Tag Archives: pricing

How Trending Status and Online Ratings Affect Prices of Homogeneous Products

The Internet and Word-of-Mouth (WOM)

Ever since the inception of the Internet, consumers have benefited from extensive opportunities to share their evaluations of products online. Most e-commerce platforms allow consumers to review products, and an increasing number of opinion platforms have been introduced that offer online consumer ratings and reviews. Furthermore, most online retailers are now listing and selling trending products, defined as products that large groups of individuals are currently purchasing or discussing (Kocas and Akkan, 2016). In their article “How trending status and online ratings affect prices of homogeneous products”, Kocas and Akkan explore the pricing implications of these reviews and trending status. The following research questions result:

RQ1: How do standardised average prices vary with product popularity (measured by the trending status)? 

RQ2: When controlled for popularity, how do standardized average prices vary with average consumer ratings?

Related Theory

Research in marketing and economics have shown that it is profitable for retailers to sell popular products at a discount as advertising the low price is an effective and cheap method to inform consumers of the extra surplus they could get by purchasing these products (Elberse, 2008). In the present study, trending is considered an indicator of product popularity as well as a costless form of advertising – trending products signal desirability and potential positive surplus to consumers (Hosken and Reiffen, 2004). Hence, one can assume that trending products are priced lower by retailers, as the resulting increase in demand more than likely compensates for the decrease in marginal revenue per item sold.

Furthermore, several studies have shown that positive ratings and reviews have a positive effect on sales (Baek et al., 2012). Similarly to trending status, high ratings can act as a signal of desirability. Hence one can reasonably assume that highly rated products should be priced lower by retailer for the same reason as aforementioned.

Formally stated,

H1: Retailers randomize prices of products independently. The average and minimum profit-maximizing prices for the trending products are lower than the prices for non-trending products given identical average consumer ratings.

H2: The average and minimum profit-maximizing prices for the product with higher average consumer ratings are lower than the product with lower average consumer ratings given identical trending status.


This study analyses data gathered from 24 of the 28 categories of books available on Amazon.com from May 25 to September 13, 2011 and includes a sample of 466’190 books. Both hypotheses are supported by the experiment, showing that a trending product should be priced lower than other products in order to exploit the higher number of browsers these trending items attract. Similarly, highly rated products lead to a higher conversion rate (from browsing to purchasing) and, hence deserve lower prices.

Strengths & Weaknesses

5-stars-no-padding Whereas several studies have examined the impact of viral characteristics of products on consumer behaviour and pricing policies, this study is the first to empirically examine the influence of trending status on pricing online in a field experiment with a large dataset. Similarly, whereas several studies have examined the impact of online reviews on consumer behaviour, no prior work has examined how online reviews and ratings affect prices of homogeneous goods. A strong point of this paper is that it acts on these 2 gaps to provide novel findings, and tangible and actionable insights to practitioners.

5-stars-no-padding  Another strength is that this paper provides a detailed methodology, which is complemented by an appendix as well as a detailed explanation of the economic foundations behind the theory (including formulas). This level of details increases the academic relevance of the paper, and allows other researcher to easily replicate the experiments, hence facilitating continuous research on the topic.

1 star    One of the weaknesses of this study is the fact that it only examines one type of products – books. Several studies (e.g. Abdullah-Al-Mamun and Robel, 2014) have shown that price sensitivity varies from one product category to another. Similarly, product reviews are generally more important for certain types of products than others. For instance, for a product such as a microwave, personal taste doesn’t really matter, hence one could expect product reviews to be more important as it provides an objective evaluation. However, for a product such as a science-fiction book, personal taste is important, hence the influence of product reviews is likely lower. Thus, it would be beneficial to replicate this study while taking into account category- and product-specific features as a predictor of prices. This can easily be done by replicating the experiment with more product categories on Amazon, and would validate the robustness of this study’s findings across product categories.

