Customer satisfaction depends on the pricing strategy of a business because pricing can have various effects on the perceived quality of the service or product. The service or product quality doesn’t directly depend on pricing.
However, when businesses allow pricing to directly affect the real cost and value of their services or products, the quality falters. That’s why it’s important to know the effects of cheap prices, the effects of changing the price, and the customers’ price perception.
Table of Contents
Effects of Cheap Prices
According to research, the perception of the quality of a product or service changes depending on the price. Society is conditioned to think that the lower the price of the product the worse the quality, and vice versa.
That’s why most customers think that something is a scam when they notice that the price is unrealistically affordable, or too low compared with their expectations. That’s why businesses need to go through thorough research before deciding the price.
Pricing can affect the service quality in terms of changing the costs in the structure of the service or product. By placing a very low price and opting for a tighter profit margin, businesses can face a very difficult situation, and experience failure to retain customers or clients.
So, it’s necessary to consider expanding the base value cost margin of a product or service. The range of the cost should be flexible and measured in a practical system that keeps track of these margins and allows for changes.
By altering the particular base costs of the product or service in an agile manner, businesses might avoid any kind of impact it may have on the quality of the service. Many tools allow this kind of cost manipulation.
Coupled with the right price monitoring tool, a flexible system provides an opportunity for a business to model their pricing according to their needs and the needs of the customers, avoiding any harmful impact the price may have on customer satisfaction.
Having a high price
There are two sides to opting for a higher price. One is that customers may think the product or service a business provides has exceptional quality and it’s worth it. The other side is that the price is too high for the volume of customers a business is aiming at. This indirectly impacts the perceived quality of the product or service.
Making it affordable
Businesses can achieve a larger customer/client base if they price their products or services in a medium price range. This way the product or service is perceived as reasonable and affordable. Customer satisfaction comes after the fact.
Service and Product Quality Perceptions
In this economy, the average consumer constantly looks for ways to save money by looking for affordable products. Coming up with the appropriate price for the product or service is difficult. The product must go through its cost evaluation.
The cost structure is analyzed and most businesses add a certain percentage to the cost which accounts for gross profit. This covers the sales expenses and the resulting net profit is the revenue a product brings to the company.
However, this is not the smartest method to use when deciding what to price a product or service. Setting a lower price doesn’t necessarily result in more customers or better customer satisfaction. The most important thing is the perceived value of the product or service.
People assign value to everything. The old uncomfortable couch might not be worth much to a stranger, but to the owner, it has sentimental value. A painting may have several values according to perception, and the product or service is customer-valued based on how it meets their needs and how much they paid for it. It’s all about the customers’ price perception.
Customers’ price perception
Every customer prefers to pay as little as possible, and this is the final step in the decision-making process. There’s research that includes searching for the product that meets the needs of a customer, then there’s the comparison phase.
In the comparison phase, a customer looks for reviews, i.e. experiences of other consumers of a service or product. Finally, the price comparison sets in, and usually the reviews and the price are the ultimate decision-maker.
Because the consumer can only assume the costs and benefits of the product or service until buying it, these are called perceived benefits and costs. Increasing or reducing these two factors can impact the customers’ perception:
- Perceived benefits: Status, convenience, choice, quality, brand, etc. E.g. People of higher status in society to drive expensive cars, flight passengers opt for convenience even though they don’t necessarily have to fly somewhere, etc.
The benefits can be exchanged in terms of choice for convenience or convenience for quality. A consumer that lives in a remote area might be willing to pay more for a low-quality product in a local store than drive to a city.
- Perceived costs: This refers to the price tag on a product or service. Let’s discuss a service as an example. If a consumer lives in a remote area, the local cleaning service might charge an unreasonable sum of money.
However, if the cleaning service located in the city center charges less, the consumer will account for how much it takes for the service provider to get to them, if the service provider will charge for the trip, etc. This is how consumers perceive cost.
Increasing the perceived benefits of a product or service can directly affect the profit of that product or service. Reducing the perceived costs also impacts the profit in a good way. So, pricing the product or service in the right manner can affect customer satisfaction and increase profits.
Opting for cheaper pricing of products or services by cutting the base costs in the cost structure can negatively affect the service or product quality. However, changing the price in terms of increasing the perceived benefits and reducing the perceived costs can increase profits. This may not end in better customer satisfaction, but it generates more revenue.