Tuesday 15 July, 2014
In marketing, we think in terms of perceived value when we set pricing. We don’t base prices on actual production costs, but on how the market perceives the value of the product.
That’s what perceived value is – the value your market places on your product or service. This is all-important in marketing because your marketing creates an expectation in the minds of customers of the price of your product. If the price you give you product doesn’t align with these expectations, this disconnect will drive customers away.
Price and Expectations
Obviously, if your product is priced too high, customers won’t buy it. This shouldn’t be too hard to understand, since we’re all customers as well. But surprisingly enough, the same goes for if your item is priced too high.
Imagine if you wanted to sell a fast food hamburger for $20. Unless you found some hipster to make the purchase ironically, or you were exporting your fast food sandwich to a country where beef prices are through the roof, you’re not going to get that $20 for a simple sandwich. People expect a fast food sandwich to cost a couple of dollars, if even that.
But let’s take an opposite example. What if your restaurant sold its steak dinner for $2.99? Or better yet, put it on the dollar menu! People would wonder what kind of mystery meat is in that steak.
My favorite example to illustrate perceived value and the power of marketing is CDs. CDs are plastic discs with data printed on them. The cost to make them is miniscule. But record companies convinced America in the late-80s that they were the most insanely high-tech product on the plant. The sound quality was like actually being there in the studio and CDs were indestructible. This shiny new music medium was so futuristic that we were convinced to pay $14 for one.
Price Setting Tactics
There are many tactics businesses use to set prices. One is competitive pricing, which means undercutting your competitors on similar products. The steakhouse up the street has a $20 steak dinner, so you offer one for $17.99 and throw in all-you-can-eat bread and salad.
Another tactic is to offer your product at a higher price but employ skillful marketing to show your customers why the price is higher. Your burgers cost more than the shop down the street, but your beef is higher quality and you offer fancier toppings. There’s always a market of folks who are willing to pay more if they’re convinced the price is worth it.
Perceived value shows us that cheaper isn’t always better. It all has to do with the expectations of the market. If you can demonstrate to them that your offering is better than those of the competitors, they’ll be willing to pay more.