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    SETTING THE PRICE
     

    How Buyers See Price

     
    In a previous article we looked at ways in which you can influence a customer's
    evaluation of your prices. This month we'll look at the psychology behind
    price perception, and how you can use this knowledge to better understand
    your customers' behavior.
     
    Most buyers do not have an accurate perception of price, even of those
    items they buy frequently. A supermarket study found that over half of
    store shoppers could not guess the price of 57 of 59 common products (
    Kraft mayonnaise, Scott towels, Maxwell House coffee, etc.) within 10% of
    their actual price.
     
    The study suggests that if most consumers don't know the price of items
    they buy every week, they have even less of an idea of the exact cost of
    most goods and services. Of course, this makes sense when you consider
    just how many different things most people buy each month. Keeping exact
    prices in their minds would be overwhelming. Durable goods purchases,
    which occur less frequently, are usually compared over brands or vendors,
    but even with durable goods, consumers use a subjective mental price scale
    to evaluate their prices.
     
    THE ELASTIC SCALE
    What this means for you is that there is some price elasticity in the
    minds of buyers for many products, and even more elasticity in the price of
    services. By employing other marketing techniques, it is possible to
    create the impression of "low cost" or "high value" with little or no
    actual change in the price of your product or service.
     
    Buyers generally see price on a sliding scale, like this:
     

    If the price is seen as . . .
    "Way Too Low" ________________________ "Way Too High"
     1       2      3      4      5
     
    Buyers may think. . .
    "Something's Wrong"    "That's reasonable"    "You're Kidding"

     
    The ends of the scale are bounded by what the buyer perceives to be a
    realistic price range for the type of product or service. For example, a
    steak dinner might have a range between $5.00 and $50.00. The buyer can
    imagine paying $5.00 for a steak at a cheap restaurant chain, and $50 at a
    top place like Morton's. That isn't to say the buyer would actually make
    either choice, but at least it is imaginable.
     
    Outside of the "reasonable" scale are the "unreasonable" prices. Any
    offer of a steak dinner would be evaluated in part by where it fell on the
    scale. For example, if I offered you a steak dinner for $1.00, your
    reaction would probably be "there's something wrong with it -- the price is
    way too low". If it was $5.00, your mental reaction might either be
    "probably a tough, cheap steak" or "that's a bargain," depending on other
    factors such as the reputation of the restaurant, if the price was a
    "special" or on a coupon, etc.
     
    A $20 price might elicit a #3 rating and a reaction of "about right." A
    $50 steak dinner at The Steak Hut may be evaluated as "it's over-priced"
    while a similarly priced dinner at Morton's may be seen as "expensive but
    worth it" or may produce a reasonable question in the buyer's mind, "What
    makes it worth that much?" Tthe buyer's response to the price depends on
    other factors like the restaurant's reputation. Finally, if a steak dinner
    is offered for $100, the reaction of nearly all buyers will be "You're
    kidding! That's way too high!" no matter what the restaurant.
     
    Note that the buyer's reaction has little to do with desire or intention
    to make a purchase, only on the price relative to their subjective mental
    scale of a reasonable price range. The boundaries of a buyer's price range
    are relative, depending on many factors, including the socioeconomic class
    of the buyer, education, age, past experiences (remember the stories of
    foreign visitors who paid $200 for a cab ride from the airport because they
    didn't know any better?), and so on.
     
    One of the biggest shocks visitors to Europe often have is the higher
    prices for most items used by travelers. The first time one hears that a
    room in a French hotel equivalent to a Motel 6 in the United States rents
    for $130 a night, it is a mind-expanding experience, creating a major
    upheaval in the traveler's mental price scales.
     
    FAIR OR UNFAIR?
    In general, we use labels to rate things, then use those ratings as the
    basis for recalling our evaluations, and making future buying decisions.
    One of the most common label sets is "fair" or "unfair." A "fair / unfair"
    rating depends on the perceived value of the item in relation to its price
    on the mental price scale for that item in our minds.
    If the price is . . .

