Knowledge Paper 007 · Pricing & Behaviour
Should We Lower Our Prices?
Why price is usually a perception problem, not a pricing problem.
The short answer
When sales slow down, one question appears almost immediately.
Should we lower our prices?
Sometimes the answer is yes.
Most of the time it is not.
Because customers do not simply compare prices.
They compare what those prices mean.
Price is not just a number.
It is information.
It tells us something about quality.
Confidence.
Risk.
Scarcity.
Status.
And trust.
Price does not exist on its own.
Imagine two bottles of shampoo.
One costs £2.50.
The other costs £25.00.
Imagine laboratory tests reveal that the ingredients are almost identical.
Would everyone immediately buy the cheaper bottle?
Of course not.
Why?
Because people are not choosing between bottles.
They are choosing between stories.
One says:
“Budget supermarket own brand.”
The other says:
“Developed by celebrity hair stylist Charles Worthington.”
The shampoo may be similar.
The descriptions are not.
Behavioural economists Daniel Kahneman and Amos Tversky repeatedly demonstrated that people do not respond to objective reality alone.
They respond to how reality is described.
Meaning changes value.
Your brain evolved to judge exchanges.
From an evolutionary perspective this makes perfect sense.
For hundreds of thousands of years humans lived in small social groups where resources were limited.
Food.
Shelter.
Tools.
Time.
Partners.
Every exchange mattered.
Our ancestors became extraordinarily good at judging questions like:
- Is this fair?
- Can I trust this person?
- Am I being cheated?
- Is this worth giving something up for?
Notice what they were not asking.
Objective value does not exist.
Only perceived exchange.
Value is constructed, not discovered.
Marketing often assumes products possess value.
They do not.
Customers create value inside their own minds.
The product matters.
But so does:
- the brand
- the packaging
- the story
- the reputation
- the recommendation
- the design
- the guarantee
- the country of origin
- previous experience
Price becomes part of that story too.
A higher price does not automatically increase value.
But it changes the description.
Price elasticity is not about price.
Economists use the term price elasticity to describe how demand changes when prices change.
Some markets are extremely sensitive.
- Petrol.
- Milk.
- Electricity.
Others are surprisingly insensitive.
- Luxury hotels.
- High-end watches.
- Enterprise software.
- Fine dining.
The goal is not simply to charge more.
The goal is to build a brand where price matters less.
Why small businesses get trapped.
Many founders assume:
“Nobody knows us. We had better be cheaper.”
That sounds logical.
Unfortunately it often creates a different problem.
Customers begin asking:
“Why is it so cheap?”
The lower price does not simply reduce cost.
It changes the story.
Sometimes it introduces doubt.
- The cheapest accountant.
- The cheapest lawyer.
- The cheapest cybersecurity provider.
- The cheapest surgeon.
Some purchases make us nervous when they are inexpensive.
A B2B technology example.
Imagine two cybersecurity companies.
One charges £49 per month.
The other charges £249 per month.
If you are protecting your home Wi-Fi, the cheaper option looks sensible.
If you are protecting customer payment data for a fast-growing fintech, suddenly the expensive platform feels reassuring.
The buyer is not simply purchasing software.
They are purchasing confidence.
The higher price reduces a different cost:
Costly signals matter.
This connects directly with our paper on Costly Signalling.
Sometimes premium pricing becomes a signal.
Not proof of quality.
But evidence of confidence.
The company appears unwilling to compete purely on price.
That communicates something.
Whether consciously or not, customers notice.
Brands reduce risk.
One of the hidden functions of branding is reducing uncertainty.
Unknown brands feel risky.
Familiar brands feel safer.
Safer choices require less mental effort.
Less mental effort often makes premium prices easier to accept.
This is why Mental Availability and pricing are closely connected.
Customers do not simply pay for products.
They pay to reduce uncertainty.
Why this matters.
Most organisations think about pricing backwards.
They ask:
“How much will customers pay?”
A better question is:
That is a marketing question.
Not a finance question.
Common mistakes.
Competing on price before competing on meaning.
Lower prices are easy.
Building a better story is harder.
But it compounds.
Assuming cheaper always means more sales.
Sometimes lower prices reduce demand because they reduce confidence.
Ignoring perceived risk.
Customers often pay premiums to avoid making expensive mistakes.
Treating price as arithmetic.
Pricing is psychology first.
Economics second.
TheSignalWorks View
Organisations often cut prices because demand is weak.
But weak demand is frequently a symptom.
Not the disease.
Customers pay premiums every day.
Not because they are irrational.
Because certainty has value.
Trust has value.
Reputation has value.
Recognition has value.
The strongest brands do not spend their lives defending their prices.
They build brands that make price a smaller part of the conversation.
Key Takeaways
- Customers evaluate descriptions as much as products.
- Price communicates meaning as well as cost.
- Strong brands reduce price sensitivity.
- Premium pricing often reflects reduced uncertainty rather than superior functionality.
- The best pricing strategy usually begins with better branding, not bigger discounts.
Frequently Asked Questions
Should new businesses always charge less?
No.
Competing on price is one strategy, but it is rarely the most sustainable one. Lower prices can also reduce perceived quality and trust.
What is price elasticity?
Price elasticity measures how demand changes when prices change. Strong brands often experience lower price sensitivity because customers compare them less directly.
Why do people buy expensive brands?
Higher prices can signal confidence, craftsmanship, reduced risk, status or quality. Customers are often paying for reassurance as much as the product itself.
Can branding justify higher prices?
Branding cannot create value from nothing. But it can communicate value more effectively, reduce uncertainty and make comparisons less focused on price alone.
Further Reading
- Daniel Kahneman — Thinking, Fast and Slow
- Amos Tversky — research on judgement and decision-making
- Rory Sutherland — Alchemy
- Byron Sharp — How Brands Grow
- William Poundstone — Priceless
Related Knowledge
About TheSignalWorks
At TheSignalWorks, we believe pricing is rarely just a commercial decision.
It is a behavioural one.
The organisations that command premium prices do not simply create better products.
They create better reasons to believe.