Why Low Prices Can Scare Off Customers

Can low prices scare customers?

Despite all the hype surrounding great deals, it turns out that cheaper isn’t always better. Research from Vanderbilt University, published in the Journal of Consumer Research, suggests that low prices can backfire for retailers because consumers sometimes see low prices as a sign of a low-quality product.

However, the researchers also found that consumers sometimes see low prices as simply good deals. Shoppers’ perceptions of a low price depend on what they’re thinking about when deciding to buy a product.

“The bottom line of our research is that people can hold two opposing beliefs about a product,” said Steve Posavac, lead author of the study, in a statement at the time of the study’s publication. “In the case of price, most people simultaneously believe that low prices mean good value and that low prices mean low quality. But these two beliefs are not equally present in consumers’ minds all the time.”

How do consumers determine the value of low-priced products and companies

If a consumer comes upon a low-priced product or service, they may see it as a good deal or they may see it as not worth their time or money. How people think about price can influence consumer decisions as much as the actual price.

“Consumers rarely have complete information and [they] use various strategies to fill the gaps in their knowledge as they consider and choose products,” Posavac said. “One of these strategies involves using naive theories: informal, commonsense explanations that consumers use to make sense of their environment.”

A consumer may perceive a company as “upscale” and assume its prices are too high or they may see a company as a discount retailer whose prices are much too high for its reputation. They may also see the discount retailer’s products as inferior. It’s not easy for a business to manage its customers’ perception of price vs. value.

How can companies improve consumers’ perceptions of low pricing?

Companies can influence how consumers feel about their low prices by conducting a market analysis and improving their marketing strategies. In the Vanderbilt study, when marketing efforts focused on the product quality, consumers looked more favorably upon higher prices. However, when companies highlighted value, consumers rated cheap products more favorably.

“A company may implement an everyday low-pricing strategy that manages to reduce brand value and alienate consumers if many of them believe that low prices equal low quality,” Posavac said. “Over the years, JCPenney customers had become so used to sales that they no longer believed they were getting a good deal. [Companies] design a strategy by assuming that a certain naive theory is going to drive consumer evaluation and choice when, in fact, several naive theories are available to the consumer.”

The research findings suggest that raising the price correlates to increased value but the focus can’t solely rely on that. It’s about combining value and convenience so consumers feel they’re getting their money’s worth. Introducing an improved product that’s still priced competitively can increase the odds of successful sales and build customer loyalty.

How can you avoid the ‘low-price, low-quality’ perception?

Of course, a product’s price doesn’t always reflect its quality. For example, currency can play a role in the pricing of products in different countries. In some parts of the world, the United States dollar goes very far. In another country, you could potentially buy a nice four-course meal for a third of the price that you would in the U.S. However, does that mean the quality of the food is bad? Not necessarily.

Another reason a high-quality product could be priced low relates to supply and demand. If a particular product is not in high demand, the price decrease could entice people to buy it. Meanwhile, if there is a surplus of a product, the company might drop the price to get rid of excess inventory. This doesn’t indicate a faulty or useless product.

For companies to control their price perception, marketing directors must present their brands the right way. Building a brand successfully plants ideas about your product in the consumer’s mind. Ideally, if your company uses an everyday low-pricing model, your customers won’t think about how cheap your product is or view it as low quality. Instead, they’ll think about how your product is a great value.

How do you disclose low prices as a service business?

Service companies disclose low prices to consumers via marketing and advertising but managing your approach is essential. If you operate a service business, creating a competitive price quote will work best. In a service business, prices sometimes vary by client and clients will want to know precisely what they’re paying for.

Besides offering a competitive price, be transparent and detailed about everything you’re willing to include in the agreement. It’s also critical for your customer to understand that a quote is different from an invoice and various factors may affect the final price.

Best practices for pricing products

There is no one-size-fits-all best approach to pricing. Many different pricing strategies exist and what will work depends on your product, the market, customer perception and your goals. And you’ll most likely have to adjust pricing and strategy a few times along the way.

No matter the product, you should first analyze your business plan so you can determine a feasible price range based on your costs and goals. Once you have a general idea in mind, you should follow these pricing tips. 

1. Check out the competition: Conduct a competitor analysis to understand your competitors’ pricing and performance. Whether you’re selling luxury goods or store-brand items, you want to price your product in the same ballpark as the competition. A price too high or too low could change the perception of your brand.
2. Talk to your customers: If you want to know how much your customers are willing to pay for your product, just ask them. A customer survey can provide insights into whether consumers prefer high quality or a low price point. 
3. Consider your industry: A recent study found that when consumers didn’t have brand knowledge, they chose the cheapest option, but when they had brand information they opted for perceived quality over price. A lower price can help you if you’re in an industry without well-known brands, but prices too low could hurt you if you’re up against a quality brand name. 
4. Be cautious about changes: Once you’ve established a price, think carefully before lowering or raising it. A Harvard Business Review study examined consumer responses to price changes and found that people track price changes and their behavior can be surprising. For example, a series of small price increases over time can incite a purchase.
5. Study the results over time: When you set a price for your product, it might take some time to see the true effects. Give it time by tracking your sales over an extended period. This way you’ll be able to see how customers are responding to your product’s price, discounting any temporary anomalies in the market. [Related article: The best point-of-sale systems offer inventory management tools that can help you track product sales over time.]

Plan prices carefully 

Pricing to drive sales is more complicated than simply offering the cheapest deal around. Consumer behavior is affected by rational reasoning and more complex emotional responses related to several factors, not just price. If sales are stagnant, you may be tempted to slash prices but that isn’t always the best strategy. Before you decide on a price, take the time to thoroughly get to know your consumers and the market. If you put in the time and effort, you’ll be more likely to land on a price that pulls in customers. 

Brandi Calero-Holmes and David Mielach contributed to this article.