"Way Too Low" ________________________ "Way Too High"

1      2      3      4      5

    Buyers may label it as . . .                  < < <  FAIR     UNFAIR  > > >
     
    The higher the price on the consumer's mental price scale for that product
    class, the more likely the item will be ranked as "unfairly" priced, and
    rejected. The vendor must provide more "value added" features to make up
    for the higher price. A $50 steak dinner, for example, must not only taste
    wonderful, but the buyer must receive "extras" such as an elegant setting,
    fine service, live music, large portions, valet parking, and so on.
     
    Additional factors that influence the perceived value of the steak include
    the restaurant's name, reputation, image, who goes there, etc. Planet
    Hollywood survived several years in large part on its celebrity image and
    the possibility of seeing someone famous, not on its food, price or ambience.
     
    On the other hand, low prices are not seen as "unfair," just unrealistic.
    (And that can be enough to set off alarm bells.) This gives a distinct
    advantage to sellers who are able to occupy a particular price position in
    which they are seen as offering good quality for a lower cost. For
    example, we have a general idea that fancy European coffee (like latte or
    espresso) sells for between $2.00 and $5.00 a cup, because this is the
    price at Starbuck's, the brand leader. Any store charging $7.00 would
    likely be seen as having an "unfair" price.
     
    But if a nice restaurant offered a similarly-named cup of coffee for
    $1.50, buyers would see it as a very "fair" price, and be more inclined to
    purchase it. (On the other hand, a "simple cup of coffee" at $2.00 would
    not be seen as "fair" by many buyers because they don't use the same mental
    scale for plain coffee as they do for fancy European coffee.)
    Chances are that if a restaurant offered "coffee with steamed milk" and
    "latte" side by side on the menu for $3.00, they would sell vastly more
    latte -- the name is a key part of the product's evaluation. As you can
    see, "fairness" is a relative concept, and depends on a number of different
    ideas in the buyer's mind which relate to price.
     
    PRICE AND QUALITY
    You are willing to pay more for Ben & Jerry's Ice Cream than Safeway Ice
    Cream because of the perception that the quality of Ben & Jerry's is
    better. People expect to pay more for quality, and usually they are
    perfectly willing to do so. In fact, many people use price as an indicator
    of quality. "If that coat costs $5,000, it must be terrific!"
     
    Consumers set limits on this type of judgment, as discussed above. When
    the price exceeds this personal upper limit, it is judged too pricy, and
    when it dips below the lower end, it is evaluated as being too poor a
    quality to purchase (like the hotdogs that come shrink-wrapped at 20 for $2.00.)
     
    Of course, price isn't always the yardstick for judging quality. When
    independent, unbiased sources of information and opinion are available,
    such as Consumer Reports, a Five Diamonds or AAA sign, a newspaper review,
    and so on, they will often be used alongside price in the buyer's analysis
    of quality, along with their own personal judgment and the opinion of friends.
     
    The price you charge for your product or service will most readily be used
    by your buyers as a yardstick for quality when . . .

  • Experience or "common knowledge" leads them to believe that price is a
    good predictor of quality in your product class.
  • There are perceived variations in quality among brands.
  • Quality is difficult to judge in other ways (such as a brand name,
    store reputation, feel, smell, independent report or review.)
  • Buying the best quality for the money is more important than other
    purchase considerations (such as brand loyalty, brand image, time or
    availability constraints, etc.)
  • Price is an important consideration.
     
    Many studies suggest that the lowest price or the best "price-quality"
    ratio aren't always the major consideration. As long as the price of an
    item falls within a particular range of acceptable possibilities, price is
    not the biggest factor in the purchasing decision (for example, for
    products like gum, hamburgers, toothpaste, gas, auto repairs, CDs, small gifts.)
     
    We usually fill up at the same gas station, even if we could save a few
    cents by looking around. The same is true of our supermarket, dry
    cleaners, and countless other stores. Familiarity, personal relationships
    with store employees, time savings, reduction of frustrations, comfort, and
    other factors also play a role in the complex decision making that precedes buying.
     

    For more articles on Pricing, click here.
     
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