It comes as no surprise that price is a main factor in a consumer’s attitude to products and brands. As such, most consumer research focuses on the relationship between consumers and price. Does the product cost too much or too little? The most common occurrence of this is the simple price-demand curve, and while it is clearly important, a decision as important as setting a product price needs to include other considerations as well.

While there is an almost limitless amount of information that could potentially be analysed to help determine the ideal price, there are three key factors that are always critical - perceived options, occasion and switching cost. The common thread of these is that they determine how each individual perceives value.

It’s all relative

The value that a consumer perceives in a product is not absolute – it is relative to the alternatives.  This may seem obvious – why pay more when you can get the same for less?  But what may be less obvious is how much this varies by person and situation. Brand loyalty and perceived value may skew how people see brands, especially new brands. Alternatives are not just determined by traditional category definitions.  Options vary in breadth and can be broader for some consumer groups, given the range of products within a loosely-defined category – such as the couple shopping for a family car, but are considering very different vehicle types like sedans, minivans and SUVs as viable options.  Alternatives can also be narrower, where channel, size, or price band more actively determine a competitive set. Understanding these variations will help inform a company’s pricing strategy and product positioning.

Right time and place

There is a raft of categories whose components fulfill different purposes at different times and these niches can often determine pricing – how products are perceived changes depending on the occasion. Lifestyle products, such as beer, are susceptible to these vagaries. A consumer who is happy to drink a less expensive beer brand, or buy whatever is on sale to drink at home, may choose a more expensive, value-added brand when they’re out on the town. Different people will have different relevant occasions, different criteria, and different evaluations of the available products, and while the variables are myriad, companies need to understand the dynamics when considering a pricing structure.  Good analysis here will identify opportunities for price discrimination, where price can be better matched to the customer’s perceived value.

Flipping the switch

Committing to expensive product categories is often a key choice for a consumer – the costs of changing allegiances can be high for these category codes, such as technology. Even if a new product or service is perceived as superior, a reasonable person still may not pay more for it due to the switching costs involved. Switching costs can come from many sources: accessories, having to dispose of the existing product, any training (both direct costs and lost productivity), contracts, and the risk of a poor decision.  This latter factor, for the customer, requires deep insight and research.  Risk can be driven by factors like uncertainty of the value, large economic consequences for a poor decision, or simply the person’s aversion to loss.  The lower the value of a product, the less of a factor this becomes: switching costs for something like facial tissue is low because it is fairly quick and easy to evaluate the product and the risk of making a poor decision or switching again is pretty minimal.  Conversely, pharmaceuticals have very high switching costs because of the unknowable impacts they can have on health and the obvious downsides of a poor decision.  All of these factors are particular to the individual and the category, and all create the possibility of mispricing a new product.

Pricing accurately requires insight into your customer’s value perceptions and a better understanding of how these may vary. Unfortunately, many companies fall short on this second point.  The good news is that all three factors above are fairly simple to assess, and taking them into consideration will lead to better-informed and more effective pricing decisions. Master these, and you’ll be on the money.

Contact Brett Matheson, Vice President, Synovate MarketQuest for more information.