The Price Perception Paradox: When Is More Less in Consumers’ Minds?

Finally, an article examining the impact of inflationary pricing on consumer behavior. But wait! This is not the standard “things cost more so people are buying less” rhetoric.

Rather, there’s much more at play in consumers’ minds – and purchase decisions – than the purely rational assumption that buying behavior is perfectly aligned to pricing.

Bottom line, up front: for some purchase decisions, things that actually cost more are perceived by consumers to be a better value.

And I’m not talking about buying a better car that will cost less in the long run. I’m talking about everyday things like snacks and beverages. And it boils down to the two factors that underlie all purchase decisions: interest, and action.

Interest: how much do people WANT the brand?

How much attention is it earning? How engaged and intrigued are people by it?

Action: how much are they BUYING the brand?

How routinized is consumption? How much is it part of everyday life?

When you look at a given industry through this lens, you find that brands will generally fall into one of four buckets:

1. Exploration: consumers have high interest in the brand, but they haven’t full adopted it into everyday life yet. Usually newer, unique brands.
2. Routine: the brand is part of everyday life, but not particularly exciting / interesting as a result. Generally big, well-established ‘power brands.’
3. No man’s land: the brand is not interesting, nor is it driving action – this is trouble, and time for something like a restage.
4. The promised land: this is the most elusive territory in that the brand is adopted and part of daily life, and yet continues to earn consumer engagement and interest. Very tough to pull off. Chick-Fil-A manages this in the QSR space: its fans eat there regularly, yet remain emotionally engaged and excited about it.

The vast majority of brands will fall into groups 1 or 2: Exploration, or Routine. And here’s where it gets interesting relative to how consumers perceive price.

People are less concerned about price for brands in Exploration, and more sensitive to price for brands in Routine.

Looking at the top 50 beverage brands in the U.S.

The cluster of brands that are high on routine – brands like Coke, Pepsi, Sprite, Dr. Pepper, Gatorade – cost roughly $0.08 per ounce at Walmart.

The cluster of brands that are high on exploration – brands like Olipop, Poppi, Liquid Death, Electrolit – cost roughly $0.13 per ounce.

The kicker? Consumers perceive less price concern with the more expensive group ($0.13/oz.) than they do the less expensive group ($0.08/oz.).

Let me say that again. The brands that cost roughly 62% MORE create LESS price concern in the minds of consumers.

And it makes sense: if you drink a Coke several times per week – it’s part of your routine – a price increase is going to hurt more.

If you’re just trying out Poppi occasionally – exploring the brand and a new category – the price doesn’t matter as much.

So what to do? A can of Coke is about $0.80, and a can of Poppi is around $3.79. But Coke’s getting more pressure in the minds of consumers. And this is true in categories like fast-food, snacks, and beyond. The more established brands – Coke, Hershey’s, McDonald’s, Pepsi, Lays – are being met with more price concern than newer, more novel brands.

So what to do if you run one of these brands – whether in exploration or routine?

The first step is to recognize that the playing field is not level. You have to know where your brand sits in consumers’ minds before you rush down the “price optimization” path.

The second step is to serve the consumer psychology that’s impacting YOUR brand’s situation.

If your brand is high routine, you’re in a tougher situation. But the path forward is not to lower the price. It’s to increase the interest.

Among the host of routes forward, the simplest mechanism to pump-up interest is to leverage Classical Conditioning to create novelty, excitement, and perceived uniqueness around your well-established, well-entrenched brand.

Think, access to exclusive concerts or gaming unlocks. Early access to new flavor drops. Limited-time-only offers exclusive to app users. And so on…

The other route to increasing interest in the face of high price sensitivity is to reduce the perceived barriers OTHER THAN price. As demonstrated above, lowering the price per ounce to $0.07, or $0.06 is not going to accomplish anything other than eroding your margins. Consumer perception is neither linear, nor rational. So focus on removing the other ‘costs’ consumers perceive:

• Time – what would I have to give up doing if I choose this? 
• Social – what will others think of my choice? 
• Physical – will this make me feel bad physically? 
• Emotional – will I be disappointed by this choice?

Now, if your brand is high exploration, you’re under less price pressure. Good for you, but don’t get too comfortable. The path forward to higher action – more regular usage and growth – remains your challenge.

If your brand is in this situation, you need a different playbook. You’ll use the principles of Operant Conditioning to create loyalty and frequency. After all, consumers aren’t too concerned about your pricing – yet – because they simply aren’t buying you enough to feel the financial pain.

Chains like Chipotle and Starbucks have used this approach with great success in promotions like ‘streaks’ – the social media-inspired technique where consumers are rewarded for visiting the restaurant every week for four weeks to unlock a badge, for example.

Another example made famous by Starbucks was the ‘treat receipt’ where morning beverage buyers receive an appealing offer if they come back again that same afternoon.

Eventually, as your brand hopefully moves into the more routinized, everyday space, price pressure will naturally emerge; consumers will be using you more, so they’ll feel the price pain more.

But there’s fertile ground to drive growth without resorting to price-slashing, if you leverage consumer psychology to serve more than meets the eye in terms of black-and-white price considerations.