Price Sensitivity and Consumption
We have already discussed the demand factors that affect pricing. Demand is based on the consumption patterns of the consumers. Sensitivity to the price change will vary from consumer to consumer. In a particular situation, the behavior of one individual may not be the same as that of the other, and may not follow the ‘law of demand’.
In fact, the pricing decision ought to rest on a more incisive rationale than simple elasticity. Some important characteristics of consumer behavior are detailed below:
- From the point of view of consumers, prices are quantitative and unambiguous, whereas product quality, brand image, customer service, promotion, and similar factors are qualitative and ambiguous. It is easier to speculate about what consumers would do if prices is raised by 5 percent than if the quality improved by 5 percent.
- Price constitutes a barrier to demand when it is too low just as much as when it is too high. Above a particular price, the product is regarded as too expensive and, below another price, as constituting a risk of not giving adequate value or being perceived as a low-quality product. If the price is too low, consumers will tend to think that a product of inferior quality is being offered.
Manufacturers are aware of the danger of lowering prices too drastically when improvements in production or reduction in the cost of raw materials would allow it. Very often under these circumstances, lower prices may be offered to the consumer by having the goods sold under another brand name.
- Price inevitably enters into the consumer’s assessment of quality. There are two reasons for this. First, it needs expert knowledge and appropriate equipment to test the quality or durability of some particular products (to say nothing of the time and cost involved in carrying out a proper test), and second, customers tend to look upon price itself as a reasonably reliable indicator of quality.
What is costly is thought to be of high quality. A higher price is ordinarily taken to be a symbol of extra quality, extra value, or extra prestige. Very often, a customer purchases a higher-priced product just because the price is higher. This is more so when the price difference is larger than when it is small.
It is very difficult to convince people that something cheap is of good quality and that something costly is of poor quality. It may be easier to prove that a dear product is of superior quality than to prove that a cheap product is of good quality.
This is especially true of durable consumer goods, which are very often differentiated, at least psychologically, through branding, packaging, and advertising.
In such cases, the sale of certain goods could be stimulated more effectively through higher rather than lower prices for two reasons; firstly, the higher price increases the snob appeal of the goods, and secondly, the higher price creates confidence in the customer that he is getting good quality.
To conclude, in many cases, price is used by the prospective customer as a clue for sizing up the quality of the product. Thus price-quality association is well established.
- With an improvement in incomes, the average consumer becomes quality-conscious. An improvement may, therefore, lead to an increase in demand. If this is so, a time may come when a rise in price results in an increase in demand. This extreme situation may arise if the price in increasingly affluent societies comes to serve merely as an indicator of quality.
- Consumers may be persuaded to pay more for heavily advertised goods. Consumers perceive a firm’s size, financial power, and age as measures of quality. Well-known firms very often assert that by virtue of their reputation, they are able to charge 5 to 10 percent higher than other firms.
- Whether the price is considered a bargain or not would depend upon the average market price of the item, the gender of the potential consumer, and the value of the item to the purchaser. Price reductions tend to be perceived absolutely rather than relative.
This means that the percentage reduction decreases for the item to be considered a bargain as the usual price increases. If a packet of potato chips is considered a bargain by a reduction of 20 percent, a bargain electric fan may be only 15 percent cheaper than the standard price.
As regards gender, it is noticed that men on average require a greater reduction in prices to be persuaded to believe in the bargain.
- In a comprehensive survey of consumer consciousness, it was revealed that the basic postulate of the demand theory, i.e. the consumer has appropriate knowledge of market prices, is not fundamentally wrong.