Customer Price Sensitivity and the Online Medium

The nature of the online medium and the characteristics of web sites can significantly alter the degree of customer price sensitivity in online markets. Many managers fear that the Internet will increase 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 comprising web site factors and several customer and intermediary factors, to explain the main and moderating effects of the online medium on customer price sensitivity. We use this framework to develop hypotheses, which we test using data from both online and offline customers in the hospitality industry. We examine two important aspects of price sensitivity: the relative weight a customer attaches to price compared to other attributes (price importance), and customer’s perceived value of undertaking a search for better prices (price search). Our results indicate that the online medium does not have a main effect on price importance, but it increases the perceived value of undertaking a price search. However, some aspects of the online medium and some web site tactics can actually dampen price sensitivity. Specifically, web site tactics such as the degree of interactivity and the depth of information provided at a web site reduce both aspects of price sensitivity. Interestingly, the perceived content of the site (in terms of price or 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, leading to lower price sensitivity relative to the offline medium. These moderating effects are different for the two aspects of price sensitivity. Compared to the offline medium, the online medium intensifies the effect of product options in lowering price importance and dampens the effect of price bundling in increasing price importance. The online medium also dampens the increase in price search that results when customers use intermediaries to compare prices. We outline the implications of our results for developing Internet marketing strategies. In particular, our results suggest that web sites should make it easy for customers to search for both price and non-price attributes.