I remember once I was buying carpets. A large store, I was regularly passing by, was having a 40% sale on its rather large selection of Persian carpets. After significant rolling, lifting and looking at these beautiful pieces I selected two small ones and was looking at them trying to make a final decision. I was mostly imaging how they would fit. The sales person, maybe misreading my hesitation, took me by surprise. What additional discount would you like, another 30%? I bought the carpets at 70% discount but I never entered that store again unless there were sales. The sheer volume of the discount made me wonder about the profit margins the store operated on and as carpet prices were a rather unknown territory to me I was not sure should I be happy I got a deal or should I be relieved I was not cheated at an earlier occasion.

The price makes a statement about the product (or store). When applying pricing tactics to try to increase sales, attract customers or just clear the warehouse, the price you set speaks about the value of the offer, its credibility, the fairness of the price, the quality of the product etc.

In my story the deep reduction of price has ruined the credibility of the retail brand. But deep promotions do not necessarily have a negative effect on brand trust and reputation. Take the fashion brands. Their seasonal sales can start at 20%, 30% and often exceed 70%. This does not hurt the image and reputation of the brand. They influence directly customer behavior.

Sales sell in the short term. In the long term they have an impact on the future response of customers to price.

The sales of a high priced brand may attract price conscious and sales prone customers who would not have otherwise purchased it. However the regular customers who have not been price sensitive in the past also change their behavior. And this change in attitude and behavior is worth understanding as this is typically the core target. Once exposed to a decrease in price, some enjoy it and become deal hunters. They postpone purchase and wait for the sales or promotions or start buying lower priced brands. We are seeing this effect across industries. A large study followed the behavior of customers for nearly 2 years and showed that once regular customers make a purchase on a deep promotion they start to buy lower priced items. The study was done in 2002 and deep promotion meant 40% at the time.

Apart from the emotional excitement to follow promotions, another reason for customers to change their purchase behavior is the new information they gather about prices that shifts their price reference points. The reference points act as internal compass that gives direction in the complex world of prices. And the pricing policy conditions customers and changes the way they perceive prices.

To trigger a response a price change has to be significant for the mind firstly to notice it. In his research on price, Kent Monroe investigates the price thresholds, the price range above and below which customers would not purchase. These thresholds are first created as perceptions after the mind makes sense of all the price stimuli and information available and then trigger response. Price thresholds have levels and customers respond faster to price increases, while for price decreases more than one perceptual threshold have to be crossed to get a response. As Kent Monroe is saying in his most recent work the question is what price difference will make a difference.

A very small price change may go unnoticed. The price reduction should be significant to have a meaning to customers. The tricky thing is how the price reduction is positioned and communicated so that it does not change the internal reference price.

Once the reference price is decreased in consumer perceptions, next time it will take a deeper cut to make a difference.

What does it take to make a price change noticed? Isn’t there a magical number?

There are in fact some generally applicable proportions, but mostly there are principles and it pays well to establish and track the limits of price perceptions and utilize them in setting the price.

When we enter a store or website and see the prices, usually we know if a price is good. Whatever you call it, an inner feeling or common sense it is giving us an indication about the price.

What happens in the mind, how we get to this point when we know the price is good or bad, how the perception of the price produces its judgment?

This is a very intriguing question, fundamental to marketing decisions.

When a price gets our attention it enters a complex system of relevant points to which we compare it. In our mind we hold many points of reference – other prices of comparable products, same product in other stores, what we get for the price – product quality, value and experience, the available budget, expectations for future income, memories of prices of past purchases, the vague feeling what the product must cost or “expert” knowledge of the cost etc., etc.

The flow of consciousness

In my mailbox I receive another offer for a vacation, 7 days, package for two. The price though does not seem right. Why isn’t the price good and how I decide this?

How much I paid last year? What other offers I have received? What amount would be my limit, other expenses will fall in that budget for entertainment, drinks, restaurants and god knows what else. Is it better to rent a house, will feel more comfortable. Friends went to Corfu last year, fantastic small hotel and the price was normal…

The flow of thoughts is gaining momentum. You remember how much you need a vacation. Wonderful pictures of previous holidays appear in your mind. However the price in the offer is pretty high. You feel a little crushed. You go on looking at other offers and stumble upon a house, good location, next to the sea shore, looks nice actually. The price? Now we are talking. The feeling of discovery overwhelms you. You look at the pictures, read the description again, you search for the telephone number and make a call.

Let’s look at the moment of perception. Next to the efforts of the mind to compare and assess the price based on the available information, in the process participate emotions. The emotional coloring of price perception can for example lead to a positive price- value or price-experience judgment. Memories, attachments, affections make you feel “the price is worth the money”.

At a later stage emotions can act as a behavior trigger, accelerating the purchase decisions. If the price is high and you are disappointed or even angry, the product is definitely not worth it, the process ends here and you decline the purchase. The trace left in your mind may influence you the next time you consider that type of product and then this brand, store or distributor will be left out of your field of awareness. On the other hand, if you come across something you have liked before that is now offered at a 30% discount, the joy of discovery may push you to an immediate purchase.

Why is it important to be aware of the price reference system – imagine for your customers the price reference point is the bed price in a double room and in your offer you have shown the all-inclusive price. The comparison will not be to your advantage.

It is worth noting that the reference system is dynamic and changes every time new evidence comes along. A discount of 40% on vacations will bring down the perception of a good price. A salary increase or an anniversary for which you want to arrange an unforgettable trip will mean higher budget and will raise the level up. The new information changes the position of the reference points and so it goes until the next time.

The references differ by product category and have different weight for individuals.

Sometimes they are not obvious for the marketer and researcher. Openly people may be reluctant to admit (even to themselves) the actual importance price plays in their decisions and go in detail about their perceptions.

Some research methods work better. While the research approach to get an understanding of the price reference system is always qualitative, depth interviews will give better results than groups in some cases and in other – it will be well worth it to go for ethnography.

Ethnography is very helpful when investigating the signals in the shopping environment that tune consumers’ price expectations. The promo signs, the signs with the sales percentage number, the grouping of premium brands in one section of the store or mall are e.g. such signals.

Many things may go wrong in how price is communicated and consumer expectations tuned. A well calculated price may be perceived the wrong way.

For example when a consumer walks in the section of the store where all price are high and passes by a discounted item, he would presume that this product is also with a high price. Unless you put a huge sign to signal it, the price change will go unnoticed.

If you would like to share cases and observations on consumer perceptions of price, you may do so in the comments below or send us an e-mail.