The Psychology of Pricing

Price can be taken as an indication of quality. If the price is perceived as being too high or too low then you may have to explain it or it will put people off.

I remember once, when I worked for Makro, the wholesalers, a range of office equipment was reduced to ridiculously low prices. There was absolutely nothing wrong with the equipment; it wasn't even obsolete but a genuine reduction. I watched as customers, initially attracted by the low prices, picked up the items and then put them down again. The goods were priced too cheaply. Customers thought there was something wrong with the products so they didn't buy.

People will also make a comparison between the product in terms of its 'perceived value,' i.e. is it seen as value for money. Pricing can be linked to the packaging. Expensive packaging can associate the product in the eyes of the customers with expensive goods. Perfume is a good example of this.

Image can play another part in the pricing game. A piece of pottery or porcelain in a tatty junk shop priced low may not be bought because it is perceived to be rubbish. Clean it up and put the same piece in an expensive antique shop and the price can be trebled (unless of course you have knowledge of antiques and know its true value.) Image can be used to fool people or it can put people off. Is your price right for your company image and for the products it sells or the services it delivers?

When you set your prices they won't stay the same forever. New entrants may come into your market, the attitudes of your customers can change, technological breakthroughs will affect your product and the cost of producing it and its positioning in the market place. Though You will consider price changes when launching a new product, to help boost an ailing product and as a loss leader to counter competition.

You may decide to lower prices to win more work in a declining or stagnant market to help keep your workforce employed. The problems of lowering your prices could not only lead to a price cutting war, but it could also affect other products/ services in the range. It could change the customer's perceptions towards you and lead to an increased expense in promotion and an image of financial instability. For example, those shops which permanently have a sale!