1 star    A second weakness of this paper is the fact that it examines the impact of online ratings by relying only on single-dimensional rating schemes. Online platforms display reviews using a variety of formats, and many platforms provide separate ratings for different product attributes. Research has shown that multi-dimensional and single-dimensional rating schemes in online review platforms have different impact on consumers (Tunc et al., 2017). Similarly, this study only looks at the ratings but not at the content of the review. However, studies have shown that the latter can influence consumer behaviour. Both these factors can influence the conversion rate from browser to buyer (Mudambi and Schuff, 2010) and thus the profitability of retailers. Hence, it would be interesting to replicate the present research in the context of multi-dimensional rating schemes, and take into account the actual content of online reviews.


We have seen that there are significant advantages to demand-based pricing for popular products with a relatively high market share. Hence, online retailers should monitor signs of trending as they act as a positive desirability signal that increases the demand of price-comparing consumers. By responding to trending signs and adjusting their prices, retailers can optimise their profits. Nevertheless, managers should be cautious of the research findings and conduct further experiments when applying them to products other than books. Finally, managers should be careful about the pace at which they adjust their prices – popularity status can change extremely quickly, but consumers will not react well to frequent price changes.


Abdullah-Al-Mamun, M. K. R., & Robel, S. D. (2014). A Critical Review of Consumers’ Sensitivity to Price: Managerial and Theoretical Issues. Journal of International Business and Economics, 2(2), 01-09.

Baek, H., Ahn, J., & Choi, Y. (2012). Helpfulness of online consumer reviews: Readers’ objectives and review cues. International Journal of Electronic Commerce, 17(2), 99-126.

Brynjolfsson, E., Hu, Y., & Smith, M. D. (2010). Research commentary—long tails vs. superstars: The effect of information technology on product variety and sales concentration patterns. Information Systems Research, 21(4), 736-747.

Elberse, A. (2008). Should you invest in the long tail?. Harvard business review, 86(7/8), 88.

Hosken, D., & Reiffen, D. (2004). How retailers determine which products should go on sale: Evidence from store-level data. Journal of Consumer Policy, 27(2), 141-177.

Kocas, C., & Akkan, C. (2016). How Trending Status and Online Ratings Affect Prices of Homogeneous Products. International Journal of Electronic Commerce, 20(3), 384-407.

Mudambi, S. M., & Schuff, D. (2010). Research note: What makes a helpful online review? A study of customer reviews on Amazon. com. MIS quarterly, 185-200.

Tunc, M. M., Cavusoglu, H., & Raghunathan, S. (2017). Single-Dimensional Versus Multi-Dimensional Product Ratings in Online Marketplaces.

There is nothing permanent except change—analyzing individual price dynamics in “pay-what-you-want” situations.

The innovative pricing mechanism Pay-What-You-Want (PWYW) has received increased attention in both research and practice during the last years. Museums and restaurants such as Brooklyn Museum and Little bay in London already implemented it. With PWYW pricing, buyers determine prices, and sellers need to accept every price, even if it is below zero. This can create a positive consumer experience, since it eliminates fair and related risks. (Kim et al., 2009)

PWYW can either be used as a promotion tool (e.g., when introducing a new product) or as a sustainably pricing mechanism. However, when buyers determine the price paid, it is important to consider individual price dynamics. This is what Schons et al., (2013) looked at. They examined the dynamics in prices paid in PWYW situations over multiple- customer-seller transactions on an individual customer level.

How did they measure this?

In order to test this, they conducted a field experiment in combination with a survey. They collected data by selling iced coffee at PWYW prices in an outdoor coffee bar frequently patronized by young people for over eight weeks. The iced coffee was added to the bar’s product portfolio for the purpose of this study, which enabled the researchers to track customers’ pricing decisions without existing supplier-specific internal reference prices (IRP). To monitor repeat purchases, they added a loyalty card that contained an ID that customers used to code their questionnaires at every purchase. The resulting sample comprised 966 first-time customers and includes 333 customer with two, 183 customers with three, and 128 customers with four purchases.

