The Cost of Price

How a Low Price Hurts Every Customer ○ 6-min Read

On a recent episode of The Knowledge Project Podcast, Kat Cole discusses pricing psychology, a term I had never heard.

But once I understood her meaning, I recognized in it a powerful idea.

Pricing psychology is the study of how price acts as a positioning attribute. When we consider what to buy and when to buy it, price tells us as much critical information about the brand and its products as does its physical attributes.

Consider Susan who’s shopping for a knife set. She finds herself in the kitchen aisle, perusing the available options. One set features a wooden block and matching handles, another set is entirely stainless steel, and the last offers four additional steak knives but with standard black handles.

Assuming the price of each approaches $30, Susan need only consider her preferences and whether the utility of one set is superior to another. In this scenario, the effect of price is neutralized… right?

By choosing the same price point, these three products force Susan to do math, everyone’s favorite pastime. She avoids doing the hard work first, and instead decides whether she prefers wood to steel, or whether brand A has a more attractive logo than brand B. But despite putting off the hard work, Susan intrinsically knows that one of these sets is most expensive, but which?

If you thought the stainless steel set, you're not alone — it comes with the fewest ‘things’. If Susan wants a block, she’ll have to purchase it separately. And the stainless steel set includes the same number of knives as the wooden set. So the steel offers the highest price per knife, or in other words, the highest unit utility cost.

That’s a phrase I just made up to help myself understand how we make purchase decisions in a scenario where the price tag refuses to guide us — I’ll come back to that later. On the surface, each knife has some value to Susan. The block has value as well, as do the styles and trims of each handle.

However, our brains don’t assign cash values to esthetics, that ‘math’ gets queued up somewhere in the math-less emotional centers of the brain right after a nostalgic high-school memory and an ice cream craving. Absent a strong esthetic calculation that concludes, “get the wood, the others are hideous,” shoppers may turn to tabulating their unit utility cost (UUC).

The unit utility cost is the price of the thing divided by how many functions it satisfies. This varies from customer-to-customer, and from Susan-to-Susan. For example, Susan A may already have a set of steak knives and wants chef knives to match, whereas Susan B (our Susan) needs as many knives as she can get her hands on.

Susan A sees the $30 price tag and regrets that her purchase buys only four of the things she needs, a $7.50 unit utility cost with some steak knives thrown on top. Susan A’s UUC is higher compared to Susan B’s, who wants all eight steak knives and feels she’s only paying $3.75 for each thing.

Unfortunately, this hyper-logical thinking leads customers to make purchases that limit their losses rather than maximize gains. No one wants to pay more than they have to, so they may settle on the product with the lowest unit utility cost, rather than buy what they actually want.

But can we use the price tag to inspire an emotional, rather than intellectual purchase?

Let The Price Guide Your Customer

We want to reduce the amount of literal and emotional math the customer must do to make a decision. Setting our price points too-close to our competitors can hurt the value of our brand and the likelihood of sale.

When discussing pricing psychology, Kat Cole believes we must first choose in which field we wish to play: value or quality. I agree with her to the core of my being, you cannot offer both.

But Stanley, you inject, “what if you make a truly incredible product that’s affordable to produce?” Charge more. The unit cost to your business suggest a floor for your price, but it does not suggest a ceiling.

When a customer sees your incredible and undercutting product right next to your competitor’s inferior alternative at regular price, which one appears to be higher quality? This is pricing psychology at work. With limited information, the customer relies on the price as a representative of quality.

I’ve labeled myself in the past as a moral marketer, and at this point some people may say, “it is immoral to charge exorbitant fees for products which cost little to produce.” If you're a marketer and you believe this, you’re ignoring the invisibles.

People complain that fashion houses markup their products egregiously despite producing them with cheap exported labor. But the labor and materials that go into a single handbag represents a negligible fraction of the total cost of imbuing that article with quality.

It may take an hour to produce a Gucci bag, but it takes decades of brand cultivation to protect Gucci from turning into The Gap. When you purchase a Gucci bag, you pay for the decades, not the hours.

And ignoring the fact that innovation and brand cultivation are ever-present costs, the price someone pays for your product affects how they perceive it. Back to the knives.

After some math, Susan understood that the stainless steel set had the highest unit utility cost, despite having an identical price tag to its competitors. Let’s restart the simulation. But this time, we set the price of the stainless steel set to $60, twice its competitors.

This new dynamic forces Susan to choose value or quality. We changed nothing but the price, and yet, the price suggests Susan should assign a higher quality to the stainless steel, and a lower quality to the remaining two.

For people who want quality knives, their choice is an obvious one. However, people who need to reduce their unit utility cost as much as possible are now left with fewer calculations to make.

Regardless of outcome, by setting a higher price the maker of stainless steel knives did Susan a favor. And we want to do our customers as many favors as we can afford. The people who buy the steel knives will value them more and are less likely to experience buyer’s remorse (I should’ve got the wooden one). And the shoppers with less cash to spare have fewer decisions to make.

So ask yourself, is your price helping your customer or stifling them? Are you playing the value game or the quality game? And does your price reflect the game you play?