Pricing is … a Signal of Quality

It’s no secret, pricing can signal quality. But why, and more importantly when, does it work? 

Think about the last time you went to your wine retailer, stood in front of the seemingly infinite choices of wines, and had to decide which one to purchase.  If you’re like me, you were probably thinking something like this:  “I’m going to a good friend’s house and they are making dinner.  The least I could do is bring a nice bottle.  I’ll spend about $40.”

We are all relatively clueless about how the wines taste, so we choose some price point and buy a wine at that price.  Here’s why it makes sense.  We are trusting that the manufacturer and the retailer both know how good this wine tastes, and they’ve decided that it’s worth $40.  We’re also hoping (or believing) many other consumers also know something about wine and if it wasn’t worth $40, they wouldn’t pay it, so the retailer wouldn’t charge it.

If only this were all true.

Let’s use something other than wine, something where we can determine quality if we try hard enough.  How about a new LCD TV?  If you are so inclined you could study all the features of a TV, figure out which ones you really need and then buy the one that just meets your requirements, without going overboard.  Another option is to look at the price range, and then buy one toward the middle of that range.  By doing this you are believing that other consumers, the manufacturers and the retailers all know what range is needed, and you are probably average so you get one in the middle.

These were two examples where we surely use price as an indicator of the quality of the choices.  But it doesn’t always work.  As consumers we use as many cues as possible to infer quality, and if some cues are off then a high price is not enough to make us believe the product is high quality.  Imagine a real estate agent pulling up to your house in an old beat up Chevy saying “I’m the most expensive because I’m worth it.”  You wouldn’t believe him.  Imagine your neighbor shows up at your door pulling a red wagon that holds several cases of unlabeled wine.  He tells you “This wine is a great bargain at only $50 per bottle.”  Do you believe him?  Of course not.

You see, price is one of many indicators of quality.  A high price alone will not make you look like high quality.  If you want to be seen as high quality, all indicators must point in that direction.

 

Mark Stiving, Ph.D. – Pricing expert, speaker, author

Picture by Sassoles