OnDemand WTP Pricing Research

Perception Beats Reality in Pricing | Bain & Company

A traditional grocer that caters mainly to higher-income customers, for instance, needs to have the whole assortment of grocery items and strong perceived quality. It would focus on very targeted moves, including key value items, promotions and signage, rather than on tactics that would significantly change the proposition, such as out-of-store advertising, 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, letting it 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 vs. 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 perceive those price gaps.

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 retailer’s signage, promotions and so on. Their answers can be compared with responses giving more or less credit than deserved on price positions. If consumers perceive that a chain’s prices are lower than they really are, the analysis can home in on the areas in which consumers think the retailer outperforms.

Data on the factors forming perception is the foundation of a plan to build an effective price image. The plan will likely include a mix of direct price changes and indirect tactics like rewards programs. Insights from surveys and store visits should link directly to the company’s strategy so that every subsequent price move will create the greatest possible value and stay true to the brand. While pricing perception will advance the overall strategy, it’s not the whole solution; pricing perception should be combined with a solid shelf-price structure.

Executing a pricing strategy effectively requires that all the relevant parts of the organization—merchandising, marketing, operations, suppliers and the senior executive team—agree on the pricing strategy itself and on the tactics to shape accurate perceptions. Teams responsible for pricing can then continually experiment with pricing tactics to learn what works with particular segments of customers.

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 did not realize the anticipated benefits in price image and sales volume. It decided to step back and take a more nuanced approach. The retailer analyzed its price positions and customer perceptions, which yielded important insights. In a nutshell, consumers incorrectly perceived that the company had higher prices than its key competitor. One reason was that the retailer offered far more price points 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 and adults’ sweaters.

The retailer defined clear roles for product categories, based on customers’ perceptions of products and whether a category has a halo effect, influencing how people perceive the retailer’s value overall (see Figure 3). It refined communications about pricing so they were consistent with the price images the retailer wanted to portray, and it reduced the number of price points. As a result of the program, the company was able to achieve its target price image, develop stronger internal pricing capabilities and grow revenues by roughly 1%.

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Perception Beats Reality in Pricing – Bain & Company.

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