How Does Pricing Affect Customer Loyalty?

The price you charge and how you display your prices have a fundamental impact on your customers and potential clients. Not only do prices determine the likelihood of purchase, but the way that you display your prices and whether or not you use price promotions (sales promotions based on discounted prices) can affect the loyalty of your customers.
 

Paying Money Is a Risk

Customers are always trying to reduce their risks when they are faced with the need or desire to buy something. They are either concerned with spending too much money, or they are worried about getting the wrong product for their needs, regardless of the price. Little, if any, of this analysis is done by shoppers on the conscious level - almost all of our decisions to purchase a product or service are subconscious.

Prices and the way they are displayed are powerful triggers for this subconscious analysis. Customers look at a price and instantly decide whether or not to buy the item, based on an internal set of values. The decision whether or not to buy is partly based upon the impact of the price on those self-regulated, internal values.

Some businesses respond to this issue with the use of price promotions. But this focuses solely on price, without realizing that it is just one part of the loyalty puzzle. Indeed, simply working out the amount of money to charge as part of a price promotion is a complex consideration in itself. This is because of the expectations people have about the prices offered by their favorite companies.
 

Reference Pricing Is Key

One of the ways in which we all determine the expected price of an item is through a "reference price." For instance, you might expect a car in your price bracket to be $20,000. Therefore, you perceive $20,001 to be more expensive than your expected price and $19,999 to be cheaper. The instant you see the price, your brain determines whether or not it is less or more expensive than you imagined. Poorly considered price promotions could disturb this subconscious process, making loyal customers somewhat confused.

Customer loyalty

This example, where a customer has an expected price, is known as "internal reference pricing." It is the kind of reference price that is "inside the head." It comes from experience buying similar products in the past, discussions with friends and colleagues and our own thoughts and feelings based on expected value.

However, we can also determine our willingness to pay for something by using "external reference pricing." This is where we compare the price offered to that of another supplier. Comparison shopping online, for instance, is based upon this kind of price analysis; we check prices against those of another supplier and then make the decision whether or not to buy from our preferred company.
 

Loyalty Is Partly Based on Reference Pricing

Customer loyalty appears to include reference pricing as a key component. We tend to be most loyal to companies that match price expectations. However, research from Syracuse University shows that it is external reference pricing that is most important when it comes to loyalty. That suggests that people who are most loyal are the ones who know what your competitors are charging. Indeed, the study found that people who use internal reference pricing, the ones who have a "gut feeling" as to the price of something, are the ones who are least likely to remain loyal to a brand. That also suggests that simple price promotions would only appeal to people who are likely to be less loyal.

This finding also suggests that price displays on websites should include competitor pricing information. Show the price on your website and the price of your competitors, and you will encourage more, not less, loyalty to your business. That's probably because of the impact of that subconscious analysis, too - showing your competitors' prices lets your customers know you are confident, which is bound to have an impact on their decision-making.

The point is, you can't rely on promoting your price against the competition. Loyalty is not just about the prices you charge.

Graham Jones is a writer and consultant on Internet Psychology.