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Different Effects of Perceived Price and Risk on Purchase Intention for Potential and Repeat Customers

Hee-Woong Kim School of Computing National University of Singapore kimhw@comp.nus.edu.sg Gupta Sumeet School of Computing National University of Singapore sumeetgu@comp.nus.edu.sg Abstract Electronic markets are known to reduce search cost for customers then intensify price competition and narrow price differences among Internet vendors. However Internet shopping is characterized by its uncertainty and risks as compared to conventional shopping. Thus, price and risk become the two main decision factors in Internet shopping as monetary and non-monetary costs. Although past research documents the importance of both price and risk to explain customers choice in Internet shopping, little is known as to how perceived price and risk together influence customers choice in Internet shopping. Based on mental accounting theory, this study examines the different effects of perceived price and risk on purchase intention for potential customers and repeat customers. Contrary to conventional intuition, survey results show that the effect of perceived risk on purchase intention is fully mediated by value perception. Moreover, perceive price does not have significant effect on purchase intention for potential customers while it has for repeat customers. These findings help to advance theory and offer practical insights in the context of Internet shopping. Keywords: Price, Risk, Internet shopping, Prospect theory, Mental accounting theory Hong Li School of Computing National University of Singapore lihong@comp.nus.edu.sg

1. Introduction
Internet shopping allows customers to compare the products offered by Internet vendors conveniently. This comparison cost for customers, facilitated partly by Internet shopbots (e.g., BizRate.com), is expected to increase price competition and narrow price differences among Internet vendors (Bakos 1998). Brynjolfsson and Smith (2000) found that prices on the Internet are 9-16% lower than prices in conventional outlets. Compared to conventional outlets, however, Internet shopping is characterized by high uncertainty and risks. Hoffman et al. (1999) identify risk perception as a major barrier inhibiting Internet transactions. From the prospect theory perspective (Kahneman and Tversky 1979) in customer choice and decision making, customers tend to behave from a value maximization perspective under conditions of uncertainty. Here, value is considered as an assessment of benefits against costs when shopping with a vendor (Thaler 1985; Zeithaml 1988). Price and risk represent monetary and non-monetary costs respectively. To-date, research has documented the importance of both perceived price and risk to customers of Internet vendors. However, little is known as to how the two cost factors together influence the transaction intention of potential or repeat customers of Internet vendors. To better understand how customers make their purchase decision in uncertain and risky electronic markets, this study investigates the simultaneous impact of perceived price and perceived risk on customer behavior in Internet shopping. Specifically, this paper seeks answers to two research questions: (1) How do perceived price and perceived risk affect
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customers purchase intention in Internet shopping? And (2) Do the effects of perceived price and perceived risk differ for potential and repeat customers? This study offers important contributions towards articulating differences in the effects of these most prominent cost factors in Internet shopping. This study also contributes to the propagation of e-commerce by providing guidelines as to how Internet vendors should address monetary and non-monetary cost issues differently for potential customers and repeat customers.

2. Theoretical Framework
Thaler (1985) proposed mental accounting theory based on prospect theory, which explains human decisions under conditions of uncertainty from a value maximization perspective (Kahneman and Tversky 1979). According to prospect theory, customers prefer positive outcomes which are more certain than outcomes which are merely probable. Such a certainty effect causes people to be risk averse when making decisions involving gains (i.e., people tend to opt for smaller but certain gains than larger but probable gains). According to mental accounting theory, customers estimate total utility for their choice and decision making. Total utility, which is the sum of acquisition utility and transaction utility, represents the perceived total value of purchasing a product from a vendor. Acquisition utility is a comparison of the equivalent value of a product (whether the product being purchased is worth its price) and its price. Previous research (Sweeney et al. 1999; Zeithaml 1988) suggests that product quality enhances equivalent value of a product. Dodds et al. (1991) found that product quality has a positive effect on acquisition utility while price has a negative effect on acquisition utility. Transaction utility refers to the perceived merits of a transaction or a deal and is based on the difference between the objective price and the reference price of the product being purchased. Objective price refers to the total amount that a customer needs to pay for acquiring a product. Reference price refers to the price that a customer expects to pay for that product (Thaler 1985). Customers derive reference price from their previous experiences or sales messages (Puto 1987). While prior research (e.g., Dodds et al. 1991; Sweeney et al. 1999; Urbany et al. 1997) has focused on the monetary aspects of value, non-monetary aspects of value like time and effort may also be critical (Zeithaml 1988). In Internet shopping, while time and effort are greatly reduced, another non-monetary aspect, namely, risk (Grewal et al. 2003) becomes critical as customer deception by Internet vendors is becoming increasingly common. The impact of the two key factors (i.e., price and risk) on customers decision during Internet shopping can be accounted for by using mental accounting theory. Regarding monetary aspect, Jacoby and Olson (1977) distinguished between the actual price of a product (which includes shipping cost for Internet shopping) and the price encoded by customers (perceived price). Customers do not usually remember the actual price of a product. Instead, they mentally encode prices in ways that are meaningful to them. For example, they compare actual prices with reference prices (Dodds et al. 1991) during Internet shopping and then encode the outcome as higher or as lower than their references. Such outcomes drive the price perception of customers, which in turn influence their decisions (Jacoby and Olson 1977). Regarding non-monetary aspect, Bauer (1960) first introduced perceived risk as a combination of uncertainty and seriousness of outcome involved. The more recent conceptualization considers risk as the expectation and importance of losses (Mowen 1992), which takes customers risk attitude into account. There are several different types of risk such as privacy risk, security risk, financial, delivery risk, etc. The risks associated with online shopping inhibit customers from making purchases online (Hoffman et al. 1999). Especially, if customers are expected to gain more benefits than sacrifice, they may show risk-aversion behavior according to prospect theory (Kahneman and Tversky 1979).
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3. Research Model and Hypothesis


