Strategic Pricing : Consumer's Price Perception

Price is an important element from a brand’s point of view for building brand equity. Brands set the price of a product depending on three factors: i) the cost of production, ii) competitor’s pricing strategy, and iii) the consumer’s perception of the value of the product.

What is Consumer price perception?

Consumer price perception theory states that, consumers already have a predefined price range (a minimum value and a maximum value) for any product category, which is acceptable to them for purchasing a certain product. The consumers tend to correlate the quality of this product with the price of the product in the price band. Where, the price of the product is at the lower end of the price range or price band, the consumer assumes it to be of a lower quality. Whereas, if the price is at the higher end of the price band, he/ she equates it to be of superior quality. Hence you find several companies such as Procter and Gamble, Unilever Ltd., Volkswagen and many more offering similar products with varying quality to compete in the different price categories, so as to ensure that they do not lose out on market share.

How to influence Consumer price perception?

There are several factors that influence the consumer’s perception of price, while some of them are controllable; there are many others, which cannot be controlled by the business. Factors such as consumer’s experience with the product, or consumer’s knowledge about the product, the consumer’s recall of the advertising and promotion strategy of the brand, etc. are not under the control of the brand. Leaving aside these factors, which cannot be controlled by the advertisers, below are techniques that marketers use to influence the consumer’s price perception of the product.

A.    Just-below pricing

Price of products ending with 9 or .99cent, instead of the next whole number, tends to generate more sales. For example, if a product is priced at Rs. 19 instead of Rs. 20 or $19.99 instead of $20, largely helps attract customers who are looking for a discount. Research shows that this sort of pricing helps to increase sales in retail stores by approximately 10-20%, due to the fact that, our brain perceives 19 to be much lesser than 20. However, this strategy might end up being detrimental to a brand, if the quality perception of the brand is more important.

B.    Value based pricing

The perceived value a consumer gets from the product is an important factor influencing his purchase decision. Hence, many marketers use the value based pricing strategy to price their products right to meet the consumer’s expectation. Usually, in value based pricing, marketers price their products in such a was so as to include the cost of production of the product, the value it adds to the consumer and a premium, if the consumer feels it’s appropriate for the quality of the product.  For example, many consumers are willing to pay a large premium for the quality provided by luxury cars, whereas most mid-range cars also provide similar features and cost much lesser.

In summary, in strategic pricing, brands want to shift the buyer’s focus from production cost of the product to the value the product will add to the customers. Though there are several controllable and uncontrollable factors, which influence a consumer’s price perception, they use various techniques such as just-below pricing and value based pricing to set the right price for their product, which in turn, would help them to maximize profits.