Price perception is one of the leading variables when it comes to consumers buying process. Economists, market researchers have already undergone researches and predict that in buying decision price are the driving forces. Several studies explain and determine and explain the same fact thereby concluding the fact with decision making. The determinants of price perception can be both rational and psychological factors. The other factors may become psychological factors and prestige. The key variable to explore and explain consumers’ price perception is the degree of understanding the psychological process of consumers’ price perception.
When a firm has seasonal demand, the discrepancies are observed between the supply and demand. Generally the firm has excess supply at the time of low demand and scarcity when there is high demand. If the firm commercializes goods and faces seasonal demands, it can minimize the effect through good management of production and storage. The problem becomes more difficult in several sectors such as tourist services. The prices being fixed by these companies and firms drives the price perception in different aspects which can differ according to the individual characteristics. The pricing fixed by the firm by undifferentiated strategies, under price discounts may lead the consumers/individuals to perceive as low quality products being offered. So the price discount strategy becomes ineffective in this case.
Role of Price Perception in Consumer Buying Process
The price perception has been one of the most important research issues on the consumer behavior for last many years. The concept of reference point is very important in this regard and efforts have been made in order to define it. Consumers establish their reference points according to their personal understanding, annotations, the existing knowledge of prices and their subjective interpretation. The reference points are dependent of two factors: the kind of information i.e. external or internal and behavioral process of formation of references. The internal reference point comes from the consumer estimation of price in his mind. The two factors contextual and temporal are involved in this formation. The first factor is related to the perception of different prices within the same category of product while buying. The temporal factor depends on the past buying experiences of the customer. The importance of both these factors varies according to the customer’s characteristics. For instance, consumer who purchased the one product more frequently will remember its price more clearly and as a result temporal factor will be more important. External information comes from the marketing and internal form other sources. It means any message of the price consumer receives through external channel and which he uses to make comparisons. The seller can control the external information by the marketing efforts i.e. through advertising and some internal factors may be beyond their control. But the information must be credible so that the consumer can use it in making his assessment of the product. The external reference point can be the price suggested by the seller on the product’s packaging, or the brand which is more frequently purchased or the price of the dominating brand. The main aim of the external reference point is to increase the internal reference price so that customer perceive existing price as attractive and buy the product
According to a research study, price perception is clearly more relevant factor in purchasing decision than reality. Research was conducted in five countries to measure the extent to which perception of price is important for retailers. Three factors were identified which are responsible for price perception. The first one is the clarity with which price is communicated, second is price communication on entry points and the third is overall environment. The research indicated the fact that the retailers who are perceived as more expensive than others are unable to compete effectively in the market. A study conducted on entry level price communication difference of Zara and H&M is a good example on price perception. According to the study, Zara was found to be 31% more costly than H&M, but the customers’ perception of this difference quite low as compared to the actual figure. This reveals the Zara’s ability to manage its perception through effective and clear communication of prices. They have been successful in portraying their prices as nearly equal to competitor but in actual their prices are relatively high. The magic of perception has worked really well in this case which reveals the importance of perception the consumers. Another classic example is the price perception of Argos which shows how they have been able to build their price perception that is better than reality. They have been able to communicate their price position in a way that results in a cheaper price perception than reality. Their advertising strategy was price centered along with prominent supply of low priced goods in order to create a cheap price perception of their goods. In this way, the have been able to portray themselves as low-priced as compared to competitors while the reality may be different. However, the company has to work continuously in order to maintain that perception.
Dimensions of Price Perception
The price perception is directly related to the success of the company. Although in the end what customer pays is the reality but how it reaches at his decision is what is dependent on the perception. Because the company is successful in creating the desired perception of the product only then the customer will consider buying it. Hence, it is the price perception that precedes the buying decision of the customer. This is why price perception is among one of the most important factors while crafting the advertising strategies of the company. For a successful advertising strategy, it is very important to read the minds of the customers. The concept of price perception helps to understand those psychological factors which are in the minds of the customers and form which they make their purchasing decisions. Understanding the factors by which the seller can influence the perceptions is very important for the companies in order to attract and retain customers. This can help them to determine the pricing strategy that will ensure their competitiveness in the market and thus, superior financial returns.
The key dimensions of price perceptions are listed below:
- Price-Quality Relationship: The impressive research done in pricing is about the consumer’s quality perception and their quality of products. Consumers perceive price as the prime indicator to presume the quality of the product. Many consumers believe that high priced products attribute better quality and lasts longer. Thus, price signals the quality. The point is very vastly mentioned in the marketing literature. If prices are marked lower than the level of consumers paying capacity they conclude it to be of low quality. Improvements in quality of products can trigger the mind for the first time and can convert the consumer into a loyal consumer as well. The consumer psychology is also affected and at the end will also affect the market share. The price-quality relationships have not been found in the western societies.
