High quality vs Low-Cost Bargain: The Current Dichotomy! (XVII). Psychological aspects of our perception when it comes to pricing.
A new week of March, and here we are again for you. There is something that we have to admit. There is nothing more psychological in marketing than pricing. Excellent price specialists are “out of this planet” psychologists. They understand how to deal with buyers needs, wants, emotions and perceptions of what is behind a price to capture the client’s faith or confidence to buy. Regardless if the EVC has been designed for an economy or a medium price or a premium segment; when we perform pricing using the value based approach (EVC), the perception of the product and service that each client has of it, is linked with the psychological motives of him or her to buy it. And the motivation to buy is what makes us pay the price when we choose one product over another one. So where does motivation come from? Which are the drives that power human behavior? When answering these questions we have to comprehend that pricing is simply a measure of the consequence of our perceptions and motives.
The drive or motivation to buy something that will satisfy our needs and wants is connected with multidimensional factors, inside us and around us that cause us to understand each product price in a particular way at a particular time. Lots of factors, such as our genes, our learning histories, our personalities, our social experiences , all contribute to our motivation to buy. Internal conditions that push us toward a goal are called drives. External motivations are called incentives.
In general our perception of the price of a product and service triggers in us the motive to buy it or not. It is more than our budget (or our income) that can trigger the motivation to buy something. Otherwise, how do we choose for debt or many installments, instead of paying the total amount in cash?
These motivations are used by price specialists and marketers to make us buy something around the VEL (Value Equivalence Line) when the method to price is the Value-Based Customer approach. In addition, each of us as buyers is particularly different to respond to a price because of:
- Our upbringing systems and groups of reference
- Our Core Values (usually instilled by our family and school)
- Our income. What we earn determines not just our options but our limits when it comes to accept a specific price.
- Each client personal perception about the meaning and interpretation on how to satisfy our needs and wants. Our drives are so ample, starting with the basic homoeostasis needs (the biological equilibrium that our bodies make to keep us alive) that are expressed in a feeling drive of being hungry, thirsty, angry, sleepy or aroused/attracted by someone from the opposite sex. Moving on up our basic needs, we also move our type of needs and wants from primitive to more advanced goals. At the very bottom our most basic biological needs like hunger and thirst. Then the next ladder is our need for a safe shelter and security, In the middle of our escalating necessities are our needs for knowledge (education) and a sense of belonging; and at the very top, are the spiritual needs that allow us choose for affiliation to identify with all of mankind, instead of only searching for achievement and power.
The price of each product and service that you buy is designed to trigger to you the desire to buy it. Or not. Pricing specialists that utilize the value based consumer approach need to be psychologically trained first formally and then with several years by experience. For example, I can’t hire a price specialist without at least checking that he or she has a Bachelor Degree in Marketing, PLUS at least 2 or 3 years of formal psychology university education and at least 5 years of experience in pricing teams. Pricing is one of the most important activities that can´t be left over in machine learning or big data automated artificial intelligence calculations, because pricing with a Value-based approach relies in psychological motives (drives, incentives), needs and wants of different levels and more importantly, in emotions.
Emotions in motion when pricing. Regardless the economic situation of each of us, we all have emotions. And emotions makes us buy something with a particular price. We all (from the extreme poor up to high-end rich) have the same basic essential needs and wants. But as soon as we scale up in our motives, the emotions play a crucial role when it comes to accept or not a specific price based on value differentials.
Beyond our perceptions, emotions are whole body experiences, feelings, mood, thoughts, and bodily sensations. There are at least 6 universal emotions that show up in us when we see a price: sadness, anger, disgust, fear, happiness and surprise. It is our perception about a price that triggers a specific emotions, and price specialists are aware of this. If we don´t know how to manage our emotions, we end up buying based on them.
For example: Some days ago my mother requested me to help her to buy a new mobile phone. Her request was: “Please help me to decide which is the most convenient mobile phone that I can buy to my internet service provider, Telefónica-Movistar, under a payment system of convenient-budget-friendly monthly installments?”. I asked her: “How much do you want to spend on your new mobile?” She answered: “I don’t want to pay more than US$150 dollars”. She added then “I don´t want to change my pre-existing unlimited internet/calls package”, but only to buy a new mobile phone.
My mother perception of the price was extremely specific. She linked the action of buying a new mobile with her phone-internet provider. Why? She also told me to accompany her to go in person to the mall, to the Telefónica-Movistar shop to help her to decide for the best option. My reply was: “Wait a minute, let’s get first informed”. I helped her to visit several phone and internet-phone suppliers. And she decided that she wants to buy a Huawei Y7P model. Why a Huawei, instead of a Motorola, or Nokia, or LG, or Alcatel or Samsung equivalent models? The selection process was based in the phone attributes of what she believes suits her better for her needs and wants.
