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What Is Price Perception & Why is it Important?

By Priceva
on November 11, 2022
When customers are making purchase decisions, they are driven primarily by price perception. Based on logical and psychological reasoning, price perception is a serious factor that affects sales volume. This comprehensive guide will answer a myriad of questions that may pop up in your mind: “What factors define price perception?”, “How exactly does it work and how does it impact buyer behavior?”, and so on. Read it to the end – we gathered insights that could be useful for any e-commerce business.

Price Perception Definition

Price perception is one of the major factors affecting the consumer buying and decision-making process. Simply put, price perception is what customers think about the cost of a particular item: they can regard it as cheap, optimal, exaggerated, fair or unfair. Numerous studies revealed that price perception is the driving force behind purchasing decisions, and it can be based on rational and psychological factors.

Factors that Influence Price Perception

Let’s take a closer look at what affects consumers’ price perception. As a rule, the final impression is composed of a combination of these factors, though they play different roles in different buyers’ minds.

Price-Quality Relationship

Of course, the actual quality of a product is a vital part of the consumer's perception of a good or service. Quality can describe any attribute of a feature set that makes or breaks a purchasing decision: ease of use, reliability, durability, and so on.

Marketing can influence the overall impression of a product, but, in the end, actual experience with a product determines customer price perception. Outside the realm of mass communication, word of mouth about quality also travels very quickly.

Note that more expensive items are usually perceived as being of better quality. So it’s not a good idea to charge the same price for both low- and high-quality items in your assortment. Besides, customers may think that low-quality products are overpriced and will stop buying them.

Price-Consciousness

It is difficult for customers to make any conclusions about the price unless they have an internal reference price. But when they start exploring the market and see that your particular product is more expensive than the alternatives your competitors offer, they start perceiving all other items in your assortment as overpriced. Research suggests that the highest and the lowest prices on the market also matter – they serve as psychological thresholds.

Prestige Sensitivity

This factor is mostly psychological, and is widely exploited by luxury brands that know their goods are subconsciously perceived as quality ones. Customers are ready to overpay for premium products because they help showcase their social status. Luxury brands, in turn, keep prices high to ensure that they match buyers’ expectations.

Service

Even for goods with numerous defects, excellent service quality can often overshadow a negative experience with the product itself. If consumers feel that they receive exceptional support when encountering a problem with a product, they develop brand loyalty. It is easier to make a purchase when you know that a manufacturer or distributor provides a quick and effective response to problems.

Packaging and Logo

The packaging and the logo have a great effect on price perceptions of consumers, especially at the point of purchase. When a consumer is buying a product for the first time, the way it’s presented can determine their perception of the material. The packaging and logo, of course, cover everything from the quality and visual appeal of an item to the attributes of the product the manufacturer chooses to highlight. Depending on the type of product and market, different messages may be appropriate and effective.

Reputation

A product's reputation is built over time and is often a combination of people’s actual experience with it, word of mouth, and marketing campaigns that attempt to establish a specific vision of the situation, product, or brand.

A consumer's perception of a product's reputation, on the other hand, is not only determined by the product's brand identity and manufacturer, but by the entire distribution chain. Even if consumers trust the manufacturer of a product, they may change their mind about the item if it is distributed by a retailer that they associate with cheap and defective goods.

Role of Price Perception in Consumer Buying Process

Price perception is one of the most important factors in consumer behavior. In this relation, the concept of reference points is crucial. All consumers establish their own points based on:

  • Their financial situation (buying power);
  • Previous shopping experience;
  • Previous experience of using the product (or its substitutes);
  • Existing knowledge of the market;
  • Competitors’ prices;
  • Products’ value perception;
  • Reputation of the brand.

While internal factors (such as buying experience and competitor rates) cannot be influenced, a retailer can focus on external factors impacting price perception. These include brand positioning, customer service, product packaging, marketing, and so on.

There’s no need to offer the lowest prices to maintain or increase sales (in fact, it can have a negative impact on the perceived product value) – a company should be able to communicate its positioning and make sure that it aligns with the price. For example, customers are willing to buy iPhones despite higher prices because Apple has established itself as a manufacturer of quality goods.

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Price Perception and Pricing Strategy

The best way to illustrate the usage of price perception is value-based pricing strategy, although customers’ impression should be taken into account with any pricing approach. Here is how you can make sure that your rates match your consumers’ expectations.

1. Evaluate your product or service

Your sales volume isn’t growing? Maybe you're not offering what your customers need, so they aren’t willing to pay high prices. Analyze how well your product matches what the consumer needs and desires, how your customers see it, and what sort of value they would be willing to pay for.

