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Consumer Psychology and Pricing

Marketers recognize that consumers often actively process price information, interpreting it from the context of prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), point-of-purchase or online resources, and other factors.4 Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer’s stated price. Customers may have a lower price threshold, below which prices signal inferior or unacceptable quality, and an upper price threshold, above which prices are prohibitive and the product appears not worth the money.

Three key topics for understanding how consumers arrive at their perceptions of prices are reference prices, price-quality inferences, and price endings.

  • • Reference prices. Although consumers may have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices.5 When examining products, they often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.”6 Marketers encourage this thinking by stating a high manufacturer’s suggested price, indicating that the price was much higher originally, or pointing to a competitor’s high price.7 Clever marketers try to frame the price to signal the best value possible. For example, a relatively expensive item can look less expensive if the price is broken into smaller units, such as a $500 annual membership for “under $50 a month,” even if the totals are the same.8
  • • Price-quality inferences. Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. When information about true quality is available, price becomes a less significant indicator of quality. For luxury-goods customers who desire uniqueness, demand may actually increase price because they then believe fewer other customers can afford the product.9
  • • Price endings. Customers perceive an item priced at $299 to be in the $200 range rather than the $300 range; they tend to process prices “left to right” rather than by rounding.10 Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic.11
 
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