Based on the above theoretical discussion, a research model is proposed. With a focus on transactions, value has been conceptualized as an assessment of benefits against costs when shopping with a vendor (Thaler 1985; Zeithaml 1988). In accordance with the total utility concept of the mental accounting theory, perceived value (from a customer perspective) is defined as the net benefits (perceived benefits relative to perceived costs) of a transaction with an Internet vendor. Past studies on consumer decision making (e.g., Kahneman and Tversky 1979; Thaler 1985; Zeithaml 1988) have been based on the common assumption that consumers seek value maximization. Consumers prefer to conduct transactions with vendors, whose products offer maximal value. This view of consumers is consistent with the rational perspective. Indeed, empirical results support such a perspective by demonstrating that perceived value leads to purchase intention (Dodds et al. 1991). Hence: H1: Perceived value positively affects purchase intention for potential and repeat customers. Increase in objective price lowers acquisition utility when the equivalent value of the product remains constant. Furthermore, based on mental accounting theory, perceived price can capture the essence of transaction utility. An increase in perceived price lowers transaction utility. Thus, perceived price should negatively affect total value. This relationship is supported by previous research (e.g., Dodds et al. 1991). Hence: H2: Perceived price negatively affects perceived value for potential and repeat customers. In addition to the indirect effect of perceived price on purchase intention through perceived value, perceived price may also exert a direct effect on purchase intention. A high perceived price implies that the objective price of a product is higher than the customers reference price thus implying perceived financial loss in the transaction. A rational customer would be deterred from entering into such a transaction. According to prospect theory, financial loss/ benefit are main determinant /deterrent of customer choice. Hence: H3: Perceived price negatively affects purchase intention for potential and repeat customers. Perceived risk can be considered as non-monetary sacrifice. This implies that an increase in customers risk perception will lower acquisition utility, provided equivalent value of Internet shopping remains constant. Furthermore, based on mental accounting theory, perceived risk represents non-monetary aspect of transaction utility. An increase in perceived risk will therefore, lower transaction utility. Thus, perceived risk should negatively affect perceived value. This relationship is supported by previous research (e.g., Shimp and Bearden 1982). Hence: H4: Perceived risk negatively affects perceived value for potential and repeat customers. According to certainty effect of prospect theory, customers overweight outcomes that are considered certain, relative to outcomes which are merely probable. Customers exhibit risk aversion behavior in situations of high uncertainty and risk as they are motivated to minimize the expected negative consequences of purchases (Kahneman and Tversky 1979). There are diverse risks in Internet shopping like privacy risk, performance risk, and financial risk, which deter customers to engage in shopping from the online vendor. Customers, under the pressure of high risk and uncertainty, are therefore, less willing to make actual purchases. This relationship is supported by previous research (e.g., Shimp and Bearden 1982). Hence: H5: Perceived risk negatively affects purchase intention for potential and repeat customers.

