What is the meaning of price?

March 2013

The sales girl looks at the label: “Reduced from £340 to £120.” […] “I’d snap it up if I were you.” The girl smiles at me. “There’s only one of these left.” Involuntarily, I clutch at it. “I’ll have it,” I gasp. “I’ll have it.” In Confessions of a Shopaholic, Sophie Kinsella describes a situation that may be familiar. Buying something in the sales, booking the hotel last minute at a cheaper rate or snapping up a real bargain in an online auction has almost become a national pastime for Germans. What effect does this ubiquitous comparing of prices have on the perceived relationship between price and quality?

In January 2013, the GfK Verein conducted a survey of around 2,000 representatively selected German consumers over the age of 14 to investigate this question. A key finding was that there is clearly a considerable gap between desire and reality. At 72%, an overwhelming majority of respondents wished that price was actually a reflection on the quality of a purchased product, while only one in ten did not. However, a far less unanimous verdict was given of the reality.

Only 44% think that the price of a product is actually a good indicator of its quality. In contrast, 24% unequivocally reject this statement and a further 32% are in some doubt, responding ‘partly agree’. In other words, less than half of German consumers consider the relationship between a product’s price and its quality to be stable when they are shopping. Being able to make such an assessment would have a clear benefit as it offers a point of orientation in the diverse product world and a method for judging even unknown products quickly. In addition to price, brand names are also used as benchmarks. For 58% of respondents, this is a key indicator, often in combination with price.

No doubt with top products

However, the appropriate price-quality relationship is not questioned to the same extent for all products. In fact, reservations are directed towards undifferentiated generalizations because the greatest divide emerges for the statement ‘Generally speaking, the higher the price of the product, the higher the quality’. For top products, the majority accept that higher prices are justified through greater worth. Two in three respondents agree that ‘You always have to pay a bit more for the best’. Only 14% do not agree at all, while 20% partly agree. More men than women think that premium products simply cost more, although it is quite likely that the two genders are not thinking about the same product groups when answering this question.

It is quite clear that different product groups are not being tarred with the same brush in other respects too. Specifically in relation to higher value purchases, the certainty of consumers that prices are also a reflection on the quality of a product is much greater than for fast moving consumer goods. Overall, 56% believe the old saying ‘you get what you pay for‘. This evidently also applies in reverse as very low priced products struggle to attach credibility to their claims of quality.

Extremely low prices inspire skepticism

Dropping prices greatly is therefore not without risk for brands, even if this has the potential to boost sales in the short term. Only one in five respondents believes that low prices are not at odds with high quality. In contrast, 51% doubt that the quality of products offered at rock bottom prices can be good.

Consequently, the intensity of promotional campaigns must be controlled effectively. The marketing tool evidently has a short-term impact and is therefore popular with sellers. However, even Paracelsus warned that it is only the dose which makes a thing poison. Consumer opinion confirms that this old medical wisdom also applies to price reductions. Overall, 56% of respondents agreed that they question whether the normal price is justified if a brand is regularly on special offer. Only 22% take a different view and are not led astray by price reductions. A further 22% are unsure as to what they should think of reductions and make their decisions on a case-by-case basis.

Older Germans, in particular, feel their price perception of the reference price is affected by too many promotions. Among those aged 65 and older, 64% begin to doubt a brand’s normal price if it is regularly on special offer. This figure drops to 49% in the 14 to 24 age group.

It is not only product quality which is called into question when products are offered at knockdown prices, but also the manufacturer’s ethical integrity. Very few consumers believe that such price policy does not impact employees receiving fair wages and 68% are certain that the opposite is true. The percentage of those who believe that low prices come at the expense of the environment is a little lower, but still 55%. Only 22% of consumers consider it likely that low-cost products are manufactured under fair working conditions.

Pricing is therefore not simply about establishing a recognizable, balanced relationship to product quality. The majority of consumers have clearly recognized that fair manufacturing conditions are not possible at zero cost. Perhaps it is time for the ethical aspect of product pricing to be communicated more effectively.

Data source: GfK Verein

If you have any queries concerning this article or Compact, please contact Claudia Gaspar,  e-mail: hello@nim.org.