Pricing Perception: Is Reducing The Price The Best Decision?

Editor's Note: Take a look at our featured best practice, Pricing Strategy (38-slide PowerPoint presentation). Pricing Strategy is a core pillar of Marketing and Product Strategy. It is 1 of the 4 Ps of Marketing (also known as the Marketing Mix - Product, Price, Placement, and Promotion). As such, knowing how to properly price your product is extremely important to the commercial success and viability of [read more]

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Price wars have broken out in consumer industries around the world. In fact, retailers such as ALDI, Amazon, and Walmart have used price to position themselves against traditional competitors in the market, pinching margins all around. Prices are being reduced because of the belief that this will boost their perceived value to consumers, who implicitly weigh price against product features and benefits in their purchase decisions.

With the pressure to reduce prices intensifies, companies are acting hastily and when decisions are made on pricing, the question now does customers notice. Often the result is customers do not notice these things. What ultimately matters are how customers perceive the price point.

Companies ultimately need to map a path to improved perception guided upon by the principles of Customer-centric Design.

A Look at Consumer Perception

Companies are reducing prices with the belief that this will boost their perceived value to customers. Yet, customers implicitly weigh price against product features and benefits in their purchase decisions. When managers make decisions on pricing, often this is not noticed by customers.

Ultimately, what matters is how customers perceive the price point.  This is why have a clear, analytical understanding of Consumer Pricing Perception should be incorporated into your Pricing Strategy.

Let us take a look at Amazon.

Amazon is a titan of e-commerce, logistics, payments, hardware, data storage, and media. It is the go-to site for online shoppers and merchants alike, a modern necessity that independent sellers love to hate. Consumers believe that Amazon offers at or near the lowest prices on a broad range of goods, even if this is not always the case.

What Amazon does is strategically select products such as bestselling items to compete aggressively and charge more than others. When it comes to consumer perception, this must align with the company’s intent so that investments and tactics put in by the company will not be undercut.

How Can Companies Better Determine What Tactics to Take

There are tools companies can use in determining what tactics to take. One of these tools is the Pricing Perception Matrix.

The Price Perception Matrix has 4 quadrants. Horizontally, this is to determine if the product is price sensitive. The farther you are to the right, the more sensitive the product is when it comes to pricing.

The vertical side is the observed halo effect.

A halo effect is a term for a consumer’s favoritism toward a line of products due to positive experiences with other products by this maker. The halo effect is correlated to brand strength, brand loyalty, and contributes to brand equity. It is the tendency for positive impressions of a person or consumer in one area or product to positively influence one’s opinion or feelings in other areas.

Application of the Price Perception Matrix in Retail Business

Here’s a case on an Apparel Retailer. The business is faced with stiff competition from other fashion discounters. To fight back, the retailer started slashing prices across the board. The retailer did not realize the anticipated benefits in price image and sales volume.

What is the perception of its consumers? The consumers incorrectly perceived that the company had higher prices than its key competitors.

What could be the reason for this perception? The retailer has been offering far more price points than its competitors. This has, as a result, confused its market. Businesses have to understand that customers can be price-sensitive when it comes to certain product categories. An example of product categories that are price sensitive is children’s t-shirts and adult sweaters.

Interested in gaining more understanding of Pricing Perception? You can learn more and download an editable PowerPoint about Pricing Perception here on the Flevy documents marketplace.

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