How to Achieve the Difficult Balance between the Reference Price and the Fair Price

Source: AI generated image (Dall-e)

In today’s digital era, where information is abundant and access to data is instantaneous thanks to emerging technologies, the understanding and management of the reference price and the fair price become crucial aspects for any business. The ability of consumers to compare prices and assess the fairness of these prices has transformed the pricing strategies of companies and entrepreneurs. Now, more than ever, it is essential that marketing professionals and entrepreneurs, in particular, understand these concepts not only to align their offerings with market expectations but also to foster a positive perception of their brands and products. This new market dynamic demands a meticulous approach to price transparency and personalization, key elements for gaining consumer trust and ensuring a favorable purchase decision. In this text, I present these concepts and suggest how they can be applied in the real world, providing practical examples and recommendations, based mainly on the findings of this recent research.

The ability of consumers to compare prices and assess the fairness of these prices has transformed the pricing strategies of companies and entrepreneurs.

Reference Price: The Invisible Baseline

The reference price is basically the price expectation that consumers have in mind before making a purchase. This imaginary price is formed through previous experiences, comparisons with similar products, and information available in the market. For example, if you are accustomed to starting the day with a cup of coffee that you buy on the way to work for $2, that becomes your reference price for coffee. Then, if you find yourself in another place with a cup that costs $4, you are likely to perceive it as expensive because it doubles your reference price.

For entrepreneurs and marketing managers, it is crucial to research and understand the reference price of their target segment. This can be achieved through price sensitivity surveys (Price Sensitivity Meter or Van-Westendorp method), competition analysis, and monitoring conversations on social networks. Ultimately, knowing the reference price helps to set competitive prices that are perceived as fair or even advantageous.

Fair Price: The Perception of Value

The fair price, on the other hand, is a more subjective concept and refers to the consumer’s perception of whether the price of a product or service is reasonable, given its quality, the benefits it offers, and the context of the purchase. Returning to the coffee example, if the $4 cup is served in a high-end coffee shop, with beans from a special coffee and a unique atmosphere, you and other consumers might consider it a fair price due to the additional perceived value.

Entrepreneurs and marketing professionals must effectively communicate the value their customers receive by paying the established price. This can include highlighting the superior quality of the product, the unique experiences it offers, or any other differentiating factor. Transparency about costs and justifying the price can also help reinforce the perception of a fair price.

Strategies to Establish “Reference Prices” and above all: “Fair Prices”

  • Educate the consumer: Through content marketing, social media, and advertising in general, educate your audience about the features and benefits of your product or service. This will help to establish a new reference price based on the perception of value.
  • Perform effective segmentation: Identify market segments that value different aspects of your offer. This allows you to adjust prices according to the expectations of each segment, maximizing the perception of value for each or the segment of your interest. “Conjoint” analysis (Conjoint Analysis) allows you to establish differences in the value perception of each segment.
  • Conduct A/B price testing: Experiment with different price levels through MVT (Minimum Viable Tests) to understand price-demand elasticity and find the optimal balance between fair price and reference price. In an MVT of prices, the transaction is controlled and suspended just before payment to establish how many customers were determined to make the purchase at each price level, but be careful, the transaction is suspended only when evaluating a concept of a product or service that does not yet exist, in which case it is necessary to find a way to compensate customers who participated unknowingly in the MVT and ended up frustrated by not receiving the product or service they were offered, this of course involves significant ethical considerations. In MVT tests with existing products or services, the transaction is not suspended, and the customer receives what they bought.
  • Collect Continuous Feedback: Maintain an open dialogue with your customers to collect feedback on their value and price perceptions, and adjust your strategy as necessary.

Practical Examples

  • A Technology Startup: When launching a new technological product, the startup conducted an extensive education campaign on how its innovative technology solved common problems more efficiently than the competition. By doing so, they established a higher reference price in the minds of consumers, justified by the additional perceived value.
  • A Local Coffee Chain: When introducing a new line of special coffees, the chain decided to communicate in detail the origin of its beans and the artisanal brewing process. This approach helped customers understand and accept a higher price as fair, given the superior quality and unique taste experience.

Conclusion

In conclusion, the era of information and technology has raised consumers’ expectations, not only regarding the quality of products and services but also in their perception of value and the fairness of the price. Adaptability and sensitivity to these changing perceptions are essential to maintain relevance and competitiveness in today’s market. Companies that manage to tune into their consumers’ expectations and proactively adjust their pricing strategies not only improve their brand image but also foster greater loyalty among their customers. This demonstrates that price goes beyond a simple number; it is a direct communication of the value a company offers and a significant influence on the long-term relationship with its consumers.

Companies that manage to tune into their consumers’ expectations and proactively adjust their pricing strategies not only improve their brand image but also foster greater loyalty among their customers.

For this reason, it is imperative that entrepreneurs and marketing professionals not only focus on establishing a fair and competitive price but also invest in understanding and anticipating the needs and perceptions of their customers. By doing so, they not only ensure a fair price perception in the short term but also build a solid foundation for brand loyalty and sustained success in the future. The dynamics of reference price and fair price, in this sense, offer a unique opportunity to align business objectives with consumer expectations, making the difference between a brand that thrives and one that merely survives in today’s vast and competitive landscape.

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