Research-Based Pricing Strategies and Customer Perceived Value
As we know, consumers don’t buy products for their functions alone, consumers buy a product because they believe they will benefit from it. The benefit of the product in addition to their own cognitive biases can be defined as customer perceived value.
We don’t buy a vacuum cleaner, we buy a clean house, a dust-free room, a solution for rhinitis…
Yes, pricing can be a complex task as it involves other marketing strategies such as positioning your brand. But there’s no other way around it. When you don’t know where to start, the idea of “I think it’s a good number” seems very appealing.
Customers Perceived Value
The customer perception of value is often unrelated to the actual price. Instead, it is much more related to intangible costs. The association between perceived benefits and perceived costs can be used to assess customer perceived value:
The Three Product Levels Model is a simplified version of the Five Product Level model of Philip Kotler. They are: tangible, logical, and emotional.
Buying an expensive suit, for example, would help you keep warm (physical), land the new job you’re applying for (logical), and avoid the embarrassment of walking around naked (emotional). Time, labor and money are perceived costs.
People simply don’t evaluate products in isolation. Products are hot or cold, long or short, expensive or cheap. Not in absolute terms but in comparison with others. This relativity approach is also applied to how we see objects. Try to remember the last time you went to the grocery store to buy a specific product. How did you decide on your purchase?
Relativity Approach to Prices
The popular illusion below was created by Herman Ebbinghaus (Professor of Psychology at the University of Berlin) in the 1890s:
While the two circles in the middle are the same size, it doesn’t seem so, does it? The contrast with large dots makes it looks little, but it appears huge when contrasted to tiny dots.
Adjust the contrast settings to make your brand look more valuable.
Our mind’s perception of value is just as relative as our eyes’ perception of size.
As there’re visual illusions, so there are cognitive illusions.
Price Anchoring
Taking into consideration Ebbinghaus’ Illusion marketers have heavily relied on the cognitive bias called Anchoring.
The best way of selling a $2.000 purse is to place it next to a $10.000 purse — (applicable for different products and same category).
When we’re making choices, we have the propensity to focus on the first piece of evidence that has been presented.
A study conducted by the University of Arizona examined the impact of price anchors.
Participants were asked to estimate the value of a hypothetical home.
They handed out pamphlets with information about the houses in the area, some with regular prices and others with falsely inflated prices. The pamphlets with the higher prices swayed a group of college students as well as a group of real-estate experts. Also, experts were conditioned by anchoring!
Price Similarity — More is Less
Limiting products and services options will help you prevent “analysis paralysis” and the “paradox of choice“, since having so many options can be demotivating.
You may think that having different products or services with the same price point could be a good idea.
But, according to a study carried out by Yale University,
Consumers are even less likely to purchase one of two identical products if their prices are even slightly different.
In the experiment, participants were given the option of purchasing a pack of gum or holding the money.
In the experiment, there were two packs of gum priced the same at 63 cents: only 43% made a purchase. However, more than 77% chose to buy a pack of gum when they were differently priced — 62 and 64 cents.
When similar items have the same price, consumers are inclined to defer their decision instead of taking action.
Price Influences Perception
High Price Boost Expectations
People believe that price is almost related to quality. Imagine you go to a liquor store to buy a bottle of red wine. How do you make your decision of purchase?
“It’s too cheap, so must be bad”. You find three same-sized bottles of red wine. Think of your purchase-making process. Many studies have shown that the price influences our perception of quality.
Antonio Rangel found out that “expensive wine tastes better” after conducting a study. Specifically, participants liked the taste of the $90 bottle better than the $5 one, and the $45 better than the $35. (They had the same wine but from different priced bottles)
Products like coffee, chocolate, perfume, and wine are examples of benefited ones by this bias.
Discounters — Careful
What’s the opposite of high prices and high expectations? Baba Shiv, Professor of Marketing at Standford, carried out a study to understand the placebo effect of discounts.
Participants were given math puzzles to solve and get paid a small amount for every correct answer. Students were allowed to buy a caffeinated energy drink that would supposedly focus their minds. Half of the participants were sold the drink at full price and half bought it at discount.
The ones who bought the reduced-price energy drink answered 30% fewer questions correctly.
Low prices damage our expectations of a product just as much as high prices boost them.
Be careful with dropping your prices to boost market share. What works in the short term might damage brands’ desirability in the long term.
Advertising for Brands with Low-Quality Perception
Advertisement your High-End Products
Brands have a portfolio of products ranging in quality and price. Think of an airline, for example, they have economy class, business offerings. Or Audi, whose product range goes from entry-level cars to high-end models.
The conventional approach to assessing advertising budgets is to distribute funds depending on the revenue of each line. These studies, on the other hand, suggest an option for any brand that is having problems with quality perception.
Given that price conveys quality, clever brands should invest more resources in their higher-end products. This provides a sense of quality to the brand that will radiate to the entire portfolio.
Example of Audi
This is Audi’s strategy. Their lower-cost models almost never are seen on TV. On the other hand, this medium is reserved for the most appealing, and invariably expensive, models. Even the low selling R8, their six-figure sports car, has featured on TV. They push their high-end models to increase the perception of quality that will radiate across their portfolio.
Example of McDonald’s
What’s McDonald’s known for? Maybe low-quality food? Well, the company also used a more aggressive approach to increase its perception of value, launching in 2015 the Signature burgers, priced at £4,69.
The Michelin-starred chef-designed burger, grilled to order and served in a brioche bun, serves as a persuasive signal of quality.
It’s important that this strategy be correctly measured. Don’t evaluate success by higher-end model sales, but rather by how brand perception has improved overall.
Perception Strategies:
Change Your Competitive Set
Make it harder for customers to compare your brand with “similars”. Take a look at the Illusion at the beginning of this article again. Ideally, you would be competing in the blue ocean, where there aren’t many competitors in the market.
Example of Nespresso
Think of Nespresso. They sell distinctive pods, which provide the right amount of coffee for a cup. Because they’re sold in that unit we compare their price to other places selling by the cup, such as Costa or Caffé Nero. When compared to the AED16 Costa charge, Nespresso pods, costing around AED1 are so cheap.
Example of RedBull
Why do you think RedBull is quite distinctive with their slim energy drink cans? If they used the regular shaped one, it could fall into the same category as Coke, Fanta, or any other soft drink and be easier compared with them.
RedBull is a different category, and now you can see most energy drinks using the slim can design to be “more comparable” or competitive in the category. It also keeps its high pricing point — boosting their customer’s expectations as we mentioned before.
Introduce a Higher-End Line
An alternative to changing your competitive set would be adapting your own product and service offerings.
An experiment conducted by Amos Tversky and Itamar Simonson shows that introducing a higher-end offering creates a new benchmark, making the other lines seem more valuable to customers.
Buyers are often unsure about what constitutes a good product; they are concerned that the most expensive alternative would be overpriced, whilst the cheapest will be shoddy. Then the middle choice works like shielding them from both extremes.
For example, a coffee shop chain might add a more expensive blend, maybe a roaster’s choice, and a grand reserve blend.
For this tactic, the measurement must be precise. In the case of coffee, the approach’s effectiveness can be measured by whether sales change to higher-margin blends. If the grand reserve is introduced and doesn’t sell a bean that doesn’t matter.
Final Thoughts
Using the above pricing and perception of value concepts can help you build your marketing strategy to maximize revenue. If you’re going to use price relativity ideas to shape consumer expectations of your brand, you can do so right before it launches. This is due to the primacy effect, which states that people’s first impressions of your brand influence their future impressions of your brand.
This article was originally posted on iStamm.com
