How Customers Perceive A Price Is As Important As The Price Itself

Harvard
Business
Review
Pricing Strategy
How Customers Perceive a

Price Is as Important as the
Price Itself
by Sandeep Heda, Stephen Mewborn, and Stephen Caine
January 03 , 2017
Price wars have broken out in consumer industries around the

world. Retailers such as ALDI and Walmart have used price to
position themselves against traditional competitors in their
markets, pinching margins all around. Financial asset managers
have been out-price-cutting one another in exchange-traded
funds in a bid to gain market share. Major U.S.
telecommunications carriers now compete fiercely on price as
they try to win new customers. And airlines are gearing up for a
price war on trans-Atlantic routes as some low-cost carriers plan
service between the U.S. and Europe.
These companies are reducing prices because they believe that

will boost their perceived value to consumers. As pressure
intensifies to reduce prices, either by cutting the list price or
offering a discount, managers may act hastily, without the same
rigor they apply to investments elsewhere, such as capital
deployment or product enhancements.
But when managers reduce prices, a fundamental question

sometimes goes unasked: Will customers notice and respond as
expected? All too often they don't. That's because how customers
perceive the price is as important as the price itself. Even if
customers fail to notice specific price moves in isolation,
companies should make sure customers have a good sense of how
the firm's prices compare to those of competitors. And most
companies-luxury purveyors aside-want to be perceived by
consumers as having lower prices, relative to competitors, than
they in fact do. A store with the same prices as a competitor's
would like to be seen as having lower prices; and a retailer with
average prices that are 10% higher than a key competitor's would
love to be perceived as being only 5% higher.
There are clear winners and losers in the battle to manage price
perceptions in order to get this so-called "pricing credit" from
consumers. Bain & Company and ROI Consultancy Services
(formerly PollBuzzer) recently surveyed almost 2,200 consumers
in Atlanta and Washington, DC, about the prices at eight retail
chains carrying groceries. We found that retailers can get either
more or less credit for their pricing than actual shelf prices would
suggest.
For example, one retailer's reputation as an upscale discounter,
built through its store and product design, has given consumers
the perception that it charges a price premium, when in fact its
prices run slightly lower than the average in the two cities. Its
pricing strategy does not mesh with its overall proposition to
customers, with the result that the retailer does not get the pricing
credit it deserves. One option for the retailer would be to raise its
prices slightly, since customers have already baked the
(incorrectly) perceived premium into their shopping decisions.
The intense competition on pricing that pervades many

industries makes consumer perception more important than ever.
Aggregator and comparison websites have brought greater price
visibility and ease of product comparison to banking, insurance,
hotels and other consumer markets. It's also easier for consumers
to split their spending among different providers, depending on
which firms offer the best perceived price-value equation. Bain's
grocery survey shows that half of consumers' monthly spending
goes to stores that are not the consumer's primary store.
Managing price perception, not just pricing structure and actual

price points, thus has become a critical capability for firms in
consumer markets.
Improving perception
How can companies get more credit from consumers for their
pricing, so they can build traffic and earn loyalty?
Companies can choose among tactics in four categories: offering

lower prices, shouting out those prices, giving great deals, and
tailoring the experience. Examples of tactics within these
categories include price-point policies (such as ending a price
with the digit 9), in-store or website signage, coupons, and a
good/better/best assortment mix. The right combination of
tactics, of course, depends on a company's sector, strategy, and
proposition to customers.
A traditional grocer that caters mainly to higher-income

customers, for instance, needs to have a broad assortment and
high perceived quality. It would focus on very targeted moves to
align price perception with its high-end value proposition,
including strategic promotions and signage, rather than on tactics
that would significantly change the proposition, such as price
matching or coupons.
A discount grocer, by contrast, typically uses private-label goods

to influence price perceptions. Since its customers are less
sensitive to product quality and breadth, the discounter can offer
a narrower assortment, which allows it to present a lower-price
and lower-end image in stores.
To determine which of these tactics to deploy, a company should

first gain a deeper understanding of its current price position
relative to consumers' perceptions. Checking its prices against
competitors' prices on comparable items will reveal actual price
gaps. Then, determining consumers' perceptions will show
whether and how they see those price gaps. The key survey
techniques involve asking consumers to select a couple of
competing providers with whom they shop, and gauging how they
view each provider's pricing on the relevant products. By
aggregating hundreds or thousands of responses, a distinct
pattern of price perception for each company will emerge.
The next task is to identify the factors that have the strongest
influence on perception. These can be gleaned through in-store
visits and surveys asking consumers about the provider's signage,
coupons, and so on. Again, aggregating responses allows
managers to see how consumers perceive the company's
performance in each tactic relative to competitors. If consumers
perceive a chain's prices as lower than they really are, the analysis
can home in on the tactics that most effectively drive that
perception.
Data on the factors influencing perception is the foundation of a

plan to build an effective price image, a plan that will likely
include a mix of direct price changes and indirect tactics like
rewards programs.
The experience of a European discount apparel retailer illustrates

the power of a disciplined price-perception program. Facing stiff
competition from other fashion discounters, the retailer fought
back by slashing prices across the board, but customers largely
didn't perceive the price change, and the retailer didn't achieve
the anticipated boost in sales volume. It decided to step back and
take a more nuanced approach. In a process similar to the survey
approach described earlier, the retailer analyzed its prices relative
to competitors and customer perceptions and discovered that
consumers incorrectly perceived that the company had higher
prices than its key competitor. One reason was that the retailer
offered a broader range of prices than its competitors, which
confused people. Also, the company discovered that customers
were more price sensitive about certain product categories, like
children's T-shirts.
The retailer defined new "roles" for product categories, based on

customers' perceptions of products, and priced according to these
roles; for example, some products were assigned the role of
driving foot traffic to stores, while other products played the role
of enhancing margins. The retailer refined communications
about pricing to make them consistent with the price perceptions
it sought, and it reduced the number of price points. As a result,
the company achieved its desired "price image" as a value retailer,
developed a more strategic approach to pricing, and increased
revenues by roughly 1%.
As this retailer discovered, there is a lot more to pricing power
than just adjusting prices. Directing investments to lower prices
may not supercharge sales. Worse, it might backfire if consumers'
perceptions don't give the company sufficient credit for its price
position. More indirect tactics, such as adjusting signage and
using private labels, on the other hand, may have an outsized
impact on pricing perception-a proven route to profitable
revenue growth.
Sandeep Heda is a partner with Bain &

Company's Customer Strategy & Marketing and
Retail practices, and is based in Atlanta.
Stephen Mewborn is a partner with Bain &

Retail practices. He leads Bain's global pricing
work and is based in Chicago.
Stephen Caine is a partner with Bain &

Retail practices, and is based in Chicago.
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Harvard

How Customers Perceive a

Price wars have broken out in consumer industries around the

These companies are reducing prices because they believe that

But when managers reduce prices, a fundamental question

The intense competition on pricing that pervades many

Managing price perception, not just pricing structure and actual

Companies can choose among tactics in four categories: offering

A traditional grocer that caters mainly to higher-income

A discount grocer, by contrast, typically uses private-label goods

To determine which of these tactics to deploy, a company should

Data on the factors influencing perception is the foundation of a

The experience of a European discount apparel retailer illustrates

The retailer defined new "roles" for product categories, based on

Sandeep Heda is a partner with Bain &

Stephen Mewborn is a partner with Bain &

Stephen Caine is a partner with Bain &

Research: How Price Changes Influence Consumers' Buying Decisions

Talking to Your Customers About Prices

Pricing Policies That Protect Your Brand

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