Perceived Value Pricing

Perceived value pricing is a method where businesses decide a product's price based on its perceived value. It determines how much value a customer attributes to a particular product. However, product perception is subjective; perceived value is hard to quantify.

In addition to pricing, brand perception dictates branding strategy. Customer perception is the deciding factor behind a particular brand being liked, talked about, and consumed more than its substitute. In the internet era, the relationship between the customer and the product dictates perceived value.

• Perceived value pricing is a pricing approach firms and businesses use to determine the selling price. In this method, firms rely on the perceived value associated with a particular product.
• Perception-based value depends on outer appearance, emotions, utility, availability, and brand value. The product's perceived value is multiplied by the adjustment factor to calculate the perceived value price.
• Competitive pricing is the biggest drawback of this method. When a competitor offers a lower price, the perceived value becomes irrelevant. Therefore, most customers opt for cheaper alternatives regarding similar brands and products.

Perceived value pricing theory is a pricing method. Firms use this method to determine a product price that would seem reasonable to the customer. This method stresses the perception of value. To a large extent, perception depends on the customer's product knowledge.

Most customers do have an idea of what a product should cost. So again, businesses must price a product around that perceived amount. In practice, though, businesses overcharge customers. For example, popcorn is priced around $3, but inside theaters (motion picture), the price is twice the amount. To justify the price hike, businesses claim they are providing an add-on experience—customers can access the product inside the theater.

But price hikes can backfire. Customers reject a product if they consider the price too steep. Some customers might even move on to a cheaper substitute. The company can lose if the price is too low at the opposite end of the spectrum.

Practically speaking, the perceived value of a product is very subjective. Therefore, it is very difficult to quantify perception. The variation in perceived value arises because a product's utility varies. For example, a carpenter might find a premium saw feasible at $19; others might find it expensive.

Let us look at the perceived value pricing formula. Businesses use this formula to set product prices:  

• Perceived Value Pricing = Product Perceived Value (PPV) * K

Here, K is the price adjustment factor for that product. When a customer glances at a product, they identify it with an estimated value, known as the product's perceived value.

So, if a product is priced higher than its perceived value, customers will doubt its quality. In some scenarios, the customer will reject the product altogether. On the other hand, when the product price matches the perceived value, the probability of purchase rises.

Let us look at perceived value pricing factors.

#1 - Outer Appearance

Seeing is believing; outer appearance creates a decisive first impression among customers. Thus, paint quality, fit-and-finish, packaging, labeling, and design dictate perceived value.

But the aesthetic angle goes beyond the product; it applies to pamphlets, brochures, store design, etc. For example, a product that offers premium functionality can fail to create a value perception if it looks unappealing.

#2 - Utility

Aesthetics have a bigger impact on first-time purchases. It cannot generate repeat customers. If a product offers functionality and fails to look appealing, it can still score well in customer retention.

Further, not all customers need a particular product. Marketing and pricing decisions depend on the market size of the product. Further, if a customer finds a product unaffordable, its utility vanishes. Thus, perceived value is high when a product can justify its price.

#3 -Availability

Common and high-volume goods are available everywhere. But some products have a smaller market size. In such a scenario, the manufacturer cannot hold a large stock. Also, the manufacturer limits their distribution network to relatively high-volume areas. When a brand is missing from supermarkets and vendor machines, its perceived value falls.

#4 - Emotions

Surprisingly, psychology plays a huge role in buying decisions. Such goods are called aspirational products. Here, the product becomes a status symbol, no longer about functionality. Watches and automobiles are some examples.

Even with cheaper goods, emotions can play a role. For example, Coca-Cola markets itself as a lifestyle, as a feeling. Owing to its popularity, the product's perceived value increases.

#5 - Brand Value

Branding also plays a vital role in deciding the product's price. In simple terms, brand value is about popularity, brand awareness, and perception. Customers assume lower value if they have never heard about a brand. As a result, popular brands impose high prices and still manage to justify them.

Let us look at some examples to understand perception-based pricing better.

Adam travels from England to New York. To reach the airport, he books a cab online. Each cab service quotes a different price for the same distance. So naturally, Adam chooses the cheapest alternative. Thus, perceived value has a lot to do with competitive pricing. The same applies to airlines.  

Let us look at the pros and cons of perception-based pricing.

The two concepts resemble each other; let us distinguish between them.

This has been a guide to what is Perceived Value Pricing. We explain its formula, examples, factors, value pricing comparisons, advantages & disadvantages. You can learn more about it from the following articles –

• Prestige Pricing
• Dynamic Pricing
• Differential Pricing