Let’s see our pricing comparison analysis of the local available options (by competitors who sell the same item):
My mother changed her initial mind of going to Telefónica Shop to buy the Huawei Y5 Neo (which was her first option), not just because it wasn´t the model that fulfilled the attributes that she was looking for (enough RAM, at least 64GB memory and size) but also because she doesn´t need a new internet/call package. She also doesn’t want to end paying US450 dollars (24 installment payments) to the internet service provider. When she understood that she can get a better option, the Huawei Y7 P for a reasonable price at Pricesmart, she decided to buy this pick.
Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be. It is not the marketer or the company stated price that matters, but the consumer acceptance of the price that is relevant here. Of course as anything in life, there are different type of customers: Some which are price takers of any pricing scenario, these clients accept prices at a “face value” from companies, or as a given. These are the customers with a low degree of analysis that do not make intelligent smart decisions, neither compare attributes by quality or by EVC or not even by price only (or a mix of them). And you can find these clients buying in the economy quadrangle, in the meeh medium scenario and in premium segment. But as human beings that are educated, we can search to be informed. Since the advent of the Internet and mobile communications, we can compare a lot. Nowadays we can compare prices using internet marketplaces or social media, and even before buying, we can go to the shop establishment to be sure of our choices.
Price Scrutiny. Given the rising analytical comparison that “educated consumers” have learned through the years, buyers are often processing price scrutiny. Buyers also tend to get informed by other client´s reviews which are written in each social media platform or B2C website. People are getting used to interpret comments from others´ prior purchasing experiences. In addition, when the EVC for the customer is meaningful, they get informed by visiting shops to see the product, and not rely only in advertising, brochures, or information through phone-calls and instant messaging.
When a customer takes its time to understand and compare prices, they tend to rely much more into:
- Reference Prices
- Price-Quality Inferences
- Pricing cues
- Reference Prices: Every single consumer has a fairly good knowledge of price ranges, but surprise, surprise, only a few can accurately remember or recall specific prices. For example, each housewife or household responsible of a family on earth, knows exactly what he/she pays month by month for its food/maintenance basics: milk, eggs, grains, flour, pasta, oil, chicken, veggies, fruits, toilette paper, detergent, and cleansing personal items. Regardless the type of society culture or if these products come in boxes, raw-unprepared, processed or in bulk, each person responsible of a household knows by heart how much she/he spends in each and all of these basics. Those who are budget constrained, particularly the low-working class are always trying to save some bucks. Given their budget limitations, each household overseer employs, psychologically, the concept of reference pricing. For example a sack of 25 pounds of corn nixtamal flour to make tortillas in El Salvador can be bought between US$7.00 to US$11.50 dollars (depending on the brand name) in the central market of San Salvador, with the wholesalers. If we assume that a household caretaker likes the Tortimasa Brand, and he/she has a family of 5 members, it is obvious that he will buy the corn-flour with the wholesalers, and not in the supermarkets, where the product is more expensive. In this specific case, the price of the 25 pounds Tortimasa flour is US$7.50. And this amount covers the needs for tortillas for this family for a month.
How much does this household superintendent pay per pound of corn masa flour? Simply divide US$7.50 between 25 pounds, and each pound of corn flour price is US$0.30 or 30 cents. If this person wants to buy the same product at Dollar City (Dollarama store), he/she can buy the same brand in a format of 2 pounds at US$0.69 (34.5 cents per pound). If he/she shops it in Walmart or Selectos Supermarkets retail chains, he/she can buy the Tortimasa pound of corn flour between 35 cents up to 57.5 cents per pound.
When the household supplier examines the pricing of other corn masa flour brands (either by using the Internet website or by watching the products on the supermarket shop rack, then psychologically the brains compare the observed price, with an inner reference price they can remember (from the last price paid he paid last month) or then he can observe the discounts in an external frame of reference (provided in a yellow price tag by the supermarket) such as a posted under discount or “regular retail price”. This comparison is a price of reference band of corn flour prices per unit of analysis. And it is built inherently inside each of the buyers. Naturally, the client know immediately what to buy according to their quality or preference standards. For example, there are some families which are pickier about the flavor and texture of the tortillas, and if they have pre-established a corn flour brand that satisfies their palate, no low price or discount will make them change their favorite brand of corn flour, not even for budgetary reasons.