What did they find?

This paper elaborates on the importance of individual dynamics within PWYW pricing. First, first-time transaction prices are based on IRP. However, the influence of IRP on prices paid decreased over time. This is mainly because individual dynamics change over time. Buying frequently results in a decreasing downward slope in prices paid and IRPs because price paid in the first transaction calibrate IRPs to a level that already reflects customers’ fairness discounts. Second, customers with higher preferences for fairness pay on average higher prices. Third, repetition negatively affects customers’ price behavior, especially along the very first purchases. Lastly, it is important to note that within this study, the prices paid reached a steady state after the third transaction, only nine customers paid zero prices supporting the findings of Kim et al., (2009) and Kim et al., (2010), and customers underestimated the product’s cost by 16%. Can you imagine: buying the same product for the second time and pay a lower price or no price at all, while if you buy it for the fourth time, the price will not differ from your last price paid?

So what does this mean?

Sellers need to be aware that implementing PWYW for frequently purchased products does not ensure profits over repeated transactions. The profitability of a PWYW application depends on whether the long-term price paid after three transactions is still above the suppliers’ cost. In addition, this study confirms that customers have difficulty determining actual seller cost and hence consistently make lower estimations. PWYW pricing practitioners should therefore provide cost information to adjust customers’ initial estimates. Since this study investigated in PWYW prices at a local coffee bar, it would be interesting to see whether other larger settings such as clothing or electronic equipment result in the same conclusions. What is your opinion? Would you rather go to a coffee bar with PWYW pricing or to one with fixed prices? And if so, would you pay more than zero euro?



Kim, J.-Y., Natter, M., & Spann, M. (2009). Pay-What-You-Want—a new participative pricing mechanism. Journal of Marketing, 73(1), 44–58.

Kim, Ju-Young, Natter, M., & Spann, M. (2010). Where customers pay as THEY wish. Review of Marketing Science, 8(2)

Schons, L.M. & Rese, M., Wieseke, J., Rasmussen, W., Weber, D. & Strotman, W. (2012) There is nothing permanent except change—analyzing individual price dynamics in “pay-what-you-want” situations. Marketing Letters, 25, 25-36

Unraveling customer-value based pricing: resolving the resistance

Sustained profitability lies in understanding sources of value for customers. For that reason, it is only suitable that the value a product delivers to the customer should be the main factor for setting prices. Cost-based and competition-based methods of pricing are outdated and customer-value based pricing is now recognized as the best working approach (Ingenbleek et.al., 2003). Though, it appears that only a minority of companies (17%) have implemented this type of pricing strategy, despite the apparent benefits. One benefit example is that research shows that customer-value based pricing is positively correlated with new product success as there is a direct link with the customer needs (Ingenbleek et. al., 2003). Especially in the current market environment, where it is difficult to have a differentiating position, obtaining such an advantageous pricing position can be crucial to help you go a long way.

Continue reading Unraveling customer-value based pricing: resolving the resistance

Priceline: A Two-Way Price Interaction

Ever wished you could name your own price for a flight or hotel? For those who have the urge to secure the best deals Priceline.com offers the perfect platform.

While Priceline.com — yes, the one with the annoying father—daughter commercials — enjoys a well established position in the travel industry in the United States, parts of Europe’s mainland are still waiting for their own version of the “name-your-price” travel website. Hence, it is interesting to briefly consider the ingredients behind the success of Priceline.com in the U.S.

With services ranging from a car rental interface to cruise bookings, Priceline.com offers a platform for both professional and leisure travelers to connect with offering companies. While this is nothing special these days, the ‘name your own price’ function that the website boasts offers a unique opportunity to interact with the offering travel companies: it allows the user to set a price for a particular service. Continue reading Priceline: A Two-Way Price Interaction