Perceived Value Pricing explains the fact that our perceptions of a price and its value aren’t necessarily determined by actual market price or financial worth but rather through the way in which the price is presented to us. This is because human psychology is victim to a Price-Value Bias which means that we are easily influenced by elements that aren’t necessarily related to the value of the product when we decide how much something is worth. There are very few products and services available that are priced according to a real calculation of their monetary value. Businesses will charge what people are willing to pay. And people will be willing to pay whatever is consistent with the perceived value of the purchase. The value of something is of course highly subjective and will depend on how the customer chooses to perceive it. The important thing to remember is that how the customer chooses to perceive it can be strongly influenced by how it is presented to them.
In sales, the perceived value of a product is often altered by the way the price is framed: meaning the price can be made to seem much smaller or more attractive than it is. For example, the price could be broken down to show how much it would cost per day over a year, which makes the amount seem much smaller as, suddenly, a £300 washing machine becomes less than £1 a day – a bargain! Similarly, the price can be reframed by simply changing the price tag from £100 to £99.99. The difference is minuscule but, in the psyche of the buyer, it becomes a much more attractive purchase. How often have you bought something that was “only” £9.99 when you would have thought twice had it been £10? It’s not just because the former price is slightly cheaper than the latter, it’s been proven that prices ending in ‘9’ are more attractive to us – even when cheaper items may be on offer! In his book “Priceless: The Hidden Psychology of Value”, William Poundstone explains how “we’ve been culturally conditioned to associate 9-ending prices with discounts and better deals.” Similarly, choosing the price you present carefully has particularly important connotations when dealing with a large sum of money: Thomas, Simon, and Kadiyali (2007) analysed 27,000 real estate transactions and found that people paid more money for houses when the prices were very precise (i. e. were willing to pay £362,130 over £350,000). This has been explained by the fact that we associate the small numbers used in precise pricing (1,2,3, etc.) as having small values and therefore automatically see these numbers and think the price is smaller.
The wording used to explain prices can also have an affect on the customer’s perception of its value. For example, when offering a discount, sometimes this won’t have the desired effect because the word “discount” or “bargain” can have negative connotations, making people believe that the quality or value of the product isn’t as high. In order to counteract this it is important to accompany the discount with a reason. As Mazumdar, Raj, & Sinha (2005) noted, some large stores found that giving a straight-forward reason for a discount or saving, such as it being a cost saving obtained from a supplier that they then want to pass on to their customer, helped to minimise negative effects and enhanced the success of promotions.
It’s also important to remember though that, in some cases, making a product appear more expensive actually helps sales because higher price tags already carry with them an intrinsic sense of value. If you’re charging more money for something, people will naturally assume there is a reason for this and attach a higher value to that product. It’s important therefore in marketing your product to really know who your target audience is to understand what type of Price-Value Bias they will be susceptible to.