Price References of Corn Flour. If you analyze the prices, let’s see the possible consumer reference prices that are usually common in all of us:
|Possible Indicators Consumer Reference Prices||Price for a pound of corn masa flour||Explanation|
|Fair Price||40 cents||A fair price is what a consumer feel the product should cost|
|Typical Price||45 cents||Average price in supermarkets|
|Last Price Paid||30 cents||Paid to the wholesale distributor in the Central Market|
|Upper Bound Price||60 cents||Reservation price or the maximum most consumers would pay|
|Lower bound price||30 cents||Lower threshold price or the minimum most consumers would pay if buying in bulk|
|Historical competitor prices||Range of 40 to 55 cents||Distribution of prices in supermarkets during the last 12 months.|
|Expected Future Price||35 cents in supermarkets||Discount of 5 cents in 15 days from now (Easter promotion)|
|Usual Discounted Price||34.5 cents||This is the Dollarama price.|
|Wholesale Price||30 cents||This is the price when buying a bag of 25 pounds in the Central Market of San Salvador.|
What happens with non ethical sellers? Some sellers are not the most ethical ones (particularly when there is not regulation neither strong entities supervising), and when it comes to be diaphanous sellers, not all companies are limpid enough. And these companies know that most of us are very poor lie detectors. For example, a seller can situate its meeh medium average quality product in the middle of expensive competitors to imply that it belongs to the same class. Another case is when department stores display apparel in separate sections differentiated by price. So we assume that any dress in the more exclusive expensive sections are pretended to be of better quality. And that is not always the case. In addition, some marketers are always encouraging reference-price thinking by setting a high manufacturer’s suggested price next to the discount one, indicating that the price was much higher originally, or pointing to a competitor´s high price (and there is not correlation to compare). When we buy manufactured items, we assume that the raw inputs are of best quality if the price tag is high or when it is advertised as such, but that is also not always the case.
Surprise, surprise! Consumers who learn to compare attributes of products and services before opting for a price are wiser and studied before choosing only for low-price. And, these buyers are able to find surprises. Either an unpleasant surprise or a pleasant surprise. When a client perceived price is different than the stated price (either lower or higher), this can have a greater impact on purchase likelihood. For example, a pair of jeans: How can we explain that a jeans (of the same mid rise boot cut model, color and size) can be found in the Gap website at US$ 69.95 (with discount of online exclusivity at US$53.00), then the same model jeans at Banana Republic is advertised at US$110.00 plus shipping (with a discount of 50% off at US$59.00); and you find it in the Old Navy at US$34.99 (with a hot deal promotion price of US$25.00); and then you find it in Armani at US$220 dollars? Of course the Armani jeans composition is 48% viscose, 32% cotton, 14% lyocell, 4% polyester and 2% elastane. Meanwhile the Gap, Banana Republic and Old Navy are 55% cotton, 40% Lyocell and 5% recycled cotton.
In addition, the Armani bootcut jeans is perfectly cut than the rest of brands, but how does it commands a US$220 dollars price tag? What type of surprise causes you this pricing comparison? An unpleasant or a pleasant? It depends on you. If you value not only the quality of materials, or the amount of years that will last you an Armani expensive item, or your income is above US$100,000 dollars per year, the money to buy a brand´s luxury jeans that will last you at least 20 years or more is probably well spent for your lifestyle. But if you can’t afford a luxurious jeans, because your salary is of a low middle income class, even the Old Navy item of 25 dollars will be considered as high-ticket. It is well possible that you end up buying a no-brand imported Chinese 10 dollars jeans in the streets of an ambulant market in the center of your city.
2. Price Quality inferences: Many consumers use high pricing as an indicator of high quality. They expect that sellers that trade high-end pricing especially with ego-sensitive products such as perfumes, cosmetics, expensive cars, yachts, luxury glasses, designer clothing and gourmet artisan food must be expensive. For example a US$3,800.00 dollars bottle of Channel Extract Gardenia (30 .4 Fluid Oz) perfume is pricey because it contains the pure concentrate extract of the flowers. Meanwhile the Eau of perfume Gardenia (6.8 Fluid Oz) price is US$350.00; it is diluted in water, but it communicates a high regard for those who buy it to gift it to someone else.
In addition, some brands adopt exclusivity and high prices when scarcity of them signifies uniqueness. The scarcity of the product (or raw materials of it) justifies a premium pricing. This is the strategy to follow when selling beautiful premium art, which is a luxury good when the artist-painter is able to be recognized by his/her industry peers because of the top quality and dedication. Other luxury goods are handmade precious material watches, expensive stones jewelry, excellent wines, leather handmade luggage and bags, haute couture clothing, yachts, and high-end luxury quality cars. For luxury-goods, customers who wish uniqueness, demand may actually increase prices because they are scarce, and because they know that fewer other customers can afford these products.
3. Price Endings. Many sellers believe that prices should end in an odd number, particularly in the popularity of the number 9. Customers who see items ending in a 9.99 believe that 9 endings suggest a discount or bargain. Believe it or not, a product priced at US$2.99 can be perceived as less expensive than one listed at $3.00, even if the difference is just one cent.
I will stop here. It has been a long post. We have covered subjects number 9 and 10 from our outline. See you next Friday again. Blessings and thank you for reading to me.
Source of theory reference for this article
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
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