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Pricing Perception: Is Reducing The Price The Best Decision?

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.

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About Joseph Robinson

Joseph Robinson is the Vice President of Strategy at Flevy. Flevy is the marketplace for best practices in business management. Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. The documents at Flevy (https://flevy.com) are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience. Flevy covers 200+ management topics, ranging from Digital Transformation to Growth Strategy to Lean Management. You can peruse a full list of management topics available on Flevy here. Prior to Flevy, Joseph worked as an Associate at BCG and holds an MBA from the Sloan School of Management at MIT. You can connect with Joseph on LinkedIn here.

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