A business’ pricing strategy can be make or break when it comes to keeping your customers satisfied. Intuitively, higher prices presumably make customers less satisfied. However, in this article, we examine why pricing strategy is in fact much more complicated.
The Problem With Cheap Prices
Pricing sends an important message to customers. Research suggests that as prices increase, so does the customers’ perception of the quality of the products being sold. This is primarily because people are naturally sceptical about prices that appear “too good to be true.” Exceptionally low pricing suggests to the customer that the product in question is not particularly valuable or perhaps is of a lesser quality than higher priced products.
Using very low pricing for your products can also make the customer more aware of its quality in general, and they may be more likely to identify faults or potential shortcomings. This is problematic for customer satisfaction, contributing to the belief that what they are buying is not particularly special or valuable.
Aside from this, under-pricing may be damaging to your profit margins, and especially if your low prices are failing to retain customers and thereby failing to offset other expenses such as ordering costs.
If a business, from the outset, chooses this low pricing strategy, they can run into trouble in the future if ever they need to increase prices to offset “behind the scenes” expenses such as ordering costs, freight costs or manufacturing costs. Starting with very low prices and then suddenly increasing prices puts you at risk of losing a whole group of customers who now perceive that your product is no longer the best deal available on the market.
If you choose to implement a pricing strategy that provides products for a higher cost to the customer, there are a couple of things to consider. Although, intuitively, higher prices would seem to deter customers, this may not be the case. Higher prices may signal that your product is exceptionally well-made or good quality, and this can attract many people.
This pricing strategy has worked for companies such as Swiss watchmakers Patek Philippe and Audemars Piguet. However, setting too high a price may also backfire and contribute to a lack of customer retention. Therefore, it is vital that management use a pricing strategy that balances the two extremes.
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Given the problems that can occur with both a low-price strategy and a high-price strategy, there must be a middle ground that avoids these issues. A 2004 study by the Solvay Brussels School found that customers are significantly more likely to display customer satisfaction when products are priced reasonably.
This suggests that pricing products within the place between “too expensive” and “too cheap” is a good way to keep customers happy. A price that is neither too high nor too low sends a positive message to the customer about the quality of the product and the value of their purchase.
Not only does a “reasonable” pricing strategy positively affect customer satisfaction, but it will also make things easier when and if you need to increase prices. Customers still perceive that they are buying a valuable product, and you can therefore retain your customer base and offset expenses involved with transportation, machinery costs or ordering costs.