How customers perceive price

I don't need to explain to anyone that there is a difference between the price tag of a product and the value that the customer attributes to it. I probably don't need to explain to anyone that if you don't need a hammer, you won't buy one even if it's 50% off. But let's look at it a little more systematically - how customers perceive price.

For customers, price is much more than just a number. Price is:

• a sign of quality and value

• an indication of how fair your company is

• one of the tools for building loyalty and trust

What influences the perception of price?

Value gap

value gap = price - perceived value

The value gap expresses the price that the customer perceives as overpayment compared to what the product actually brings them. In other words, the greater the value gap, the less likely the customer is to buy the product. The price is too high for what the customer will get out of it (based on subjective perception, not an objective list of features and cost calculation).

The value gap is perceived, subjective, and cannot be measured by external metrics.

What influences the perception of the value gap:

• Perception of added value
  Added value that raises the price from $1 to $2 is easier for customers to understand than added value that raises the price from $100 to $200. Although it could be justified in both cases, the increase in price, which needs to be either rationalized or experienced, is so large that it can discourage the customer.

• Risk of regret
  The greater the value gap, the more people react to any shortcomings.

• Price size
  The higher the price, the more people consider whether the product really has adequate added value, or what else they could buy for the same amount, and they may question its benefits. With a low price, people expect low quality and therefore low perceived value.

• Expectations
  For a product costing $100, it may be enough for me that it is "good," but for a product costing $1,000, I expect it to be great.

• Law of diminishing returns
  Many products are composed of many attributes/features - cars, software, houses, etc. - and customers need different features with varying intensity. Even if each feature costs the same amount, users do not consider their benefits linearly.

• Frequency of use
  If we use a product infrequently, the perception of the value gap increases.

Deadweight Loss

The value gap does not exist in a vacuum, but in the context of the total amount of resources. It is not just that the customer feels they have overpaid, but that the customer could have purchased something else of value for the excess price. Deadweight Loss then represents regret that the overpayment could not be spent on something else useful - not just to save money, but to gain new benefits.

Deadweight Loss needs to be considered in relation to the customer's economic power. A customer with lower purchasing power will perceive deadweight loss more sensitively than a customer with higher purchasing power. If a customer has $10,000 left per month, they will perceive a value gap of $100 much less than someone else who has $1,000 per month. Perception can then vary between "what I want" and "what I really need."

Feature creep

Feature creep represents the continuous addition of functionality to a product that does not necessarily represent added value for the vast majority of customers.

Feature creep usually arises as:

• over-engineering (striving for a perfect product that allows the customer to do absolutely everything)

• striving to do everything that any customer wants

Simply a "overloaded" product.

However, neither reflects the perceived added value of most customers.

Feature creep has its disadvantages, e.g.:

• increased product complexity in terms of both production and use

• production costs that may not be recouped (even if we are doing "what the customer wants")

But if we look at feature creep in the context of the value gap, then not only does it not increase the perceived added value for most customers, feature creep actually reduces it.

If a customer has a product for $100 that has 10 features that the customer needs, they will feel that they are only paying for what they need. If a customer has a product for $90 with the same 10 features they need and 5 they don't need, they will feel that they are paying for something they don't need, even though the price is lower! (Let's assume that they cannot compare them side by side).

Loyalty and price

Price affects loyalty. And now I'm referring more to the difference between "free" and "for a penny." Free doesn't necessarily create a relationship. Free costs nothing, and it doesn't matter whether the customer needs it or not. Even "for a penny" has a different psychological impact:

• the customer feels ownership because they have actually bought something

• payment (especially repeated payment) reinforces consistency of behavior

• payment increases the feeling of value - it costs something, it has some value

• payment inspires more trust than something free, creating a sense of commitment on both sides

Free should only be used for introduction, for product adoption. But price creates loyalty.

And as a bonus, even the smallest amount forces the customer not only to want something, but to start considering whether it is worth the price. Even "for a penny" acts as a barrier against feature creep. The customer no longer thinks only in terms of "I'd like that," "yeah, go ahead and add it," and randomly clicking on questionnaires asking "What else should we add?" The customer pays for the decision.

Packages, tariffs, and customer choice

Are fixed-price packages/tariffs with fixed functionality better, or is it better for customers to be able to tailor the functionality of a product exactly to their needs and pay only for what they need? Both have their advantages and disadvantages.

• cognitive load
  packages are easier to understand than studying each function individually.

• speed of adoption
  customers choose packages faster than if they were to select each feature separately

• degree of control over functionality
  packages give less control over what the customer will actually have in the application; either something will be missing, or there will be unnecessary features

• degree of control over price
  packages do not allow for as good price control (and reduction of the value gap)

And to make things more complicated, packages increase the total price that customers are willing to pay:

• a package is easier to justify than when each feature has to be justified separately

• the customer perceives the price for added value better; $10 for 5 features is easier to understand as added value than one for $2, one for $1.50, etc.

• packages simplify the comparison of options in terms of price; the customer has 4 options instead of all combinations of 20 features.

However, this only applies if the packages make sense to this particular customer, otherwise there is a risk of:

• a feeling of deception if they have to choose a cheaper package without the functionality they need - they pay, but don't get what they want

• a feeling of unnecessary overpayment if they choose a package with what they need, but which has additional functionality

If possible, offer both options:

• the option to purchase themed packages "at a discount"

• the option to purchase a single feature

This solution reduces cognitive load, simplifies price rationalization, and provides control.

Conclusion

Price is not just cost + margin. Price is a psychological relationship between perceived value, commitment, and the meaningful use of limited resources.