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Don't pay the price

It pays for consumers to be weary of the price tactics marketers use

Person buying lots of shoes thinking it was a bargain

Right now, someone, somewhere, will be having a sale. Sales staff will wring their hands complaining about prices so low they might as well given the stock away. Bargain hunters with their noses held high will sniff it out and gorge on the savings. Prices will be carefully marked against merchandise for maximum appeal.

Different framing of prices appeals in different ways

  • 50% off

  • 2 for the price of 1

  • Buy 1 get 1 free

Take your pick. They are all the same but appeal in different ways to different people. You could of course suggest that prices were hiked up to begin with. Who pays full price anyway? The lure of a “saving”, even if it's just on paper, can change the game even for those who think of sales as just a marketing tool. The psychology behind pricing is a minefield that can trip up even the most astute shoppers. For example, how does the positioning of the following promotions influence your thinking?

Prices are inherently problematic in a world where the cost of a product or service is often unknown to the purchaser, market power can influence supplier pricing, and value and willingness to pay is at least in part driven by perception.

Differences in the availability of information drive perceived value

Information imbalance around the actual cost of a product or service helps suppliers influence your purchasing decisions. Imagine you are purchasing a pair of jeans. Let’s say they cost $10 to make and supply but what you see in front of you is a price tag of $100. The simplest form of discounting, a sale offering 20% off, offers a $20 price reduction. The price and 20% off tactic is a tool that encourages you to spend. Of course, if you knew the cost was $10 odds are you wouldn’t feel like you have received good value.

Comparatively, a pair of jeans selling for $80 with a cost of $60 may not be perceived positively even if the consumer gets better value (e.g. through comfort or longevity).

As corporations get larger they can become very efficient at driving down costs through economies of scale, however, this doesn’t necessarily translate into consumer value if the company knows it can maintain a higher price.

Companies create market power to influence prices and consumers' perceptions

Where companies grow to have substantial market power they can influence the market and mitigate competition to maintain price premiums even if it is detrimental to consumers' pockets. Companies will actively seek non-price mechanisms to avoid competing on price. Marketing, legal protection, quality, convenience and a range of other tools come in here. New medical technology is a fascinating case study as the existence of patents over the new tech inhibits competition and allows the manufacturer to charge high prices even if the marginal cost to create the product is very low. Of course, it is possible that without the patent the new product would never have been developed. At the end of the day, many companies are seeking to profit so if they can charge $500 instead of $100 for a product, they probably will. High prices become problematic when a company's market power cannot be challenged and consumers miss out on the benefits of competitive prices.

Companies can influence our perception of value and increase our willingness to pay without adding any functional value to the product. One of the classic examples here is Apple who has been successful at capturing a significant price premium in the smartphone market through a combination of slick marketing, clever product positioning, and a loyal customer base with two-thirds of the industry profit even though they only capture one-third of the revenue. From a purely functional perspective, Apple phones aren’t wildly different from cheaper competitors, but by giving customers a positive emotional response when using and purchasing their devices they have increased the perceived value and willingness to pay.

Often the prices consumers pay are not a fair reflection of quality and functional value, but of course, we do not have perfect information, and even if we have done our research we are not fully rational. Marketers are clued up on this and use it to drive the bottom line. Consumers can benefit from taking a deep breath and reviewing the benefit they will really derive from their potential purchase. For small purchases paying a bit more isn’t going to change your life. However, for big purchases, consumers should be aware of the tricks of the trade to ensure they are getting fair value.


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