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  • Writer's pictureDr. Gary Witt

How Buyers See Price

In a previous article we looked at ways in which you can influence a customer's evaluation of your prices. Here we'll look at the psychology behind price perception, and how you can use this knowledge to better understand your customers' behavior.

Most buyers do not have an accurate perception of price, even of those items they buy frequently. A supermarket study found that over half of store shoppers could not guess the price of 57 of 59 common products (Kraft mayonnaise, Scott towels, Maxwell House coffee, etc.) within 10% of their actual price. The study suggests that if most consumers don't know the price of items they buy every week, they have even less of an idea of the exact cost of most goods and services.

The Elastic Price Scale

What this means for you is that there is some price elasticity in the minds of buyers for many products, and even more elasticity in the price of services. By employing other marketing techniques, it is possible to create the impression of "low cost" or "high value" with little or no actual change in the price of your product or service.

Buyers generally see price on a sliding scale, like this:

If the price is seen as . . . "Way Too Low" ________________________ "Way Too High" 1 2 3 4 5

Buyers may think. . . "Something's Wrong" "That's reasonable" "You're Kidding"

The ends of the scale are bounded by what the buyer perceives to be a realistic price range for the type of product or service. For example, a steak dinner might have a range between $10.00 and $50.00. The buyer can imagine paying $10.00 for a steak at a cheap restaurant chain, and $50 at a top place like Morton's. That isn't to say the buyer would actually make either choice, but at least it is imaginable.

Your prices must fall within this "imaginable" range!

A $20 price for a steak might elicit a #3 rating and a reaction of "about right." A $50 steak dinner at The Steak Hut may be evaluated as "it's over-priced" while a similarly priced dinner at Morton's may be seen as "expensive but worth it." The buyer's response to the price depends on other factors like the restaurant's reputation and its image.

Note that the buyer's reaction has little to do with desire or intention to make a purchase, only a judgment on the price relative to their idea of a reasonable price range. The boundaries of a buyer's price range are relative, depending on many factors, including the socioeconomic class of the buyer, education, age, past experiences, etc.

Fair or Unfair Price?

In general, we use labels to rate things, then use those ratings as the basis for recalling our evaluations, and making future buying decisions. One of the most common label sets is "fair" or "unfair." A "fair / unfair" rating depends on the perceived value of the item in relation to its price on the mental price scale for that item in our minds.

If the price is . . .

"Way Too Low" ________________________ "Way Too High"

1 2 3 4 5

Buyers labels: < < < FAIR UNFAIR > > >

The higher the price, the more likely the item will be ranked as "unfairly" priced, and rejected. The vendor must provide more "value added" features to make up for the higher price. A $50 steak dinner, for example, must not only taste wonderful, but the buyer must receive "extras" such as an elegant setting, fine service, live music, large portions, valet parking, and so on.

On the other hand, low prices are not seen as "unfair," just unrealistic. (And that can be enough to set off alarm bells.) This gives a distinct advantage to sellers who are able to occupy a particular price position in which they are seen as offering good quality for a lower cost. For example, we have a general idea that fancy European coffee (like latte or espresso) sells for between $3.00 and $5.00 a cup, because this is the price at Starbuck's, the brand leader. Any store charging $7.00 would likely be seen as having an "unfair" price, but $2.00 would be a bargain.

Chances are that if a restaurant offered "coffee with steamed milk" and "latte" side by side on the menu for $3.00, they would sell vastly more latte -- the name is a key part of the product's evaluation. As you can see, "fairness" is a relative concept, and depends on a number of different ideas in the buyer's mind which relate to price. You must understand the buyer's thinking as you decide on your price and your message.

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