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According to the prospect theory, certainty in transaction with a vendor increases the aversiveness of losses as well as the desirability of gains from the transaction. Perceived price is positively related to financial loss and negatively related to gain. For this reason, the effect of perceived price on purchase intention may differ between potential and repeat customers. Urbany et al. (1997) also found that perceived price as transaction utility is a less important determinant of choice when quality, the determinant of the equivalent value of a product, is uncertain. Instead, greater confidence in (vendor and product) quality makes perceived price a stronger predictor of purchase intentions. Thus, price advantage/disadvantage becomes a more salient decision component when the level of certainty in a transaction is high. As described above, the level of certainty regarding online transactions with a vendor is higher for repeat customers than for potential customers. Hence: H6: Perceived price has a stronger negative effect on purchase intention for repeat customers than for potential customers. Potential customers lack information about the vendor and have no direct transaction experience with it. On the other hand, repeat customers possess direct transaction experience with the vendor, which lowers uncertainty and risk of transacting with the online vendor. Transaction experience increases consumers familiarity and knowledge, thus reducing uncertainty and perceived risk of transaction with the online vendor (Brynjolfsson and Smith 2000). Therefore, repeat customers perceive lesser risk than potential customers. Hence: H7: Perceived risk has a stronger negative effect on purchase intention for potential customers than repeat customers. 4. Research Methodology and Results We chose an Internet bookstore because books vary less in quality as compared to other products. The chosen Internet bookstore receives about 120,000 customers visit daily and sells about 15,000 books everyday. We collected data for a period of 2 weeks via an online survey. We received a total of 513 (161 potential and 352 - repeat) complete and valid responses. There was no significant difference between the two customer groups in terms of age, Internet experience, and gender. The survey instrument (available on request) was developed by adopting existing validated questions wherever possible. Some items were self-developed to make the survey instrument more accurate to the current study. We conducted confirmatory factor analysis on measurement model using LISREL for testing uni-dimensionality, convergent validity and discriminant validity. In testing uni-dimensionality, PRICE4 was dropped as it shared a high degree of residual variance with other items for both groups. Then, we tested for convergent validity. All path loadings were greater than 0.7 except the first item of perceived price (PRICE1), and all of them were significant for both customer groups. The CFRs for all constructs were above 0.7 and AVEs for all constructs were above 0.5. Thus, convergent validity is established for both customer groups. Discriminant validity is established if the inter-correlations among the latent variable is below 0.6. For both the potential and repeat customers, the inter-correlations among the latent variables were below 0.6. Also, square root of each constructs AVE was larger than its correlation with other constructs, thus establishing discriminant validity between constructs. For hypothesis testing, we examined the structural models of both customer groups. The testing results suggest that the measurement models adequately fit the data for both groups. Figure 1 shows the standardized LISREL path coefficients. For potential customers, perceived value significantly influences purchase intention and explains 30% of the total variance. For repeat customers, perceived price and perceived value significantly influence purchase intention, explaining 37% of the total variance. Thus, H1, H2, and H4 are supported.
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H3 is only partially supported because perceived price has an insignificant relationship with purchase intention for potential customers. H5 is not supported.
Potential Customers Perceived Price -0.40** Perceived Value -0.19** Perceived Risk R 2=0.18 ns 0.77** Purchase Intention R 2=0.30 Perceived Risk -0.35** ns Perceived Price -0.42** Perceived Value R2 =0.36 ns 0.35** Purchase Intention R 2=0.37 Repeat Customers -0.30***

ns = not significant; *: p<0.05; **: p < 0.01 ; ***: p < 0.001

Potential Customers: Normed X2=1.34, RMSEA=0.046, RMR=0.040, NFI = 0.96, NNFI = 0.99, CFI = 0.99, GFI = 0.91, AGFI = 0.88 Repeat Customers: Normed X2=2.67, RMSEA=0.069, RMR = 0.053, NFI = 0.97, NNFI = 0.98, CFI = 0.98, GFI = 0.92, AGFI = 0.89

Figure 1: Structural Model To examine the different effects of the same antecedents (perceived price, perceived risk, and perceived value) on purchase intention between the two customer groups, we employed the constraint test suggested by Byrne (1998). An insignificant !2 difference between the base model and the constrained model indicate that antecedents have same effect in the two groups. For perceived price, there was a significant increase in !2 ("!2= 11.34, "df=1, p<0.001) indicating that the path coefficients were significantly different between the two groups. The values of the path coefficients indicate that perceived price has a stronger influence on purchase intention for repeat customers than for potential customers. Thus, H6 is supported. For perceived risk, the difference was insignificant. Hence H7 is not supported.

