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SETTING THE PRICE

     
     

        How To Use Price Perception to Sell More

      "Buy low, sell high" is the formula for success in the stock market and

    the business world. Fortunes have been made on all sorts of odd items by
    following that dictum, from tulips to domain names. Of course, the trick
    is like the old joke about how you make rabbit stew: "Step One, catch a
    rabbit."
      There are numerous ways to look at pricing. Our focus in these next few
    columns will be how to use price to support your overall marketing
    strategy, to use price as a means of persuading your buyers to accept
    certain ideas, and to create the image you desire in their minds.
      Price is all in the mind. Here's an illustration: If I were sitting there
    with you now and said, "I'll sell you a gallon of water for $100," you'd
    laugh at the joke. But if you were out of water in the desert, you'd start
    looking for your cash. Recently a gas station in Tennessee received
    national coverage for charging $4.95 a gallon to protest the higher prices
    they were paying to a big oil company. The funny thing was that while the
    NBC crew was shooting the story, a woman drove in a bought two gallons of
    $4.95 gas -- she was on empty and worried about getting stranded.	
    Customers expect a "fair" price. But "fair" is in the mind of the
    beholder. Look at perfume. You can buy a six ounce bottle of a very nice
    smelling perfume at Walgreens for $6.00. If you want Chanel No. 5, go to a
    fine department store, where they'll let you smell it for $6, but just one
    ounce will cost you $250.
     
    Psychology Can Add Value
      Why the 4000% difference in price? They both smell very nice. The
    difference isn't so much in the bottle as in the minds of the women who buy
    Chanel for $250. They know that Chanel gives them a number of
    psychological "value-added" features -- they know their friends will
    recognize the scent and admire them for their good taste; they know they
    will feel good about themselves when they wear it; and they know that it is
    part of the overall special image which they project to their husband,
    friends, and business associates. In short, they are willing to pay for
    benefits which are not even in the bottle of Chanel, but in people's minds.
      Oddly, the reverse can also be true. A survey of grocery stores which
    primarily serve Hispanics in the Southwest found their customers believed
    these store offered lower prices than more well-known chain stores nearby.
       In fact, the survey found the stores had comparable or even higher prices
    on many items, and that many patrons could actually save money while
    getting higher quality by shopping elsewhere. But buyers were convinced
    that the utilitarian features of the store meant they were spending less on
    operations, and passing on the savings to their customers.
      A similar thought process goes on in the minds of those who go to flea
    markets or bargain-basement clothing stores. In Illinois, for example, the
    Farmer Store sells clothing of all sorts at a discount, displaying
    everything from shirts to shoes in huge tables bordered with six-inch
    planks to keep merchandise from spilling on the floor. At first they tried
    to keep the apparel neatly in stacks, but soon found that people bought
    more if they had to sort through mounds of clothing. Shoppers were
    convinced that if the merchandise was displayed that way, it had to be cheap!
      The lesson here is that the price can been seen in many ways by buyers, as
    fair or unfair, high or low, depending in part on factors which have
    nothing to do with the actual product or service being offered. By
    understanding the ways in which you can manipulate these other factors, you
    can price your products and services to provide the greatest overall return
    on investment.
     
    The Buyer's Mental Price Scale
      There are two major types of influence on the buyer's evaluation of your
    price. (1) Those you control, and (2) those you don't. Those you don't
    control are generally related to the buyer's past experience, while those
    you do control are related to your advertising messages.
     
      Influences on their price perception you don't control:
      (1) Past experience with that product line: If you know you paid about
    $3.00 for a cafe latte at Starbuck's, you're more likely to think $5.00 for
    the same drink at Coffee Plantation is unfair. If you've never bought one
    before, you have no reference. That's why companies with products that
    expand into new areas have a great deal of flexibility regarding price.
      (2) Knowledge of what others paid: If your neighbor paid $40 for a cab
    ride from O'Hare into Chicago, you're less likely to think that price is
    unfair. You have a basis for judgment.
      (3) Recalled advertising: This is one of the major problems with frequent
    discounting -- people remember that the product was much cheaper two weeks
    ago, and will likely be on sale again. Whether they buy it or not, they
    will feel that the price is too high, and if they buy, they'll not be as
    happy with the price they pay as they otherwise would have. That's why it
    is often smarter to ADD value to a product as part of a promotional deal,
    rather than just cut its price.
      (4) Brand name perception: We tend to think that well-known brands which
    have a reputation for higher quality will sell for more. Numerous studies
    show that consumers use a brand name as a substitute for product quality.
    "Bayer means quality," which is the reason Bayer aspirin can charge double
    the store brand's price for the exact same product, and sell millions of
    units every year.
     
