How does your pricing strategy affect customer satisfaction?
Setting your prices right and keeping customers happy can be hard. But get it right, and you’ll be able to see improved customer satisfaction and increased revenue.
According to Herrmann et al. (1992), price perceptions directly influence satisfaction judgments: “The research demonstrated the influence of perceived price fairness on satisfaction judgments empirically.”
So if price does affect customer satisfaction, are you charging enough to ensure high customer satisfaction?
This is the question we’ll be exploring today. By combining research from multiple trusted sources and opinions from leaders in the industry, we will try to see exactly how closely pricing and satisfaction are correlated.
To answer this, we’ll break it up into three key questions:
- Does price fairness affect customer satisfaction?
- Can price affect service quality?
- Does customer satisfaction affect price tolerance?
Does price fairness affect customer satisfaction?
According to Xia et al. (2004), price fairness refers to consumers’ assessments of whether a seller’s price is reasonable, acceptable or justifiable. In a separate study on factors affecting customer satisfaction, the authors found that “charging a fair price helps to develop customer satisfaction and loyalty.”
This is backed up by another study from Herrmann et al. (2007), which concluded that customer satisfaction is directly influenced by price perceptions, albeit indirectly, through the perception of price fairness. The price fairness itself and the way it is fixed and offered have a great impact on satisfaction.
Let’s break this down with an example. You might be an IT service provider that offers IT support. What this research is saying is your clients’ satisfaction levels are affected by how much you charge them. So if you’re billing them a premium price (more than competitors will), they will expect a premium offering: faster response times and priority service.
Alternatively, if you offer a budget pricing option, your customers’ expectations will be lower because they perceive the price to not include all the added benefits of perhaps a more expensive IT provider.
So with that in mind, how can you use pricing to improve customer satisfaction?
To improve overall customer satisfaction, you need to be pricing your products high enough to give you the resources to offer amazing customer experiences. By increasing your prices, you can allocate more resources to deliver better customer service. Bringing it back to the IT company example, you can now offer two-hour response times instead of four-hour frames. See how that can improve satisfaction?
Now, let’s take a look at the next question…
Can price affect service quality?
Researchers at the Stanford Graduate School of Business and the California Institute of Technology conducted a study on the influence of price and quality on customer satisfaction.
“What we document is that price is not just about inferences of quality, but it can actually affect real quality,” said expert Baba Shiv. “So, in essence, price is changing people’s experiences with a product…”
To break this down for you, Shiv is saying that price does affect service quality.
For example, if you have two different wines, one that costs $5 and the other $45, you would perceive the $45 wine to be of better quality, right?
If you have to pay more for a similar bottle of wine, you assume the merchant is charging more because it is a better-tasting wine.
But, is it really better quality? Or is it just perceived to be?
The researchers that conducted this study found that an increase in perceived price of a wine did lead to increased taste expectation. Therefore, the study concluded that higher customer satisfaction is based not on real quality, but the price as people see it is an indicator of product quality.
In layman’s terms, consumers use price as a reference for perceived quality. If you charge a higher price, customers’ expectations will be higher.
So when it comes to customer satisfaction, if you are charging a premium, you will need to deliver a premium service to ensure satisfaction. Anything below that will result in poor customer satisfaction.
Furthermore, if your price is in the medium range, but you offer a premium level of service (above customer expectations for the price paid), you can expect high customer satisfaction.
Gordon Tan, managing director of R & G Technologies and founder of Client Heartbeat, put this into perspective really well at a recent ASCII event. He said: “There is a correlation between price and service. If you offer a low price, it means you have fewer resources—which makes it harder to deliver a good service. If you charge more, you can throw more resources at it, ensuring you deliver a high level of service.”
Tan is spot on.
My question to you: Are you charging enough to deliver the high level of service you want to offer clients?
The top five companies using Client Heartbeat don’t drop their prices to win business. They are selective with clients and understand the relationship between price and service quality. – Gordon Tan
Does customer satisfaction affect price tolerance?
A study that examined the relationship between customer satisfaction and price tolerance has found a positive association between changes in customer satisfaction and changes in price tolerance. Eugene Anderson reported in the study: “The findings imply that increasing customer satisfaction is likely to decrease price elasticity of demand. In particular, the findings imply a 1 percent increase in customer satisfaction should be associated with a 0.60 percent decrease in price sensitivity.”
This tells us that over time, customer satisfaction does influence price tolerance. It means that as a customer becomes more satisfied with the level of service delivered by a company, price becomes less of a factor.
This makes sense. Customer satisfaction leads to customer loyalty.
Related: 18 ways to build customer loyalty
Anderson went on to provide a recommendation to companies considering improvements in customer satisfaction. He said: “[Companies] should consider the financial benefits of improving satisfaction as a consequence of customers’ increased willingness to tolerate price increases.”
As price tolerance also provides an important indicator of loyalty, firms interested in assessing the long-term benefits of customer satisfaction should consider using price tolerance measures along with more traditional measures of loyalty, such as repurchase intentions and willingness to recommend. – Eugene Anderson
So what does this mean for your pricing strategy?
It means that if you deliver a high level of service that creates high customer satisfaction, your customers will be willing to pay more.
Let me say that again:
If you deliver high customer satisfaction, you can charge more.
Have you ever wondered how your competitors can offer such a superior level of service? More than likely it’s because they are charging more. This links back to Gordon Tan’s quote earlier. If you charge more, you can allocate more resources to customer service and actively put systems in place to improve customer satisfaction.
Re-evaluate your pricing strategy to bring it in-line with your customer satisfaction goals
Are you charging enough to ensure you can deliver high customer satisfaction?
My task for you is to take a look at your pricing strategy. Are you a low-cost provider? Are you a premium provider? Do you sit somewhere in the middle?
Then think about whether your service is congruent with where your pricing strategy is. If you a premium provider, do you deliver a premium level of service that is superior to that of your mid-range competitors?
From the research and opinions provided in this blog post, I challenge you to start using pricing as a way to improve customer satisfaction. For those of you that have been struggling with customer satisfaction strategies in the past, try playing with your price.
Try to raise your prices. You will see the benefits of being able to allocate more resources to create amazing experiences that make your customers go WOW. This will lead to stronger satisfaction and eventuate into happy customers that consider your prices fair.
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