' short- and long-
term performance. Even with our quick check of pricing practices, it is
still not clear whether product quality should be ignored in every
circumstance. It is difcult to imagine a brand that consistently offers in-
ferior products at price premiums and keeps growing its customer base.
Still, one can offer examples where overcharging led to a brand's demise
(e.g., Hummer in cars), or could have preserved a brand's positioning
among the premium brands (e.g., Sony in consumer electronics).
Longitudinal studies relating pricequality difference to brands' percep-
tions over time should inform us better about the appropriateness and
limitations of the brand heuristic proposed in this study and any other
pricing heuristics that may be uncovered in the future.
Strong brand Weak brand
Consumer defection
Low High
Larger prot
Loss of prot
High Low
Market share gain
1742 A. Rusetski / Journal of Business Research 67 (2014) 17331743

Table 6
Pricequality differences and brand scores in 2009 US automotive market.

Brand Brand Score Standardized quality Standardized price Pricequality difference

(standard deviation, n)

Hummer 19 1.32 1.53 2.85 (1.02, 2)

Chrysler 0.98 0.30 1.28 (1.38, 7)
Land Rover 1.14 0.13 1.26 (0.64, 3)
BMW 0.16 1.01 0.85 (1.16, 9)
Mercedes Benz 100 0.06 0.75 0.82 (0.92, 8)
Jeep 21 0.76 0.01 0.74 (1.5, 6)
Dodge 0.83 0.13 0.70 (1.37, 13)
Cadillac 102 0.61 0.00 0.61 (1.03, 6)
Porsche 0.21 0.62 0.41 (1.34, 3)
Saab 18 0.10 0.50 0.4 (0.77, 3)
Chevrolet 0.27 0.11 0.38 (1.29, 21)
Saturn 0.37 0.02 0.36 (0.78, 6)
Jaguar 0.29 0.03 0.32 (0.91, 3)
Mercury 0.28 0.03 0.31 (1.34, 9)
Ford 109 0.13 0.04 0.17 (1.07, 19)
GMC 0.04 0.05 0.1 (1.06, 8)
Audi 0.15 0.10 0.05 (0.58, 4)
Buick 0.06 0.03 0.03 (1.92, 3)
Mazda 17 0.17 0.16 0.01 (1.21, 14)
Volvo 0.08 0.19 0.11 (1.46, 8)
Mitsubishi 0.22 0.35 0.13 (1.23, 9)
Nissan 0.08 0.06 0.14 (1.04, 18)
Honda 149 0.65 0.44 0.22 (1.02, 15)
Lexus 0.47 0.21 0.26 (1.32, 7)
Lincoln 0.03 0.29 0.26 (1.47, 5)
Lotus 0.37 0.65 0.28 (, 1)
Pontiac 0.44 0.73 0.29 (0.66, 7)
Inniti 0.47 0.17 0.30 (0.98, 4)
Mini Cooper 0.77 0.38 0.39 (1.58, 3)
Subaru 0.20 0.20 0.40 (1.39, 11)
Toyota 193 0.64 0.18 0.45 (1.09, 24)
Volkswagen 0.45 0.10 0.55 (0.65, 8)
Kia 0.26 0.82 0.56 (1.19, 10)
Suzuki 7 0.30 0.93 0.63 (0.71, 4)
Acura 0.63 0.05 0.68 (1.18, 4)
Smart 0.63 0.13 0.76 (, 1)
Scion 0.43 0.48 0.90 (1.29, 4)
Hyundai 0.30 0.99 1.29 (0.67, 12)

Notes: The pricequality difference involved the following steps. For example, the Hummer H3 competed in the Midsize 2-row SUVs category. The price of the car was $36,915 while the
category average price was $32,988 with standard deviation of $3635. The Hummer H3's standardized price was 1.08. Its standardized quality metric was 1.04, more than one standard
deviation below the category average. These two numbers produced a pricequality difference of 2.12. Hummer also offered another model in 2009 the H2 with the pricequality
difference of 3.57, bringing the average for the brand to 2.85.

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