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Customer Price Thinking

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Cost | Benefit | And... | See also

How do customers think? If you knew this, then you could be more effective in your pricing of products and services.

Cost

The cost of the product is a lot more than just the price that you charge. Any discomfort that the customers has to endure is also perceived as an element of what they are paying.

Reference price

Customers will usually compare your price against a reference price if at all possible.

If your product is different to other products that the customer may use as a reference then they will have more difficulty in comparing your product and hence may be less price sensitive. They may also conclude you are offering something completely different. This can be a good thing when they like your product and it can be a bad thing when they are unable to categorize it and consequently ignore it.

Switching cost

There is always a switching cost when moving from one product to another. This may be measured in time, effort, money and emotion. Sometimes this can be clearly defined, such as when switching from one bank to another, where accounts need to be closed and opened and monies transferred. It can be less obvious when, say, buying a new television set. In this case, the switching cost includes the time taken to learn how to use the new TV plus the loss of anything that the previous television did that the new one does not.

Price relativity

When you have $1, something that is $10 is vastly expensive. But when you have $1000, then $10 is insignificant. We view money and define 'expensive' and 'cheap' relative to the money we have already.

Price is also viewed relative to a reference point, as above. This can include competitor pricing, prices of your other products or just an expectation picked out of the air.

Risk assessment

Customers may well consider a range of risks, such as the chance of failure and the cost of subsequent maintenance. They will add these risks to a conceptual price that may not be quantified but is effectively higher than the named price.

Warranty

Any warranties associated with the product will be seen to reduce risk and consequently overall price. Many customers do not look closely at warranties, which may turn out to offer very little. However, if they are disappointed by this at a future date, then they will be unlikely to buy again.

Shared cost

Perceived costs (and risks) may be lowered when customers consider that they are sharing the cost with others in some way. This may be found when people buy things in groups or where some other support is offered, for example in assisted buying of property for people on low incomes.

Benefit

Set against the costs, customers also include the benefits that they will gain. Note that the only benefits that count are those that the customer sees. You may think there are more to be had and maybe you can persuade the customer of some of these during sales, but in the end, the customer defines the benefit.

Checklist completion

Customers often turn up with a checklist of things that they want. This may be written down or may be in their head. These are the things they are looking for and for which they believe they will be paying. If they change this list, adding or removing items, then the value that they see will change in proportion to such an adjustment.

Functional benefits

Customers of course think about the benefits they are going to get from using your product, but this may be less significant than thought. It is a sad fact of modern life that, while we have some wonderfully high-tech products, most customers use only a tiny corner of what is possible with these wonders.

Aesthetic benefits

As well as seeking a product that does something useful, customers also like things that look nice, feel nice and sound nice. Even relatively mundane products can be made more valuable with nice hues and textures.

Social benefits

A further benefit that customers seek is being able to boast about having one of your products so other people are envious and look up to them. This is one of the important things about product positioning and can allow you to successfully charge a higher price.

And...

Contextual effects

The time, place and location will all affect the customer's perception of cost and benefit. Even the same person in the same place on different days may value things differently.

Return on Investment (ROI)

A simple calculation that buyers often do, least conceptually, is to compare the total benefit with the total cost, including emotional aspects such as the loss felt when replacing a much-loved previous product. Commercial buyers may do this calculation more numerically, with a spreadsheet and weighting factors. This is how what we called 'value' is assessed.

Price and quality

Customers tend to think that higher prices mean higher quality and consequent greater exclusivity. This can lead to some strange actions, though when understood can be a useful element for negotiation ('Yes, we are more expensive but we're much better quality'). When customers are very price-focused (which is not uncommon) then you may need to shift their thinking to aspect of quality as well.

Price and quality trade-offs are closely related to ROI assessments.

Fairness

Buyers will, in the end, decide whether the price is fair. If they do think it is fair, then they are not guaranteed to buy, but at least they will continue to consider the product. If they think it is not fair, then they may well reject the purchase and walk away, even if they have no other current options.

See also

Price Expectation, Market Research, The Need for Fairness

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