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Pricing as a Head Trip

Can prices be set too low for consumers? A recent study by Dr. Antonio Rangel of CalTech says yes. Dr. Rangel observed the brain activity of subjects and found they exhibited more pleasure drinking wines when they thought they cost more. For those of us that study the finer points of pricing, this is a very interesting result. We all know that there is a sense to “you get what you pay for” that acts as a negative factor when evaluating the lowest priced alternatives. What Dr. Rangel has established is that there is more than the fear of getting stuck with an inferior product at work; people actually get more enjoyment from certain products if they think they cost more. The data communicated by the price is working not just at a rational level, but at an emotional level as well. That is, from the brain’s standpoint, these products are objectively better in a post-purchase environment.

Are there implications beyond wine?

When dealing with unknowns, most of us seek out whatever relevant information is available. We can go read user reviews at Amazon and process the information ourselves from the several to dozens of individual reviews. Or, if we don’t have the time or inclination, market prices are an excellent aggregate measure of market desire for given product. Thus, one can reasonably expect a $90 bottle of wine to be better than a $5 bottle of wine because the price carries with it implicit market data. The really interesting finding from Dr. Rangel’s study is that this information is not just used as pre-purchase decision criteria, but that the pleasure centers in our brains buy into the data too, providing us with enhanced post-purchase enjoyment as well.

Pricing sends a powerful message to potential buyers. In a recent article on pricing and segmentation [link], I discuss how to use pricing and segmentation to increase profits—that is, not to leave less money on the table. The implication of Dr. Rangel’s work is that pricing is also an important determinant of who comes to your table, and lower prices are not always better in attracting potential customers as the greater enjoyment we experience from “expensive wines” then feeds back into subsequent purchase decisions.

So do lower prices send the wrong message?

It depends on what you are selling. If you are selling value, potential customers see lower prices as a good thing. However, where pleasure is involved and consumers expect significant variations in quality between offers, you need to think about pricing differently and the data that is implicitly communicated. Beware of discounting, especially, as once the discounts (however delivered) come to be expected by the market, consumers are likely to view the enjoyment of your product differently. Some consumers will turn up their noses at your product while others will only buy on sale. A classic lose-lose.

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