      This is especially true when it is hard for the buyer
    to quickly and independently evaluate the quality of the product. Shoppers
    can look at the chicken in the package to see if it looks good, but they
    can't tell whether the store brand aspirin is good until they have a bad
    headache -- and that's too late! [Yes, the chemical make-up is on both
    labels, but long scientific words just confuse most ordinary people.]
      (5) Common sense: When a product's price falls so far out of the range we
    expect, it goes against our common sense to believe the price is correct.
    Common sense is a huge hurdle for a seller to try to overcome. One of the
    great challenges Starbucks faced was to get people who were used to paying
    a dollar for coffee to spend three or four times that amount.
     
      Influences on price perception which you do control:
      (1) Price comparisons you offer: Sellers can influence a buyer's
    perception of their price by providing information about what others sell a
    comparable item for, such as the clothing price tag that says, "Suggested
    retail price: $X" or "Sold elsewhere at $X." This is effective for two
    reasons:
      First, people don't recall exactly what the item sold for when they saw it
    (if they ever did). One recent study found that a majority of shoppers
    couldn't guess the price of over 90% of common purchases like toilet paper
    and milk within 10% of their actual selling price.
    Second, most buyers will take your word that the quality of both items is
    equivalent. Discount clothing stores have used this one technique to sell
    millions of dollars of shirts and dresses, often making comparisons which
    are not strictly 1:1.
      Keep in mind that if you use a "Suggested retail price" which is higher
    than the estimated price range in the buyer's mind (whether it is true or
    not), the "suggested" price will not be used as a reference, and your
    credibility will be damaged. For example, if buyers think that Hathaway
    dress shirts sell for between $30 and $40, and your "suggested retail
    price" says $50, they'll suspect that you are trying to manipulate them and
    think less of you for it.
      (2) "On Sale" signs. Buyers are generally trusting people. If you tell
    them an item is on sale, they'll believe the price they see is lower than
    the one last week. In general, buyers will believe that an item on sale is
    a better value than one which is not. This assumptions rests on another
    fundamental belief of most buyers -- that products and services are usually
    priced fairly, based on the whole "package" being offered.
     
      If you see an ad for a leather coat at Macy's which is 40% off, you're initial reaction
    is "That's a bargain," not "I wonder if it was overpriced to start with?"
    Of course, the problem with sales is that you make less on that unit of
    merchandise, so you have to hope your overall volume will make up for it.
    Sales are best used to attract people to the store where they can be
    exposed to full price. Supermarkets regularly put a few common items on
    sale each week, selling them even below cost to bring in more shoppers.
      (3) Discounts: There are three common types of discounts used in
    advertising: (a) Discount Range; (b) Exact Discount; and (c) Upper End
    Discount. These three methods can create different perceptions about the
    same discount.
      (a) The Discount Range promises you'll save something ("10% to 40% Off!")
    depending on the item you select. A different approach is to state a
    minimum discount ("Save 25% or More!")
      (b) Stating the exact discount offered ("Christmas cards 50% Off!") gives
    the buyer greater certainty of what to expect. Research shows that stating
    an exact discount is as effective as stating a range, when that range is
    small ("10% to 20% Off!").
      (c) Using the Upper End Discount is often the most attractive and
    effective method of gaining buyer attention, interest, and action. "Save
    up to 70%" is usually more effective than a range, because the lower number
    in the range takes some of the focus off of the higher number, and it is
    usually the one read first ("Save 30% to 70%!"). This is especially true
    when the discount is large. But be careful not to mislead people with this
    pitch. Having one item at 70% off and fifty at 10% off is a sure way to
    make them mad.
      (4) Using the word "Only": The word "only" implies that others are
    selling similar items at a higher cost. Often this technique for
    manipulating the buyer's perception of the price is paired with a
    comparison technique, such as "Only $X! Compare at $Y."
    These techniques focus on some ways to make the price appear more
    attractive, but there are more effective ways to get the price you want by
    creating a perception of quality and value in the buyer's mind. That is
    the focus of part two of this series -- Click here to read "How Buyers See Price"
     
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