July 5, 2023
The hunt for the perfect price can be as elusive as a unicorn for those in the e-commerce world. Set it too high and you risk losing sales; too low, and you might just be undermining customer satisfaction. Surprising? Indeed, but recent research indicates that pricing your products too low might be damaging your brand more than you think.
As Xia, Monroe, and Cox's ground-breaking study on price fairness perceptions asserts, "customers assess the fairness of a price not only based on their individual gain or loss but also in comparison to other customers and the seller's gain." This means pricing isn’t simply transactional. It’s a psychological factor directly influencing customer perception and satisfaction (1).
Matzler, Würtele, and Renzl took this further in their study exploring the impact of price perception on customer satisfaction. They found that customers' perceptions of a product's price significantly influenced their overall satisfaction, involving aspects like perceived fairness of price, perceived match between price and value, and the influence of price comparisons with other products.
Researchers found that customers' perceptions of a product's price significantly influenced their overall satisfaction.
Have you ever noticed: the harder you work to get something, the more value you tend to assign to the object? No surprise here: it’s a very common phycological bias called "Effort Justification Bias”.
As it turned out, it works in the context of pricing as well. If customers pay more for a product (emotional price counts as well as the monetary price), they subconsciously view this product as having higher value and thus would feel more satisfied with their purchase, resulting in higher brand loyalty.
Let’s see if the real-world examples prove the multiple studies behavioural scientists have been conducting over the years.
If we address the luxury goods market, the connection between price and associated brand value is evident. Here, high prices aren't just a reflection of quality materials and craftsmanship. They're a signal of exclusivity. If a luxury brand drastically drops their prices, customer satisfaction that is partially driven by the sense of exclusivity declines as a result.
Surprisingly, the other spectrum of the market — discount stores — also highlight this principle. JCPenney's "Every Day Low Price" strategy is a textbook example. When the retailer removed sales and coupons and instead offered consistently low prices, customer perception of product quality dropped, leading to significant company losses. Instead of making millions through offering the lowest price, as they had anticipated, JCPenny became an outsider, and lost a big chunk of customer loyalty.
Read more on the JCPenny failure in our ebook 3 Myths About Pricing
Airline tickets offer another good illustration. While airlines often offer cheap tickets to attract customers, they've found that rock-bottom prices can backfire. The imperial study conducted in 2011 by Suan Dusit proved a clear correlation between consumer satisfaction and the airplane tickets price. If prices were too low, consumers were more likely to be unsatisfied with the trip. Most of the “cheap customers” were trying hard to find a sensible reason for a low price suspecting the airline company in cutting corners on safety, food quality and service levels.
A recent study proved a clear correlation between consumer satisfaction and the airplane tickets price.
As digital marketing expert Neil Patel cautions, "Price is a direct reflection of your product’s value in the eyes of consumers. Pricing too low can signal low quality, which can deter customers rather than attract them."
As eCommerce managers and marketers, you have to answer a crucial question: how can you find the right price — one that isn't too low to trigger dissatisfaction due to perceived low quality or too high to push potential customers away?
Research suggests that up to 45% of product switches occur because the price is considered too high. Balancing these opposing forces — price-induced customer dissatisfaction and customer price sensitivity — can seem like walking a tight rope.
However, this balance is not unattainable. It all boils down to accurate price monitoring and a robust repricing strategy. Constant vigilance on market trends, competitor prices, and customer behaviour can inform a pricing strategy that not only respects the value of your product but also meets your customers' perception of fairness and affordability.
Investing in an automated price monitoring and repricing solution can be a game-changer in this respect. These tools enable real-time tracking of competitor prices, market trends, and your product's price history. You can swiftly adjust your prices in response to market dynamics while ensuring they align with your product's perceived value. Moreover, sophisticated repricing solutions can leverage AI and predictive analytics, giving you the power to forecast market changes and adjust your pricing proactively.
Remember, as asserted by eCommerce consultant, Mark Dawson, "Pricing isn't just a figure. It's a strategy that can make or break your business." So take the reins of your pricing strategy today. With the right tools and understanding, you can discover your product's "Goldilocks zone" in pricing — not too low, not too high, but just right.
Sophisticated repricing solutions can leverage AI and predictive analytics, giving you the power to forecast market changes and adjust your pricing proactively to achieve price leadership.
With these insights and tools in your arsenal, you are well-equipped to transform pricing from a potential pitfall into a powerful driver of customer satisfaction and brand loyalty. You can indeed ensure that your customers feel they've received their money's worth and more, promoting long-term customer relationships and sustainable business growth. If you still hesitate, you're welcome to take our FREE Pricing course that would allow you to boost your pricing expertise and acquire a Pricing Expert Certificate.
(1) For example, there are studies that show a correlation between pricing and reviews
"Price, Quality, and Online Review Ratings" by JudithChevalier and Yaniv Dover (2016) or "The Impact of Price on Online Ratings and Reviews" by ItaiGurvich and Lior Strahilevitz (2017).
And studies that prove a correlation between a price and loyalty: "The Impact of Price on Customer Loyalty: A Mediating Role ofCustomer Satisfaction" by Syed Zahid Ali and Tariq Jalees (2018), or "The Role of Price in Customer Loyalty: An EmpiricalInvestigation of Customer Retention in Mobile Telecommunications Services"by Iryna Pshenychna and Andriy Boychuk (2018).
Step-by-step guide on maintaining high profitability in retail.