So, the starting point is to research your customers: identify their weaknesses and insecurities and assess how well your product addresses them. Rethink the benefits of your product and make sure it genuinely caters to buyers’ needs. This is imperative for increasing your goods perceived value.

2. Evaluate your customers’ buying power

Customer preferences and tastes are very important to generate an effective pricing strategy. If you can make your product or service meet those specific needs, the perceived value is likely to increase. However, you need to make sure consumers will be able to afford your goods. Your pricing ranges should align with your customers’ projected budgets.

3. Adjust your prices

The perceived value of your product or service depends on how much your potential customers benefit by obtaining it. Higher prices represent quality for consumers and they don’t mind paying more for products that deliver a little bit extra. Premium brands are the best proof of this. Maybe it's time to show your potential customers all the benefits they are going to get when they purchase your product.

However, if you cannot boast higher quality goods, do not overcharge – make sure that your prices correspond with the value you actually deliver and stay agreeable compared to the rates of your competitors.

4. Leverage customer value marketing

The more options a market offers, the less willing are customers to pay for your product. This is because they will have the opportunity to compare your items to alternatives and enjoy a wider choice.

An effective way to be relevant even in case of fierce competition is to show your value proposition within your marketing strategy, making your product or service stand out from the crowd. Brands that use the perceived value method successfully highlight the unique characteristics of not only their products, but the business itself.

How to Know Price Perception?

Before you start leveraging any price strategy, it is important to ask yourself “What do customers think about my current pricing?” You can run surveys and tests to find this out, but keep two things in mind.

First, price perception is a very subjective concept because it depends on different psychological factors and experiences unique to each customer. Second, this is not a stable value and might change over time under certain circumstances.

Hence, instead of asking consumers directly, you should analyze your sales volumes and consumer behavior depending on how much you charge. This is where price intelligence software may come in handy: it will provide statistics on purchases and competitor rates, which can serve as a great starting point for your pricing strategy.

How to Adjust Consumer Price Perception

Here are a few recommendations for correcting value perception by presenting prices for your products or services:

  1. Make your price visually smaller. Our brain is conditioned to conceptualize quantities. It prioritizes the size of the numbers over their value. So if you want your prices to be perceived as lower, reduce your font size or do not use decimals – a few cents aren’t likely to make much difference for your profit margin.
  2. Use small magnitude words. When choosing the words you are going to use near your price (visually), choose the ones with the meaning of “less” or “smaller”. For example, “low maintenance cost” will be received better than “high performance”. The vocabulary you choose will influence the perception of your prices.
  3. Separate delivery and handling costs. At first glance, it is very convenient to include shipping expenses in the product cost. However, when buyers see competitors offering more agreeable rates, they would rather buy their items, even if shipping expenses will be charged separately at the checkout stage.
  4. Offer payment by installments when possible. If you offer 5 payments of $99 instead of a single payment of $500, the price will be perceived as smaller. Your offer will be more attractive to your clients. There is a big difference between $99 and $500, and the comparison will be to your advantage.
  5. Be specific with higher prices. According to one study of the price precision effect, buyers are willing to pay more money when the price is specific. For example, the price of $14,884 is considered to be significantly lower than $15,000. The precision of the numbers triggers a psychological association with smaller numbers, which influences the client’s price perceptions.
  6. Track the market and stay proactive. If you run an e-commerce business in a highly competitive niche, there is no need to manually analyze prices – automate the process with the help of price optimization tools and receive data-based suggestions using repricing software by Priceva. These solutions will provide real-time market data, enabling you to maintain sustainable pricing strategies.

Conclusion

Price is one of the most important aspects that buyers pay attention to. Pricing can both make your goods more attractive, or avert consumers who think you charge too much.

At the same time, price perceptions do not always reflect the real cost of a product or service, since its worth may be different for certain people. That is to say, there is no ideal price, but as a retailer you should strive to cater the most optimal pricing to as many consumers as possible. A thought-through pricing strategy coupled with advanced price tracking software will enable you to do just that.

FAQ

What affects price perception?

Price perception is made up of a multitude of factors, including overall value delivered, product quality and the customer’s previous experience of using it, the brand’s reputation, as well as its marketing efforts. All these points can be divided into logical and psychological, or internal (that depend on a specific customer’s mindset and experience) and external (that depend on the brand and the market).

Why is the price important to customers?

Every customer has a different budget and buying power. Everyone strives to get the best value possible for the price they are ready to pay. Besides, people tend to compare the cost of different items and figure out some reference price for a particular product.

How does price affect consumer behavior?

Depending on how they perceive a price – fair or exaggerated – customers can decide to purchase a product or turn to your competitors in search of alternatives. Since price comparison is comparatively easy and fast in the e-commerce niche, buyers often put this factor above others.

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