The effect of poor pricing policies

Pricing strategy is one of the most important aspects of a business. In some ways, we are rational when it comes to making a purchase decision. In other ways, we aren’t. Placed next to each other, most people would select the more expensive product as the better one, even if it isn’t.

If two identical products were placed in front of each other – one priced at $49.99 and the other priced at $249.99 – which would you assume is the best?

The pricing strategy of offering a more expensive product than competitors is often referred to as price-quality signaling. Setting a higher price than your competitors’ is meant to signal that your product is of better quality.

Luxury brands, from manufacturers of Swiss watches to boutique fashion houses, have used this strategy very effectively for decades, earning a reputation for quality not just because of quality itself, but because of pricing that reflects quality.

While the price of your product undoubtedly affects customer perception, does it also have an effect on satisfaction? Are customers more satisfied with your product if it costs more, and would raising your prices have a positive impact on metrics like Net Promoter Score®?

As it turns out, it might. From freelance service providers to large companies, many businesses have reported a change in customer behavior and sentiment – almost always for the better – as their prices increased. Here’s why:

People are naturally skeptical of the cheapest deal around

A low price doesn’t always mean eager customers. Consumers are often naturally skeptical [REPORT] of prices that are below the market average, believing that a deal that looks “too good to be true” usually it is not.

When you price your product below the competition, there’s a risk that the customers you draw in will view it skeptically. They might be more aware of its faults than normal, and more alert to potential shortcomings and issues.

This can affect customers’ sentiment and satisfaction. When customers start using your product with the belief that “because it’s a cheap product, it isn’t the best in its category” this manifests itself in skepticism and a lack of enthusiasm.

When you change your pricing, you change your audience

Consultants, freelancers, and agencies around the world can attest to the fact that cheap prices all too often attract clients with unrealistic expectations. Likewise, products marketed for cheap, value-for-money pricing often attract buyers seeking a great deal at a low cost.

When your business depends on retention, price-focused customers can become a frustrating liability. If you ever need to raise your prices, you risk losing them as your product is no longer the best deal on the market.

Changing your pricing often also means changing your audience. For a SaaS business, it could mean transitioning from an audience of solopreneurs to an audience of small businesses. For a different type of business, it could mean transitioning from SMEs to enterprise customers.

Different audiences have different expectations. Your current audience might like your product, but are they the best possible match? Often, changing your pricing changes the customers you attract, making it easier for you to achieve positive sentiment and a higher Net Promoter Score.

In some markets, the price can make a product desirable

Swiss watchmakers like Patek Philippe and Audemars Piguet have built profitable businesses not by offering value for money, but by offering luxury exclusivity at a high price.

If these companies reduced their prices, they likely wouldn’t win customers – instead, there’s a real risk that they would lose the customers they’ve spent decades earning.

Products that don’t seem to follow the laws of financial gravity are called aspirational products – items that are desirable not just because they’re good, but because they’re expensive. As these products become more expensive, the desire for them increases.

While the world of B2B and B2C software is very different from high fashion, there are several principles that apply to both industries:

• People want to buy something of high quality, and the price is often an indicator of quality.
• Management leaders often prioritize the “best” or most expensive solution over an unknown, less expensive one, even if it isn’t necessarily better.
• Many businesses are also guilty of irrational behavior when it comes to purchasing, prioritizing aspirational brands over brands that offer value for money.

The aspirational factor differs hugely between industries – few people buy a spreadsheet application because of its brand name. However, it still exists, and taking advantage of it through your pricing strategy can have a significant effect on customer satisfaction.

Customers love reasonable prices, not necessarily low prices

A 2004 study by the Solvay Brussels School [REPORT PDF] found that customers are more likely to develop a loyal, satisfied relationship with a business when products are priced reasonably.

The key term above is reasonable, not necessarily low or high. When pricing appears to be fair and in line with the amount of value the product provides, customers are more likely to develop a trusting, loyal commercial relationship.

Other studies, such as this study by Vinita Kaura [STUDY], show that the perceived price has a significant positive impact on price fairness. When people believe prices are fair, they’re far more likely to form a positive opinion of the product, company, and brand.

If your product is underpriced – which means that it offers value far greater than its cost – your pricing strategy could be damaging both your profit margin and your ability to maximize satisfaction from customers who view its pricing as too good of a deal.

Low pricing can also affect your ability to support your product and its customers. If your weak profit margin makes it hard to offer good support or a generous return policy, for example, it’s likely to have a negative effect on customer satisfaction.

Is your pricing helping or hurting retention?

Pricing is one of the most difficult aspects of creating and selling a product. Set a too high price and you will create the risk of alienating potential customers and force yourself to lower prices later in the process. Set a low price and you will risk to compromise your service and reduce your margin.

It’s clear that pricing has a significant effect on customer satisfaction. Get it right – make it fair and reasonable – and your pricing will contribute to customer satisfaction instead of hurting it. Get it wrong and you could end up upsetting or outright losing, many of your customers.

From pricing to service, features and overall experience, Retently lets you survey customers to find out what they think about your product. Implement Net Promoter Score for your business and start collecting actionable feedback.

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