Price Perception and Price Positioning: Give Customers What They Want

Vladimir Kuchkanov,

Product Manager at Competera

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• What is price perception?
• What is price positioning?
• How to know your price perception without asking customers directly?
• Manage price positioning strategies with tech

What is price perception?

Price perception marks the way shoppers perceive the price level at a particular online or offline store. The fundamental category defining the essence of price perception is subjectivity. What it means is that the real price level should not necessarily match with the customers' price perception. 

Here is an example: imagine you run a low-cost grocery store and decide to price bananas higher than competitors. Most likely, customers would continue buying bananas along with the other products while they perceive your prices as cheap ones. The point here is that price perception is a powerful tool that can either bring more revenue or destroy the retailer's financial health. 

What is price positioning?

Price positioning represents the process of adjusting shop prices regarding the position a retailer wants to represent in the market. Price positioning is closely linked to price perception as these two categories are constantly shaping and impacting each other.

In this article, we're going to explore how to evaluate price perception and which factors contribute to price positioning the most. We're also going to dive deeper into price perception and price positioning management and explore how advanced pricing software can deal with it. This entry could serve as a guideline helping retailers to capitalize on price perception. Let's start!  

How to know your price perception without asking customers directly?

Now, when you know what price perception is, the next question that comes to mind is ‘How can I know what customers think of my prices?’. But, before answering, we must admit that it is not possible to inquire or capture price perception comprehensively because of the two major reasons. First, as we’ve mentioned below the category is subjective and it’s not easy to get into the mind of your customers. The second reason stems from the dynamic essence of price perception i.e. it is not stable and might change under particular circumstances. 

Price perception is a complex phenomenon shaped by a number of dimensions. The change of one of these elements, eventually, impacts the overall price perception. That’s why deconstructing customers’ perception into structural elements is a good starting point to find how shoppers might feel about prices without asking them directly.   

Let’s have a closer look at the elements shaping retailer’s price perception:

• Product quality. For customers, price is an indicator of quality. The general rule implies that the higher priced products are expected by customers to have better quality. What it means in terms of price perception? Retailers should consider the quality-price relationship in their pricing or promo strategy. For example, if you launch a discount to liquidate stock and put the same price for both low and high-quality products, the customers might perceive low-quality products as overpriced. It means retailers should differentiate pricing in regard to product quality, otherwise, their price perception could be distorted. This notion is especially relevant during the periods of markdown. 
   

• Consumers’ price-consciousness. Buyers are not equally conscious about every product price. There are particular groups of products towards which shoppers feel more price-conscious. Usually, these are the products called 'best price guarantee' or BPG. They are priced in regard to competitors being crucial for retailers in terms of either protecting or increasing their market share. The prices for this kind of products are also an important element shaping overall price perception. Here is an example: if you price BPG products higher than your competitors while offering lower prices for all the other types of products, your store would still be perceived as rather expensive.

• Promo. While describing the dimension of product quality above, we’ve partly mentioned the importance of promo differentiation during the markdown. Retailers should be particularly careful during the markdown periods: willing to clear stocks as promptly as possible, they might unintentionally undermine all the previous efforts to shape and maintain particular price perception. Many retailers still use traditional approaches to markdown without noticing the devastating impact it has on price perception. 

• Psychological factors. Retailers shouldn't forget that human behavior is not always rational. In his best-selling book "How Customers Think: Essential Insights into the Mind of the Market", Harvard professor Gerald Zaltman argues that 95% of all purchasing decisions are subconscious. The luxury brands are a good example to show how psychology is linked to price perception. Buying premium or luxury segment products is often a means of demonstrating one's social status. In this case, shoppers want the products to be expensive even if they are explicitly overpriced. So, if you're selling premium products make sure your pricing is coherent with buyers expectations. 
   

Based on this, we can make a list of simple questions helping to get an overall impression of your price perception without actually asking customers:

1. Is your pricing differentiated in regard to the qualitative features of products? 
2. Are the BPG products priced competitively and coherently with your positioning? 
3. Is your markdown process optimized (e.g. promo depth for various products is diversified etc)?
4. Does the prices for exclusive range meet customers expectations?

Manage price positioning strategies with tech

Usually retailers are interviewing customers in order to understand how they see their brand compared to competitors. At Competera, we developed another way for you to calculate this. First, we need to see what competitors affect the sales volume for every category in each store or channel. Let’s use the table below as an example.

We can see that store C is influenced by competitors more than other. This means its customers not necessarily consider prices as “optimal” and often compare them to competitors. The sales volume depends on competitors’ prices for the largest amount of products here, which also means that the store C has a high cross-elasticity. Now, let’s see how these shops are ranked.

 

Store A gets the highest added value, because its customers have a high level of trust taking for granted that the prices are low. Store B depends on its competitors with less optimal prices from the buyers’ viewpoint even though the prices in store B are just as low as in Store A. Store C has unreasonably high prices for their main categories compared to competitors, and has low added value. We added another type, Store D, which is a luxurious brand with a loyal customer base, yet still high prices. Based on the image, retailers should try keeping their business within the green quadrants of the graph as it helps them to get more revenue while keeping customers loyal. 

The simple example we’ve outlined also shows the importance of identifying your real competitors and true KVIs as these products impact price perception and customers’ loyalty the most. And that’s where you need advanced pricing software. Competera’s recurrent neural networks analyze retailer's and competitive historical data to find the real impact every market player has on sales as well as identify true KVIs in your portfolio. This, in turn, is the key to reinforce customers’ loyalty and increase market share. Click below to learn more and explore new opportunities.