The perception of value in retail goods stems from the notion that the consumer believes (or doesn’t believe) a product will satisfy their needs. It becomes a complex synthesis in the mind of the consumer that includes price, brand and social proof. Because of this, retailers need to improve the price perception of goods to increase profitability.
In its most basic form, perceived value determines the price the consumer is willing to pay for a product or service. Often it has little to do with the actual monetary value of the item. Rather, perceived value is based on the product’s theoretical ability to fulfill a need and provide satisfaction, known as utility.
Brand name often affects a consumer’s perception of value, driving them to pay more for a brand name product, such as Tylenol, that is very similar to a product whose label is unfamiliar to them that may perform the same function and produce the desired results. By using strategic marketing techniques, a company can, over time, increase the perceived value associated with their brand.
There is a perception among many consumers that paying more for an item means the item will be of higher quality or last longer. That’s not always the case, but often perception beats reality in retail. For example, a consumer in the market for a diamond engagement ring might find three different price points for the same size and quality of diamond. Assuming they can afford it, often the consumer will choose the ring with the higher price, operating on the theory that the diamond that costs twice as much is somehow a better product.
An important element of perceived value in connection with merchandising is the concept of social proof. There is a general belief that if other people are behaving in a certain way — in this case, purchasing a certain item — that represents an indication of the correct behavior. For retailers, this concept can be observed in the consumer’s reaction to a store display. If the display appears to have several products gone because consumers have made the decision to purchase, other consumers are reassured by that and view it as an indication that the product is a worthy purchase. Consumers are often reluctant to be the first one to select an item from an untouched display.
Companies are also using social proof online as a way to grow sales. Accounting software company Freshbooks has a dedicated testimonials section on their homepage; Help Scout, a customer service software company, offers video case studies on their website; and Cultured Code, the developer of popular apps, posts screen captures of customers’ tweets. Video camera brand GoPro posts user-generated content, which is becoming one of the most trusted forms of social proof. Amazon leverages social proof with their “Customers who bought this item also bought” lists and also makes it easy for customers to share their purchases on social media. Beauty and skincare retailer, Tatcha also has a Bestsellers tab in the menu on its website in efforts to draw their audience to purchase.
Regarding perception of value as a reflection of price, retail giants like Walmart and Amazon believe that by reducing prices, they boost perceived value. The risk retailers face by attempting to compete in this way is that they will end up in a “race to the bottom” in an effort to beat every competitor’s price. The fact is that the perception of low price is more important than actually having the lowest price. In addition, it’s important to remember that consumers are initially motivated by whether they believe the price of an item reflects its value.
Thus, for retailers to improve profitability, they must improve price perception, which may or may not mean actually reducing the price. A way to accomplish this is by identifying key value categories (KVCs) and key value items (KVIs) — that is, categories and SKUs whose prices consumers are likely to notice and remember. By pricing those items competitively, retailers can charge higher prices on other items and avoid the race to the bottom.
Keep in mind that perceived value always begins with whether the consumer believes your product will satisfy their needs. By making strategic decisions on price, increasing brand awareness, and leveraging social proof, retailers can enhance the perceived value of their product to grow sales and drive increased profits.