Published August 10, 2021
You’ve calculated your costs. You’ve factored in your overhead. Now it’s time for the fun part: setting the markup for your product. But with so many pricing strategies out there, where do you begin?
Most brands turn to objective factors—like competitor rates and supply—to make pricing assessments. While these elements are critical, your pricing strategy should also incorporate a more ambiguous yet equally influential concept: consumer psychology.
To maximize revenue, you must understand how people perceive pricing and your brand as a whole. This knowledge empowers you to adjust your pricing while still maintaining your customer base and brand reputation.
A strategy that sets your prices on the low side might seem like a good way to drive sales. After all, won’t customers be attracted to the brand with the cheapest prices?
The truth is that while lower prices can attract customers looking for a deal, they can also create a situation where people believe your products are “cheap” or “low-quality.”
“Many businesses mistakenly underprice their products attempting to convince the consumer that their product is the least expensive alternative hoping to drive up volume,” says small-medium business (SMB) consultant Laura Willet. “But more often than not it is simply perceived as ‘cheap.’”
Research from Vanderbilt University shows that while consumers often equate lower prices with “low quality,” they can also perceive low pricing as a sign of “good value.” Since consumers can adopt either perception, the question for business owners should be, “How can I lower prices and capitalize on the ‘good value’ perception without drawing the ‘low quality’ stigma?”
It turns out that how consumers view lower-priced products (“good value” or “low quality”) has a lot to do with how they are marketed. In the Vanderbilt study, a group of participants was introduced to bottles of wine marked at different prices. When the participants were subtly reminded of “quality” in the initial marketing, they preferred the more expensive wine. When they were subtly reminded of “value,” however, they opted to go with the cheaper wine instead.
The takeaway here is straightforward: it’s okay for your pricing strategy to include pricing products lower than your competitors. But if you go this route, be sure that your messaging emphasizes the value or “good deal” people get when they purchase with you.
Related: These global marketing trends will make your business stand out
While pricing low might draw customers looking for a good deal, it can also cause you to miss out on revenue. According to Harvard Business Review, one of the main reasons new products don’t earn what they could is that developers often “grossly underestimate how much customers would be willing to pay for them and charge prices far below what they could have charged.”
But how do you know when you can change your pricing strategy and increase prices without pushing potential customers away or getting a reputation as an overly expensive brand? The key is making sure your price increase is backed by quality, whether that’s offering top-notch service or a high-value product. A Forbes 2020 survey uncovered that 62 percent of customers are willing to pay more for products when they’re accompanied by good customer service.
CRM platform SuperOffice notes that a great customer experience might include building a responsive mobile design or offering self-service options. The business development corporation Strategic Vision also shares a few ideas for improving your customer experience, so your audience is more willing to pay higher prices for your products:
If you’re going to be charging higher prices as part of your pricing strategy, make sure you’re also delivering a world-class customer service experience that leaves your clientele feeling taken care of from start to finish.
Whether businesses like it or not, brands tend to have a pricing reputation which is basically the general belief most consumers have about how your company’s pricing compares to your competitors.
Consider three grocery retailers: Kroger, Whole Foods, and Erewhon. If you were to ask American consumers to rank these three grocers according to price, they’d likely say Kroger is the cheapest, Whole Foods is in the middle, and Erewhon is at the top.
The problem with price perception is that it can be very difficult to change. If Erewhon, for some reason, ever wanted to become known as the supplier of the cheapest milk in town, it would take more than just lowering prices to make a meaningful shift in consumer perspective. And, given that roughly 50 percent of sales are driven by price perception, it’s worthwhile understanding how to manage it and letting this inform your pricing strategy.
In their article on price perception, Bain partners Sandeep Heda, Stephen Mewborn, and Stephen Caine share a four-step process business owners can use to get a handle on price perception.
Wherever you are in your pricing journey, it’s a good idea to understand the price perception your brand has and to have some awareness of how you can manage it favorably.
As you continue to define your pricing strategy, keep in mind that your pricing plan will inevitably change over time. The economy is dynamic. Supply and demand fluctuate. People’s needs differ with the season and the year.
Keep an eye on these factors to make small, informed changes in your pricing. These mini pricing experiments will help you gauge consumer preferences, so you can stay competitive and profitable in the long run.