5. Discussion
The effect of perceived price on purchase intention was found to be insignificant for potential customers. Urbany et al. (1997) found that perceived price influences purchase intention only when customers are more certain about quality (the overall quality of purchasing from the current online vendor). As potential customers are not certain about quality, the effect of perceived price on purchase intention is insignificant. On the contrary, as repeat customers are more certain about quality, the effect of perceived price on purchase intention is significant. This is in conflict with Reibsteins (2002) finding, according to which price is a dominating factor for attracting potential customers. The effect of perceived risk on purchase intention was found to be insignificant for both potential and repeat customers. Previous research (e.g., Brynjolfsson and Smith 2000, Hoffman et al. 1999) mentions perceived risk as a major barrier to Internet transactions. This study shows that perceived risk does not have a direct effect on purchase intention. Rather, its effect is meditated by perceived value for both potential and repeat customers. The study also found that the impact of perceived price on purchase intention is stronger for repeat customers than for potential customers. Similar to our finding, Urbany et al. (1997) found that transaction utility (perceived price in our study) significantly influences purchase intention only when customers are more certain about quality. This result is somewhat in conflict with Rebstein (2002), who noted the dominating role of price in attracting new customers to a retailer web site out of 10 factors. Reibstein (2002) also noted price as the least important factor in attracting repeat customers to return to the same site, and customer support and on-time delivery as the two dominating factors.
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We acknowledge several limitations in our study. First, our sample is limited to the customers of a single Internet bookstore. The research needs to be replicated across diverse context of e-commerce. Second, the use of Internet survey limited this study to a pool of Internet users who browsed the web site of the selected Internet bookstore within a period of two weeks. Third, this study classified customers into potential and repeat customers, depending on the existence of transaction experience with the Internet store. Contrary to previous research (e.g., Reibstein 2002), this research found repeat customers to be more price-sensitive. This may be due to not classifying repeat customers into transactional and relational customers. Future research may examine the different behaviors among different groups of repeat customers.

6. Conclusions and Implications


This research studied the different effects of perceived price and perceived risk on purchase intention for potential and repeat customers. From the theoretical perspective, first, this research demonstrates the individual and combined effect of perceived price and perceived risk on purchase intention based on prospect theory and mental accounting theory. Although previous research provides substantial evidence of importance of perceived price (e.g., Brynjolfsson and Smith 2000; Dodds et al. 1991) and perceived risk (e.g., Hoffman et al. 1999; Sweeney et al. 1999) in explaining online purchase intentions, their combined effect on purchase intention has not received adequate attention of researchers. This research adopts the concept of transaction utility in mental accounting theory to explain the individual and combined effect of perceived price and perceived risk on purchase intentions for both the potential and repeat customers. Second, this research shows the different effects of perceived price on potential and repeat customers purchase intention. Also, an important outcome of this study was that for potential customers, the effect of perceived risk and perceived price on purchase intention is mediated by perceived value, while in case of repeat customers, perceived price also has a direct impact on customers purchase intention. From the practical perspective, first, the results of this study affirm earlier suggestions that value is one of the most important drivers of Internet transactions (Chen and Dubinsky 2003). Internet vendors need to increase benefits (e.g., service quality, convenience, and pleasure) and reduce sacrifices (i.e., price and risk) for enhancing customer value. While enhancing value is a generally useful strategy, Internet vendors may also want to adjust their strategy depending on customer tenure. To generate initial sales with potential customers, Internet vendors can focus on raising total value. As perceived price affects repeat customers purchase intention more strongly than for potential customers, online vendors can attempt to offer lower prices for their products rather than raising total value in order to generate continuous sales. Third, while it has been understood that price and risk are the main cost factors in Internet shopping, this study shows that these costs factors do not affect purchase intention of potential customers. Many Internet vendors have competed with each other on lower price to acquire new customers assuming that price is the most important decision factor. This study found that perceived price has a direct effect on purchase intention only for repeat customers. 7. References Bakos, Y. Reducing Buyer Search Costs: Implications for Electronic Marketplaces, Management Science (43:12), December 1997, pp. 1676-1692. Bauer, R. A. Consumer Behavior as Risk Taking, in Dynamic Marketing for a changing world, R.S. Hancock (Ed.), American Marketing Association: Chicago, Illinois, 1960, pp. 389-398.
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