Factors of price perception: how do buyers evaluate the product?

14.03.2023 14:09

Author and content analyst on trade automation

What is price perception?

Price perception is a subjective, emotional evaluation of a price by a buyer. Each buyer has his or her own ideas and beliefs about what is "expensive" or "cheap" and the benefits he or she will receive by investing in a purchase.

Accordingly, it is rash and hasty for a business owner to think that by raising the price of a certain product, he or she will immediately lose his or her customers. Similarly, lowering prices does not mean an immediate increase in loyal customers.

Issues related to pricing are studied from the perspective of the consumer, retailer, and manufacturer. If the customer has the right idea of the price, it can become a significant competitive advantage for the store.

Market research conducted in the early 00s showed that a negatively perceived price can cause more customer dissatisfaction than the absence of a certain product on the shelves or an insufficient level of service in a store. While manipulations with the arrangement of goods in the sales area increased sales by 5-6%, manipulations with price increased sales by 32%. This suggests that price plays a leading role in the product promotion strategy.

A number of factors influence the customer's perception of price:

Novelty factor

One of the main factors of price perception is the customer's previous familiarity with a product or service. The more familiar the customer is with the product and its characteristics, advantages and disadvantages, the more loyal the price perception is. On the contrary, if the product or service is new to the customer, he or she often perceives the price as too high due to lack of familiarity with the product.

Positive experience factor

Price perception is a dynamic process and can change over time. If the customer receives additional benefits or positive experience from use, he or she can calmly and understandably react to an increase in the cost of the product in the future.

The factor of store format

Representatives of the Stockholm School of Economics, Ylva Noren and Johan Lind, developed flyers offering to buy chilled chickens at a high price of €10.90/kg or a low price of €4.90/kg. The leaflets were distributed in a traditional grocery store, the ICA supermarket, and in a discount store, Netto. The results:

In both stores, the lower price (4.90 €/kg) was perceived by customers as more favorable,
in the Netto discount store, the higher price (10.90 €/kg) was also perceived as more favorable,
in the traditional ICA grocery store, customers believed that the chicken was of higher quality.

The format of the discount store influenced the perception of price, while the format of the traditional store influenced the perception of quality, which means that the perception of price by customers depends on the format of the store where the product is sold.

Subconsciously, people trust more those stores that specialize in selling a particular type of product and react normally to price increases in them.

Influence of the situation on price perception

In addition, price perception is influenced by the context of the purchase, i.e. the situation in which the buyer makes a decision. For example, if a customer really needs a product, he or she is willing to buy it even at a high price. This is in contrast to the case when the purchase is just for fun.

For example, if people buy pizza to eat with friends or for pleasure, they choose a more expensive pizza and do not consider it expensive. Conversely, if they buy pizza simply to avoid cooking dinner at home, the perception of price may be decisive in the choice and not in favor of the more expensive product.

Does the buyer remember prices?

The traditional theory of customer price awareness is based on the fact that customers mostly remember prices and compare products in stores based on price. However, in 1990, Peter Dixon and Alan Sawyer conducted a survey and found that the perception of price reductions during sales is often overestimated by 10%. Their findings were shocking at the time:

Shoppers did not know how much goods cost: less than half of the shoppers were able to correctly name the price of the item they had just bought, and the quoted price differed from the actual price by an average of 15%.

Shoppers overestimated the size of the discount: less than half of all shoppers were aware that they had purchased a product on a special offer. Thus, the discount was not a strong signal for customers to buy.

Customers could not remember the price tag they had just seen on the product.

However, there is still a significant number of shoppers who pay close attention to prices. These shoppers compare prices in different stores and are more likely to buy products on special offers. They are easy to identify:

They spend more time at the shelf with the product they want or on the product page,
they are interested in discounts, demonstrate their awareness of the range and dynamics of prices,
and are willing to wait.

It is easier to sell to such customers by offering "special conditions" - an individual discount, promotional code, kit, gift, free shipping, etc.

Factors of price memorization

However, other scientists Kent Monroe and Angela Lee later challenged the previous study: "How can a buyer who is unable to correctly name the price of an item they have just bought, yet still evaluate that item as inexpensive, for example? Similarly, one might ask whether a buyer would really ignore the price if the price tag on a bottle of Coca-Cola reads €30?"

