Pricing is a psychological game
Written by Shirley Lichti for The Record, June 20, 2001

Of all the elements in the marketing mix -- product, price, place and promotion -- the only one that contributes directly to a company’s bottom line is price. Yet, pricing can be a psychological game.

If consumers perceive prices as being too high, they may buy competitive brands or search for substitute products. And if prices are set too low, it will ultimately hurt your long-term profitability.

Very few customers will ever tell you when you’ve set your prices too low, but you can be sure they will let you know when they are too high.

Given the cost structure of most large corporations, a one per cent improvement in price yields an average net income gain of 12 per cent. In some companies, a one per cent improvement in price could mean the difference between a profit and loss.

So it’s definitely worth your while to spend the time determining what price your consumers are willing to pay.

Many companies do not understand the value of their products or services. As a result, they base their prices only on their costs or on competition, rather than on customer perception of value.

Luxury car manufacturers understand perceived value. They know that high prices signal exceptional quality to their customers.

As a result, more than 70 Canadians have plunked down $50,000 deposits to be on the waiting list for the ultra luxury Vision SLR from Mercedes Benz. The car, which has a list price of $500,000, will be launched in 2003.

Gardening supplies provide another example of how important perceived value is in determining the price consumers may be willing to pay.

Last year gardening was ranked North America’s Number 1 pastime, with consumers spending over $7 billion on plants and accessories. Some homeowners now treat their gardens as investments rather than just valuing them for their aesthetic value.

The result? Mature Japanese maple trees now fetch up to $50,000 and a mature rhododendron as much as $5,000. The perceived value of hand-picked rocks results in price tags of thousands of dollars.

There are many other pricing tactics that can be considered. One is bundle pricing, where several products are sold together at a single price to suggest good value.

Some examples of products or services sold this way include personal computers, stereo components and vacation packages, which may include travel arrangements, accommodation and meals.

Another aspect of pricing relates to services, which can be quite different from the pricing of products. Services are intangible, so perceived value is even more important.

Because there are so few other cues for a customer to judge service quality, price sends out an important message. Pricing too low can be just as harmful as pricing too high. For example, how many people would hire a $50 divorce lawyer?

In addition to contributing to the bottom line, the right price can be a tool to control capacity management. An accountant who is too busy can raise prices. While some clients may take their business elsewhere, the remaining clients will be more profitable customers for the accountant.

Alternatively, off-peak pricing at movie cinemas, hotels, and airlines can be used to stimulate demand by charging lower prices at less popular times of the day, week or year. For example, airlines offer specials on weekend travel and movie theatres offer discounts on matinees.

While promotional pricing may work very well for some organizations, it can be the kiss of death for others.

Consumers may be motivated by a dollar off coupon to get their hair cut at First Choice Hair Stylists. However, if an accounting and business consulting company like KPMG were to offer a two-for-one tax promotion, it would likely leave people wondering about the quality of their service.

Company objectives can also play a big role in setting prices. Not every company is interested only in profit maximization. Research has found the most common pricing objectives are pricing to achieve a target return on investment, stabilization of price and margin, pricing to achieve a target market share, and pricing to meet or prevent competition.

Many factors need to be considered when setting prices. Companies definitely need to understand their cost structures as well as the competitive environment in which they operate.

But remember that pricing is a psychological game. So, along with other pricing strategies, be sure to spend some time to understand the perceived value of your products or service.

Start by considering your target market. Who are your customers? Are they price sensitive? Are they buying to fill a need or a want? Is the product or service they are buying an impulse decision or a carefully thought out purchase? How often do they purchase?

While you may never sell a $50,000 Japanese maple tree, if nothing else you should end up with a better understanding of your customers, and possibly with a healthier bottom line.

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