You should be aware of the following pricing effects and apply them to your own business or be aware of them when you are next a customer.
Thomas Nagle and Reed Holden in their book The Strategy and Tactics of Pricing detail nine factors that influence how a consumer perceives a given price and how price-sensitive they are with different purchasing decisions.
They are:
Reference Price Effect
A buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives.
Difficult Comparison Effect
Buyers are less sensitive to the price of a known or more reputable product when they have difficulty comparing it to potential alternatives.
Switching Costs Effect
The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
Price-Quality Effect
Buyers are less sensitive to price the more that higher prices signal higher quality specially for image and exclusive products.
Expenditure Effect
Buyers are more price-sensitive when the expense is a large percentage of the buyers’ available income/budget.
End-Benefit Effect
The effect refers to the relationship a purchase has to a larger overall benefit, and has two parts: Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost: The price proportion cost is the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit. The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the components’ price.
Shared-cost Effect
The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.
Fairness Effect
Buyers are more sensitive to the price of a product when the price is greater than what they consider is fair or reasonable given the purchase context.
The Framing Effect
Buyers are more price sensitive when they perceive the price as a loss rather than a gain forgone and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.
How can you successfully apply the above information?