Price is all in the mind of the buyer. 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.
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 a small bottle will cost you $250.
Use Psychology to Add Perceived Value
The difference is in the minds of the women who buy Chanel. They know the brand is high-class and they expect to pay more for it. And they know the high-class image 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 a much higher price for benefits which are not even in the bottle of Chanel, but in people's minds.
The lesson here for retailers is to use your marketing to create an image of your product or service which is high-class, high-worth. Then buyers will expect to pay a premium for it.
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! It wasn’t, but the perception created by the display made customers see the price tags as cheaper!
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 that you can manipulate these other factors in your marketing message and display, you can price your products and services to provide the greatest overall return on investment without having to cut the price.