- Price-Consciousness: It is defined as consumers’ degree of focusing for paying less in buying. The high price conscious consumers tend to do a lot of research work before buying that particular product. The economic theories have also indicated that price has the significant roles in buyers’ preferences. The buyers generally try to maximize their benefits while purchasing and price plays a influential role in their buying process.
- Value-Consciousness: This concept follows the price quality evaluation of the consumer. It comprises of what a consumer get on behalf of what they have paid for the products or services. If consumer thinks that quality is less then what they have paid, they tend to get dissatisfied and henceforth stops purchasing that product. The vice-versa of the situation leads to turning them into regular or may be loyal consumer. Consumers who are capable of making this sort of evaluations are called “Value Conscious Consumers” They generally don’t mind paying higher prices if the quality of product justifies it.
- Price Mavenism: This could be defined as the consumers being experts about the lowest priced stores and starts sharing the information by informing them. These consumers evaluate different aspects of product to justify it with the price bracket into which they are offered and compare it with other stores to get the best benefits out of it. The consumer’s socio-economic character, previous experiences and learning processes play an important role. The price information collected is shaped by rational and emotional motives of consumers. These types of consumers are experts in the product information’s and thus may be called as ‘advisors’ by other consumers.
- Sale Proneness: Sales influence consumers’ price perceptions significantly. The consumers generally evaluate their last purchases with the current ones. Sales, price discounts aim to increase the total sales and also create positive purchases evaluation. The best price evaluations can be made during the sales or discount prices. Another research has also indicated that young consumers tend to be lesser influenced by the sales as compared to those of the older generations.
- Prestige Sensitivity: It is a psychological dimension. Consumers can perceive high price as positive and even as a negative. The high pricing of the product can be perceived as a way of losing the money. Consumers buying these sorts of products generally consider it as a part of their status. They tend to purchase on their emotional moves. A prestigious product is considered to be a symbol of wealth and living above standards. Prestige sensitivity is the factor behind the same and can happen because of difference of socio-economic characteristics of consumers. This concept can be used in developing high quality and distinct product image.
- Domestic-Foreign Product Sensitivity: The product sensitivity amongst domestic-foreign product also plays an important role in price perceptions. The place of product manufacturing also influences the the buying behavior and hence leading to think upon the pricing being perceived by consumers as well. Thus this dimension is also necessary to be included into the consumers’ experience of judging the price. Brand recognition, effects the quality and price perceptions. Origin of country is also not untouched by it and influences the consumer. The products from developed country are generally regarded as the high quality and costly. The domestic and foreign products are also viewed emotionally and symbolically. This dimension is unique to evaluate and hence included in describing price perceptions.
Price Perception and Pricing Strategy
A company will begins a good pricing with a complete understanding of the value and price of the products or services from the price setting to capture the customers’ perception on value and price. For example, if a customer decides to buy a product but he or she find that the price that set is higher the value which is from a products, this will make the customer making decision that does not buy this product. A company can make the decision on pricing based on two types of value basing pricing which are good-value pricing and value-added pricing. A good-value pricing means a company will sets a fair price by offering the right combination of quality and good service. Besides that, value-added pricing means a company will sets the prices based on customers’ perceptions of product value rather than the manufacture’s cost.
The customers’ perception on value and price will set the ceiling of price; costs also will set the floor for the price that a company can set. A company needs to know the costs that spend on products before they can decide the pricing decision by using cost-based pricing. Cost-based pricing is a stage that a company set prices that including the producing expenses, distributing expenses, selling expenses and the value of return on effort and risk. A company should consider the cost-based pricing as the important stage in pricing strategies. The costs that spend on products can be two forms which are fixed costs and variable costs. Fixed costs are the costs that do not easily vary with production level while variable costs are the costs that vary directly with the production level. Examples of fixed costs are bills for rent, interest or executive salaries while the examples of variable costs are bills of electricity, packaging expenses and so on. The company must calculate the costs of products carefully. If the company costs are higher than other competitor’s costs during the producing and selling the products, this will make the company set the higher prices to earn some profits. The effects of charging the higher prices of products, the customers will buy the products from other competitors because the price that offers by the competitor is cheaper than the company. Therefore, a company should consider the customers’ perception on value and prices as important elements because customers can determine company performances.