Why a Low Price and a Discounted High Price is not the Same

• November 11, 2020

If you think the buyer perceives your price equally whether it is just a low price or a higher price with a discount – then think again. 

When we are considering buying a product or a service, our subconscious mind creates a whole slew of associations. We decide if we believe the features and functions of the product or service will deliver the value we expect to receive. The brand and everything we associate with the brand influence the value and benefit we expect to receive from the product or service. So, does the lack of a brand, and how the product or service is presented to us affect how good we think it will be once we purchase it? If the product or service is sold by a salesperson, how that person presents themselves and the product or service will have great influence over how we will associate value and benefit to the product or service. Some of these associations will add to the value we expect; some will detract from them. Some brands will add value; others will be totally neutral; some will detract from the value. Also, some features will add varying degrees of value; others will be neutral, and some will detract from the value. 

This cocktail of associations can be summarized as “perception of value,” and it happens in the blink of an eye, while the potential customer is going through the decision-making process as to whether they will purchase the product or service, or not. This also means that for most of our purchases, we do not make a true valuation of the various products or services available but we use our “perception of value” or gut feelings to aid us in making a decision. In behavioral economics, the term for this process is known as heuristics. 

As soon as we see the price of the product or service, we make an immediate association between our “perception of value” and the price. It is an association that is emotional, but where the outcomes are pretty simple to come by. There are only three possible outcomes:

• The price is above my “perception of value,” and therefore I will not buy the product or service.
• The price is generally in line with my “perception of value,” and therefore I will buy the product or service. This is valid for a range of prices.
• The price is below my “perception of value” and therefore, what I initially thought was an adequate product or service must have some perceived flaw I did not initially discover, and hence, I will not buy the product or service.

It is also important to know that different people will have differing “perceptions of value,” and the very same people will have a different perceptions of value across various times and circumstances. But for now, that is a topic for another article. 

So, if a too low price is set, then what can occur is an expectation with the buyer that the product or service may be inferior (even though that cannot be proven at the time of them making a purchasing decision). Why does a price plus a discount work differently? That is because the buyer’s “perception of value”  is then tied to the original price before the discount was put in place, and the discount just means the buyer now perceives the product or service as a bargain, it is a better deal for them.

So, to sum this up in a more formulaic manner:

• Price compared with “perceptions of value” = a buy or not buy decision
• Price compared with “perceptions of value” + discount = a bargain

However, it needs to be noted that the discount cannot be too large. If it is, a significant discount in itself will make the potential buyer think twice about purchasing the product or service. It might have the opposite effect to what the seller initially intended – a higher sales volume. Just as with a too low price, to begin with, an excessively large discount will generate doubt in the mind of the prospective buyer. They will think, “the vendor must be desperate to sell this, probably because nobody wants to buy it because it is not a very good quality product or service,” or ”the vendor has figured out there is something wrong with the product or service so they must offer a deep discount to sell any of them at all.” 

In conclusion, most buyers are usually quite quick to decide the value they perceive with a product or service they are thinking of purchasing. They then compare that value with the price and decide to buy or not buy the product or service. Discounts, if reasonable and not too large, will drive higher sales because the buyer’s “perception of value” is anchored to the original higher price, not the discounted lower price. Thus, a discounted high price is not the same as a lower price – even if the dollar value is the same!

Per Sjöfors
Founder
Sjöfors & Partners
www.sjofors.com