Catherine, one of our podcast listeners, wants to know how to establish her organization’s reputation for having low prices without the companion reputation for having cheap and low-quality products. It’s a good question that, in my experience, is easy to get wrong. However, since I would imagine some of you have a similar problem, I also wanted to share that discussion here with you.
The fundamental problem for many businesses is wanting a reputation for low prices and high quality. However, these are two ideas that conflict in the minds of consumers. People are savvy enough to know that to have a low price, you need low costs, and low costs typically are associated with low-quality materials or construction.
So, disrupting this assumption is difficult. It is possible, though.
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For example, Amazon has a reputation for low costs and high quality. Part of that is because service quality and delivery speed come into that high-quality assessment. Moreover, they have a reputation for continuous improvement, which is often another quality indicator.
However, prices on Amazon have crept up over the years, too. So, the difficulty is that these things are linked, even for big brands like Amazon. High quality and improvements (plus market factors beyond their control) lead to higher prices, even if you have a low-price reputation.
Price Image Is Affected by Non-Pricing Experience Details
It is important to remember that non-price factors drive your reputation for pricing. When discussing the reputation for low prices, this area falls under the Price Image area of customers’ price evaluation. Price image is influenced heavily by things other than the numbers involved.
Surprisingly, many non-number factors have a lot more sway for customers. For example, décor can indicate to people what to expect regarding pricing. If it looks lush and beautiful, and many attentive staff are there to help and guide you, these signals indicate that prices will be high. The reverse is true, also. If you pile things in heaps and have the appearance that no one works there, then that indicates prices will be low.
There’s a famous story about the first Home Depot. The night before it opened, some employees shined all the concrete floors to look nice for a grand opening. The founder was furious! He ordered the team to scuff up the floors. He wanted it to look like a lived-in store, a warehouse, or someplace construction workers go. He was sending signals that it was a low-price store.
Price image is the intersection between pricing and branding. If we use these indirect signals, like décor or service, they will affect pricing reputation more than our quality image. Look for opportunities where the signal will send a stronger low-price signal than a low-quality signal.
People evaluate pricing in two other ways, too. For example, let’s say you want to manage your estate with a will and trust. However, you have never priced something like this before. If the law office tells you they can do it for $2,000, you might not know if that is reasonable. In cases where you don’t know, you resort to two other common price evaluation shortcuts; these are internal and external reference points. Internal reference points are based on experience, i.e., you know what your brother paid. External reference points come from the environment, meaning the information is given to you, as in the quote you get from them or the price tag for related items you see before you get the quote.
Two Common Pricing Strategies
Regarding pricing strategies, most firms engage in two broad categories. The first is Everyday Low pricing, and the other is High/Low pricing.
So, Everyday Low pricing is the strategy that all the prices are as low as possible on anything and everything they can. You see this in grocery stores and furniture or electronics stores. High/Low pricing is everyday pricing that is higher but with periodic deep discounts, too.
How one infers a reputation from those two strategies depends on whether customers evaluate before or after they’re in the store. From the outside, Everyday Low pricing communicates low prices better.
However, High/Low pricing stores have an advantage from inside the store. Seeing deep discounts on some products sends a solid low-price signal. Moreover, having higher prices also sends a higher-quality signal.
So, if you’re trying to lure people and communicate low prices, Everyday Low pricing probably works better. But once people are inside the store, a High/Low pricing strategy sends a lower price and a higher quality signal.
Remember, These Ideas Are in Conflict
It’s challenging to reconcile that a brand or a store might be both low-price and high-quality. So, provide your customers with a story to moderate this conflicting information. Having a plausible explanation for why you violate the market norm makes the Low-Price, High-Quality reputation palatable for people.
For example, Ikea doesn’t have a reputation for having super high-quality furniture, but it’s furniture people like, design- and function-wise. They have a straightforward story for offering low prices and reasonable quality. They save on costs because they flat pack everything and have customers assemble it. Fewer links in the chain that need to extract profit and their efficiency allow them to have (reasonable) quality at a low price.
So, for Catherine, we have this to offer. Organizations should look for asymmetric communications, signals that will send a stronger low-price than a low-quality message. Those can be non-price signals like decor or service and other things like that. Also, consider how you construct your pricing strategy. Sometimes Everyday Low Pricing is best; other times, High/Low works better.
Perhaps most importantly, have an explanation for why you can be both. Firms need a story that they can tell customers that will help them understand how these two things that should not coexist may exist, and that’s why you can have both low prices and high quality.
Remember, if you have a business pickle, we want to help. Just visit me here and let us know what you need help with. You could be featured on the podcast. Plus the quality of the answers is high and the price couldn’t be lower.
Colin has spoken at hundreds of conferences, including some of the world’s largest brands. Talk to Colin about how he can speak ‘in person’ or ‘virtually’ at your conference. Click here.