Pricing on Perceived Value  


Pricing on Perception

Our clients often wonder if they have priced their products and services appropriately, and they always wonder if they could charge more to improve profit margins. Increasing prices without damaging your business is often easier than you think, but it should be a carefully-managed process; you don't want to turn off new customers or lose existing customers by going too high.

Perceived Value
One way to increase prices without damaging customer relationships is by adding to the perceived value of your product or service. Perceived value is the value a customer assigns your product based on what he believes he is getting out of it. This perception is a combination of tangible and intangible factors.

For example, an executive going to the airport can choose a taxicab or a town car service. Both will get her to the same place and will take the same amount of time, but the average airport trip fee is about $25 more for a town car versus a taxi. Part of that is based on the higher cost of purchasing and maintaining the vehicle, but most of it comes from the service's perceived value.

In the town car example, perceived values are both tangible and intangible. From a tangible standpoint, the executive can see that a town car is cleaner and roomier. Also, the seats are more comfortable, and the driver is friendlier. The car service might also provide guarantees and other perks that help the executive feel confident she will get to the airport on time. Equally important though, the executive feels a powerful pull towards the town car based on her intangible perception that executives should travel in style. She is willing to pay more for the service in order to ride in a manner appropriate to her status.

You might be thinking that you are in an inflexible market and can't possibly raise your prices. Surprisingly, there is wiggle-room in pricing and opportunities to add perceived value in almost any industry. For example, the supermarket industry, one of the most fiercely competitive, has accommodated premium stores that offer better lighting, layouts, products and services in exchange for higher prices. Like town cars, the customer is getting the same basic product, but she is willing to pay more for the experience of shopping in a nicer environment.

Competitive Analysis
Before you make any pricing changes, first evaluate what the market will bear. You do this by auditing your competitors to find the range of prices your customers are currently getting. This can be a tricky practice, as many companies do not publish their prices, but you must find a way to at least estimate the range of prices in the market. Create a chart listing your competitors' price points. If you have multiple services or products, do this for each one.

With a continuum of price points in the competitive market, Acme Towncars can see that it is on the low end of its direct competitors. This means it might be able to raise its price by increasing perceived value.

Defining Perceived Value
When looking to expand market penetration, it's important to define your company's perceived value, especially as compared to the other options in the market. To do this, consider the following questions:

  •  What tangible values do your customers receive by choosing your product or service? These are related to features, such as more comfortable seats, on-time service, friendly staff, etc.

  •  What intangible values do your customers recognize by choosing your product or service? These are related to how your product makes your customer feel. They are usually defined using adjectives such as important, powerful, savvy, attractive, smart, etc.

Pricing Using Perceived Value
Compare your answers to the above questions to the values of your direct competitors. One way to do this is to create a graph ranking prices, tangible values, and intangible values.

In the town car example, we would do this on a scale of 1-4, with 1 being lowest/worst, and 4 being highest/best. In this case, Competitor A is perfectly priced in the market - it has the lowest price and the lowest set of perceived values. Acme Towncars has the highest level of intangible values, and higher tangible values than Competitor B. This means it should be able to safely raise its price to that of Competitor B ($45) and possibly even go higher, to a price point between that of Competitor B and Competitor C ($47.50).

Marketing Perceived Value
Once you have identified your company's perceived values and priced your product or services appropriately, make sure that your marketing materials and process reflect the values you most want to promote. Here are some examples of how to market based on perceived values:

Tangible Benefits

  •  You are always on time: provide a money-back guarantee if you are late.

  •  You have the most comprehensive program: provide a chart showing how the features of your service or product stack up against your competitors'.

Intangible Benefits

  • You help your customers look good at work: publish testimonials of customers saying how much their boss appreciated them based on the service you provided.

  • You make your customers feel rich/successful/beautiful: display images of the people your customers want to emulate using your product or service.

In conclusion, there is usually a spectrum of possible price points, and there are many ways for you to determine how to price your products. How you market your business can help you make sales at a higher price - just make sure your company's service follows through on your marketing promises!