Pricing Perceptions

Most companies reduce prices believing that it would boost their perceived value to consumers, who implicitly weigh price against product features. But all too often they do not. Here is how to get proper credit from consumers for your chosen price position.

- Sandeep Heda, Stephen Mewborn and Stephen Caine

Price wars have broken out in consumer industries around the world. It’s no secret that retailers such as ALDI, Amazon and Walmart have used price to position themselves against traditional competitors in their markets, pinching margins all around. Financial asset managers have been out-price-cutting one another in exchange-traded funds in a bid to gain market share. Major US telecommunications carriers now compete fiercely on price as they try to win new customers. And airlines are gearing up for a price war on transatlantic routes as some low-cost carriers plan service between the US and Europe.

These companies are reducing prices because they believe that will boost their perceived value to consumers, who implicitly weigh price against product features and benefits in their purchase decisions. As pressure intensifies to reduce prices, either by cutting the list price or offering a discount, companies may act hastily, without the same rigour they apply to investments elsewhere, such as capital deployment or product enhancements.Yet, changing prices can have an even greater effect on company financials.

When managers make decisions on pricing, a fundamental question sometimes goes unasked: Will customers notice?

All too often they do not, and what ultimately matters is how customers perceive the price point. Most companies — luxury purveyors aside — want to be perceived by consumers as having lower prices, relative to competitors, than actual shelf prices warrant. A retailer with average prices that are 10 per cent higher than a key competitor’s would love to be perceived as being only 5 percent higher.