The right way to use Advertised Reference Prices (ARP)

Pricing isn’t just a number. It’s a carefully crafted perception, a subtle cue, and sometimes even a psychological strategy. For product marketers, pricing is more than a bottom-line figure, particularly in industries where negotiation is common – it’s a dynamic conversation that shapes customer behavior.

One powerful tool in this mix is the Advertised Reference Price (ARP), a pricing tactic designed to influence consumer perceptions and, as recent research reveals, even affect negotiation outcomes.

From my experience in B2C (consumer), B2B (business), and B2G (government) sectors, I have learned that ARPs play a powerful role in shaping buyer perceptions.

But how does this tactic work, and what are its implications for product marketers? Let’s dive into the mechanics of ARPs, their role in shaping consumer psychology, and how they can be strategically used to drive demand and revenue.

What are Advertised Reference Prices?

Advertised Reference Prices (ARPs) are the higher prices retailers prominently display next to a product’s sale price. For example, if a pair of headphones is listed as “Now $199, was $299,” the $299 figure is the ARP. Its purpose is clear: to make the sale price look like a great deal.

But ARPs do more than signal savings – they anchor the consumer’s perception of value. This psychological effect, called anchoring bias, subtly nudges customers to compare the sale price against the ARP rather than assessing whether the product’s worth aligns with the sale price.

In industries where prices are negotiable – think automotive sales, real estate, or enterprise software – ARPs play an even more intriguing role. They don’t just influence whether a customer perceives a good deal but how the negotiation unfolds.

How ARPs shape negotiations

A recent study, Perceived Versus Negotiated Discounts: The Role of Advertised Reference Prices in Price Negotiations, reveals a fascinating dynamic: the gap between the ARP and the sale price – known as the Initial Perceived Discount (IPD) – can significantly influence negotiation outcomes.

Here’s what the researchers discovered:

1. Greater IPDs reduce negotiated discounts

When customers see a high ARP, they perceive the sale price as a significant discount, which reduces their motivation to push for further discounts. This phenomenon stems from two primary factors:

Reduced likelihood to negotiate:

A high IPD creates a sense of satisfaction. The research found that for every $1 increase in IPD, the likelihood of a consumer initiating negotiation drops by 5.7 cents. Why? Consumers often feel they’ve already secured a good deal, making them less likely to challenge the price further.

Anchoring during negotiation:

The ARP serves as an anchor that influences customers’ expectations. Even during bargaining, they subconsciously use the ARP as a benchmark, leading them to accept smaller negotiated discounts.

2. Higher revenue through negotiation

In industries with fixed pricing, ARPs primarily drive demand by making the product appear more valuable. However, ARPs contribute directly to revenue in bargaining scenarios by influencing the final negotiated price.

According to the study, nearly one-third of the revenue gains from higher ARPs come from customers agreeing to pay more during negotiations.

3. Strategic similarities across pricing models

Interestingly, the research shows that the optimal ARP is similar for both fixed and negotiable pricing models.

However, the benefit of using ARPs is significantly higher in negotiable contexts. This makes ARPs a potent tool for sellers operating in industries where bargaining is the norm.

Implications for product marketers

For product marketers, these insights highlight the power of ARPs' power as a pricing tactic and a strategic lever that can shape customer behavior and drive business outcomes. Here’s how marketers can apply these findings:

1. Design ARPs thoughtfully

The effectiveness of an ARP depends on its believability. While setting the ARP as high as possible to maximize the perceived discount might be tempting, unrealistic reference prices can backfire. Customers are savvier than ever; exaggerated ARPs can erode trust and invite regulatory scrutiny.

Marketers should aim for ARPs that balance perception and plausibility. Use market research and c ompetitive benchmarks to determine authentic reference prices while maximizing the perceived value.

2. Leverage ARPs in negotiable pricing scenarios

The research underscores that ARPs are particularly impactful in industries where prices are negotiable. In these contexts, ARPs do more than boost perceived value – they set the stage for the entire negotiation process.

For example, an ARP can anchor discussions around premium pricing tiers in enterprise software sales, even if discounts are part of the final deal. Similarly, in automotive sales, ARPs can make advertised discounts seem more attractive, discouraging customers from pushing for additional reductions.

3. Segment your customers

Not all customers respond to ARPs in the same way. Experienced negotiators may discount the significance of ARPs, focusing instead on market value and alternatives. On the other hand, price-sensitive or less experienced buyers are more likely to be influenced by perceived discounts.

By segmenting your audience, you can tailor your ARP strategy to match their expectations and behaviors. For instance, premium segments may require a more nuanced approach, while mass-market customers may respond well to higher IPDs.

4. Train sales teams on anchoring effects

Sales teams play a crucial role in reinforcing the messaging around ARPs. By understanding the anchoring effect, sales professionals can use ARPs to frame discussions effectively.

For instance, they can emphasize the product's value relative to the ARP rather than allowing the conversation to focus solely on further discounts.

5. Measure and optimize

As with any marketing strategy, the effectiveness of ARPs should be continually measured and optimized. Track key metrics such as conversion rates, average transaction values, and customer satisfaction to understand how ARPs impact your bottom line.

Practical applications across industries

The principles outlined in the research have broad applications across industries. Here are a few examples:

Automotive: Dealers can use ARPs to anchor value perceptions for new and used vehicles. For instance, highlighting an ARP of $30,000 for a car advertised at $25,000 can reduce the likelihood of further negotiation.
Real estate: In property sales, ARPs can anchor buyer expectations, framing the asking price as a discount relative to market value.
Retail: For big-ticket items like electronics or appliances, ARPs can drive demand and revenue by creating a sense of urgency and value.
B2B sales: Enterprise sales teams can use ARPs to frame premium pricing tiers, making negotiated discounts feel like substantial savings.

Ethical considerations

While ARPs are a powerful tool, they must be used responsibly. Exaggerated or misleading reference prices can undermine trust and invite legal challenges. To maintain transparency and credibility, marketers should ensure that ARPs reflect genuine pricing history or market value.

Final thoughts

Pricing is more than a tactical decision – it’s a strategic narrative that shapes how customers perceive value. As the research on ARPs demonstrates, the gap between perception and reality can significantly influence negotiation dynamics, creating opportunities for both customers and sellers.

For product marketers, the key lies in understanding how ARPs influence behavior and leveraging them to align with broader business goals. By thoughtfully designing, deploying, and optimizing ARPs, you can create a win-win scenario where customers feel they’re getting a great deal, and your organization achieves higher revenues.

Ultimately, the price isn’t just right – it’s strategic.

How advertised reference prices influence pricing negotiations