Small business industrial buyers' price sensitivity: Do service quality dimensions matter in business markets?

Abstract

One of the major obstacles to effective pricing emanates from difficulties experienced in predicting business buyers' price sensitivity. With a view to obviating these obstacles, this study examines the effect of five key physical distribution service quality dimensions on price sensitivity from the perspective of small and medium retail buyers. Based on a survey of 233 cellular phone retailers in China, the authors articulate how the five salient service quality dimensions exert either direct effects on price sensitivity or indirect impacts through perceived value and customer satisfaction. Theoretical and managerial implications are also provided for effective retailer relationship management, profitability improvement, and customer segmentation in distribution channels.

Introduction

Price formulation is one of the keys to profitability for most small and medium enterprises. However, this process can be fraught with difficulties. One major obstacle arises from complexities inherent in predicting customer price sensitivity (Tung et al., 1997). Complications are especially common in physical distribution channels, where competition is fierce and where there is increased customer efficiency in searching for information on price and in making rapid comparisons across suppliers. In this sense, suppliers have actively sought various means of weakening retailers' price sensitivity, thereby moderating price competition. If suppliers can segment their customers, in terms of their willingness to pay, a price discrimination strategy may be viable. Hence, insights on the drivers of price sensitivity can be of extreme value. Nevertheless, compared to customer satisfaction and loyalty, only moderate effort has been devoted to studying price sensitivity (Anderson, 1996, Anderson and Sullivan, 1993). This is so particularly in the setting of small and medium retailers in distribution channels.

Recent research on customer price sensitivity has concentrated on price elasticity, primarily from an economics-oriented perspective, focusing largely on market characteristics such as product category, household disposable income, and product life cycle (Bijmolt, van Heerde & Pieters, 2005). Most studies have employed behavioral data such as those located in databases measuring purchase conduct or those created by scanner panels (Kanetkar et al., 1992). A major limitation of this line of inquiry lies in the neglect of such critical determinants as service quality, customer satisfaction, and perceived value.

Complementing the foregoing efforts, the second research stream originates in services marketing and concentrates primarily on service quality and customer satisfaction. Among the few extant studies in this stream, price sensitivity has been considered one critical consequence of service quality or customer satisfaction (e.g., Zeithaml et al., 1996). To date, scholars have continued to treat service quality as a high order construct and have generally neglected exploring the role of service quality dimensions (attributes or factors) in forming price sensitivity. To fill this deficiency, Dabholkar, Shepherd, and Thorpe (2000) call for approaching service quality dimensions as distinct antecedents of overall service quality in studying relationship management. From the theoretical perspective, our understanding of the complicated relationships involving service quality dimensions, customer satisfaction, and perceived value to price sensitivities remains very limited. Practically speaking, distribution channel managers need to clearly understand how each key service quality dimension influences price sensitivity, so as to manage customer relationships effectively, thus generating profits. Moreover, in spite of the significance of price sensitivity in distribution channel management, scant research has been conducted from the perspective of small and medium buyers.

To assist in filling existing research gaps, the current inquiry is conducted with the aim of examining both direct and indirect effects of salient physical distribution service quality (PDSQ, hereafter) dimensions on small retailers' price sensitivity. Our research focus on current buyers' sensitivity to price change. This is of significance because formulating prices which meet the demand functions of existing consumers involves the critical area of decision making, which can, in turn, exert a strong influence on profits (Reichheld et al., 2000, Reichheld and Schefter, 2000).

Given the preceding considerations, this research attempts to contribute to an advanced understanding of price sensitivity from the perspective of small and medium retailers in the setting of cellular phone retailers in China. First, basing our approach upon equity theory and the quality–value–loyalty chain model, we explicitly treat service quality dimensions as antecedents of price sensitivity and empirically test the proposition that each of the service quality dimensions may directly or indirectly influence price sensitivity. We focus primarily on service quality aspects because (1) the effect of product quality on price sensitivity has been well studied, and (2) with the rapid development of technology, competition has shifted to service-related competence. Second, in line with the quality–value–loyalty chain model (Parasuraman & Grewal, 2000), we examine whether or not constructs used in customer relationship studies such as service quality dimensions, satisfaction, and perceived value explain a significant portion of price sensitivity. Finally, by examining antecedents of price sensitivity from small and medium cellular phone retailers operating within distribution channels in China, a rapidly developing market, the present inquiry enriches our knowledge on one of most critical behavioral consequences of customer relationship management.