Based on Monroe and Lee's article, French researchers Marc Vanuelle and Xavier Drez hypothesized in 2002 that price memorization is influenced by the specific memory used by the customer at the time of purchase, i.e. there are three types of memory that store price information:

Verbal memory - when we are aware of and can reproduce information of only one type. For example, "this juice costs sixty-seven hryvnias".
Visual memory - "reads" the price tag - 67.50 UAH.
Price range memory - we memorize an approximate price range: the price of this juice varies between 60-70 hryvnias.

Depending on the situation, the buyer relies on the type of memory that is most accessible at that moment: verbal memory works best during promotions ("the juice cost 67 UAH, and now it's 59 UAH - we buy it"); price range memory works in product categories where buyers often make purchases ("sugar should cost between 30 and 40 UAH - it's within the normal range, you can buy it").

This study is useful because it helps to understand the factors that influence consumers' price awareness.

Among other things, the study identified the following factors of price perception:

→ the more frequent the store's promotions, the better customers distinguish between normal and discounted prices,

→ the wider the range of prices in a certain product category, the worse customers remember these prices

→ the easier it is for customers to recall cheap products in a store, the cheaper they perceive the store as a whole.

→ shoppers can more easily remember prices they have seen before, but if there is no emotion about the product, shoppers cannot recall the exact price,

→ researchers have also shown that if an ordinary product is placed next to expensive brands and a higher price tag is hung, customers perceive it as less expensive.

Price sensitivity factor for different categories of goods

The price sensitivity of a product is the level of change in demand when the price of a product increases or decreases. It is usually measured using price elasticity, for example, when a 10% price reduction increases sales by 20%.

Consumer sensitivity to price, as well as price perception in general, depends on various factors. The psychological perception of price can be clearly seen in the example of discounts: a discount clearly displayed on a price tag is more effective than one without reinforcement. Goods with a well-displayed discount sell better than goods with a discount that is not visible.

For entrepreneurs, it is important to identify the products that are most sensitive to price fluctuations - when prices increase, demand decreases, and vice versa, when prices decrease, demand increases.

In 2000, scientists Danaher and Brody conducted a study using 110 brands in 26 product categories.

They found the greatest sensitivity to prices for goods with a long shelf life:

long shelf life,
with a low level of competition,
cheaper segment,
brands that are rarely sold with discounts,
and those that are bought by consumers frequently and for stock.

What else does price sensitivity depend on?

The level of price perception depends on the buyer's personal preferences, such as quality preferences, product characteristics, and commitment to a particular brand or retail chain.

Price sensitivity is also influenced by the situations in which customers buy goods.

In their study, Martinez-Ruiz and Molla Descals found that promotions are most effective on weekends, especially on Saturdays. Based on a study of promotions in a Spanish supermarket chain, they also found an asymmetry in price elasticity, which meant that more expensive brands that were sold on special offer took sales away from cheaper ones. In addition, the same cannibalization effect in the case of price reductions was found in the combination of cheaper brands + store brands.

The researchers found two other factors that have the greatest impact on price sensitivity: shelf life and large market share. It was found that while many promotions had a positive impact on sales, they had a negative impact on profitability. However, this does not mean that lower prices always lead to lower profitability.

Typically, retailers and brand owners like price-sensitive products because this characteristic allows them to sell a lot of goods when their price is reduced.

However, price sensitivity can be a negative characteristic if the product attracts mainly bargain hunters. They only buy the product at a discounted price and stop buying it when the price returns to normal.

Other factors of price perception

The perceived value of a product is influenced by the buyer's characteristics, such as income, social status, education, etc. For example, people with high incomes may be more inclined to buy expensive products because they can afford to spend more money. At the same time, this does not remove the objection "it's expensive" if a person is currently looking for a cheaper product.

Sellers' perception of price

"Entrepreneurs often believe that if they make a fair revaluation at the exchange rate, their product will become too expensive and no one will buy it. Thus, they mistakenly avoid raising the price of their products, fearing that customers will stop buying anything.

For the most part, customers compare products by price. But in the minds of customers, price is an indicator of product quality. If your product is more expensive than your competitors', you should have 3-4 "why" arguments.

The other side of the problem is sellers who measure the price by themselves and believe that the buyer will not buy the product at that price. This devalues not only the value of the product but also the store as a whole. This problem is solved by "educating" sellers: introducing subordination (because it is the respect for the store owner on the part of sellers that forms the "image" of their workplace in their minds), corporate culture, store quality charter, customer service criteria, and a system of motivating sellers," says Olga Kovalenko, editor of Torgsoft.

Програма обліку товару для інтернет-магазинів, крамниць, торгових точок, складів та виробництва

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